To Err is Human; to Forgive, Divine – HMRC Delays and ESC A19

To Err is Human; to Forgive, Divine – HMRC Delays and ESC A19
In 1983, HMRC introduced a new computer system for PAYE. In 2005, they finally realised that it had not been working properly for over 400,000 pensioners, and as a result about three billion pounds of income tax had not been collected from their pensions.


HMRC came clean about this in the summer of 2007, and announced that although they would be putting things right for 2007/08, they would not be trying to collect unpaid tax for the previous 15 years.


This magnanimous gesture on their part was of course partly because it was unthinkable to impose huge tax demands on some of the poorest people in society, but it was also simply the operation of an “Extra Statutory Concession” called ESC A19.


ESC A19 is subtitled “Giving up tax where there are Revenue delays in using information”, and it does more or less what it says on the tin, though as always there are a number of conditions that must be present for the Concession to operate.


The Concession only applies to income tax and capital gains tax payable by individuals, not to corporation tax on company profits, and it operates if tax has not been collected on time due to HMRC’s “failure to make proper and timely use of information”.


The information could be from an individual’s tax return or even from a letter or phone call made to HMRC, or from his employer, if it affected the tax code allocated to an employee, or from the Pension Service if it relates to the State Pension.


There are various conditions. Broadly, HMRC must have failed to use information about extra tax being due for more than a year after the end of the tax year in which they were given that information and it must be the case that the taxpayer concerned “could reasonably have believed that his or her tax affairs were in order”.


In some cases, tax will be written off even if HMRC become aware of it less than a year after the end of the relevant tax year. This applies in cases where they have failed more than once to act on the information or where their negligence has allowed the tax arrears to build up for more than two tax years in succession.


The tricky part of these conditions can be the “reasonable belief” one. If you know that HMRC has made a mistake and either not taxed you enough or repaid too much tax to you, you have a legal duty to tell them about it. This sometimes comes as a shock to clients who have benefited from HMRC’s incompetence and (for example) received too large a repayment.


They tend to see this as a piece of good fortune which goes some way to redressing the balance in their favour, and it upsets them when I have to explain that unless they give it back they will be committing a criminal offence under the Theft Act!


If, however, the situation is less clear cut and in the circumstances the taxpayer could not be expected to have realised that he had paid too little tax, then ESC A19 means that at worst he will only be caught for this year’s and last year’s underpayments.


Two of the commonest examples of the problem are pensions (as described above), and company cars. If your employer provides you with a company car, you are liable to income tax on a benefit in kind, calculated on the basis of a percentage of the list price of the car when new. The percentage varies according to the CO2 emissions of the car concerned, and whether it runs on petrol or diesel. In other words, it is very complicated!


Your employer is supposed to send in a form to notify HMRC when he first provides you with a car, and HMRC are supposed to alter your PAYE code to collect the tax due out of your monthly salary. Often, this does not happen, and the tax is collected out of next year’s salary, together with the tax on the same car for that year as well.  This level of delay does not qualify for ESC A19, because the delay has not gone on for more than a year after the end of the first tax year.


In a case where the PAYE code is not altered for over two years, however, ESC  A19 should drop the earliest year out of account, provided you “could reasonably have believed” you were paying the right amount of tax.


Fortunately, although they will not come right out and say it, HMRC seem to accept the argument that a typical PAYE coding notice is so badly designed and poorly explained that no “reasonable” person could be expected to understand it. Even if you use an accountant to deal with your tax affairs, the argument to run with HMRC is that this is even more reason for you to “reasonably” believe you were paying the right amount of tax, because your accountant did not alert you to the problem.


So if you get an unexpected demand for back taxes from HMRC, always consider whether you can use ESC A19 to at least reduce the amount you have to pay!


James Bailey