The ‘secret’ is a practice sometimes used by HM Revenue & Customs (HMRC) upon request, called ‘equitable liability’. It can significantly reduce a taxpayer’s tax bill. Unfortunately, HMRC will be ceasing to apply this concessionary tax treatment from 1 April 2010. However, there is a window of opportunity for taxpayers to take advantage of equitable liability before then, in appropriate cases.
Why the ‘secret’?
Equitable liability is by no means new. However, back in August 1995, HMRC said: “It has become increasingly apparent to us that, while many practitioners know of this practice, some do not.” That statement is probably as true today as it was nearly 14 years ago.
This is one reason for the expression ‘secret’. Another reason is that HMRC have arguably not publicised equitable liability as much as they might have done, probably so as not to encourage the late submission of returns or other information.
How does it work?
Taxpayers may sometimes be late submitting tax returns and other information to HMRC. This could result in HMRC demanding too much tax. Despite the tax bill being too high, it may be too late to reduce it (even if HMRC and the taxpayer think it is possibly excessive), because the legal time limit for making changes has passed. However, ‘equitable liability’ can come to the taxpayer’s rescue in the right circumstances.
For example, HMRC will sometimes make a ‘determination’ of a taxpayer’s liability, in the absence of a tax return or full information. A determination is broadly an estimate of the taxpayer’s income or gains. The tax is therefore estimated as well. The tax shown as payable is treated as if the taxpayer had filed a tax return showing that amount of tax payable. HMRC will then seek to collect that liability, even though the taxpayer’s ‘real’ liability could be significantly lower.
The tax bill can be amended if the taxpayer files a tax return or submits information to change a determination based on an estimated amount. If the taxpayer is outside the time limit for putting things right, the tax bill normally stands (taxpayers can replace the determination with correct figures within 5 years after the tax return filing date for that year, or one year after the determination, if later).
To the rescue!
But if equitable liability is successfully claimed, HMRC will not seek to collect the full amount of tax otherwise due. However, there are (of course!) strings attached. For example:
• The taxpayer (or adviser) must provide acceptable evidence of the correct (lower) liability;
• Tax returns must be filed up-to-date; and
• The (reduced) tax liability must be paid in full.
Not too late – yet!
Whilst the equitable liability concession is being withdrawn from 1 April 2010, HMRC will still accept late returns or information to reduce tax liabilities if equitable liability relief is requested and agreed before then. So for taxpayers who may be able to benefit from equitable liability, the advice is clear: claim it while you can!