I got a call today from one of my accountant clients about someone who had come to his office with a whole sheaf of “determinations” of his tax liability from HMRC. If you fail to file your self assessment return HMRC can “determine” the amount of tax you owe them, and if you still do not file a return, that tax is due and payable. As you would expect, the estimates of tax due in these “determinations” tend to err on the expensive side as an incentive to file a return and establish the correct liability. If you have still not filed the return by the fifth anniversary of the correct filing date, then the “determination” is final and conclusive and there is no legal way that the tax charged can not be collected – or so the inspector had told my client.
I was glad to be able to let him in on a relief that HMRC do their best to keep secret – “tell them you want them to apply Equitable Liability to the determination”, I said.
When I was a tax inspector some years ago, there used to be rumours about an Inland Revenue policy known as “Equitable Liability”. No one in the office was really sure what it was and I was told never to mention it to taxpayers.
For many years, tax inspectors tried to avoid getting involved with “Equitable Liability”. To quote from their instructions for dealing with insolvent taxpayers:
“The Revenue does not normally take the initiative in suggesting that an application should be made under these provisions”
Or, more bluntly, in their instructions for recovering tax due:
“Although this is the case (that is, that HMRC will apply Equitable Liability in many cases) you must never express an opinion on the amount of an assessment, say anything which might imply that part of the tax/NIC is not due or use the term “equitable liability” in correspondence or conversation (other than within the department)”
This policy of secrecy about Equitable Liability meant that whether it was applied to your case or not depended on whether you were lucky enough to have a tax adviser who had heard of it or not, and the Chairman of the Board of Inland Revenue was hauled over the coals for allowing this ridiculous situation to exist by the Select Committee on Administration in 1995.
The Chairman having promised to make the policy public, an article was then published in the Tax Bulletin in August 1995 explaining how Equitable Liability worked, but you will have a long search if you look for it anywhere else in HMRC’s published information!
Equitable Liability came about as a result of the old rules on insolvency (before the 1986 Insolvency Act) which made the Inland Revenue a “preferential creditor” when someone went bankrupt or a company became insolvent. This meant that the Revenue had to be paid in full before the other creditors could pick over whatever was left. In a case where a taxpayer had neglected his tax affairs so that estimated assessments had become “final and conclusive” because he had not appealed against them, there could be huge tax liabilities based on pure guesswork by the inspector and these would be collected in preference to real debts for real goods and services supplied by the other creditors.
In order to remedy this unfair treatment of the other creditors, the Revenue developed the policy of “Equitable Liability”. Under this policy, where tax is legally due because of the way the system works but if the taxpayer had filed his returns on time, the actual amount of tax would have been less, HMRC will only collect the lesser amount.
Despite the reform of the insolvency laws – so that now the taxman generally has to wait in line with the other creditors – Equitable Liability has survived and is still the official (though almost secret) policy of HMRC.
It is important to realise that Equitable Liability only applies when you have been taxed on estimated amounts because you have not filed returns in time – it does not let you off from your correct tax liability – but for those who have let things slide and got themselves into arrears because they have not submitted their returns, it remains an important relief.
But don’t expect the tax inspector to tell you about it – as we have seen from the quotes at the start of this article, his instructions actually forbid him to mention it!