HMRC’s powers to write off employees’ underpaid tax

Did you know under Extra Statutory Concession A19 (ESC A19) HMRC have the power to write off income tax and capital gains tax you owe in respect of historic periods where the underpayment is due to an HMRC error or administrative failure?

How can someone underpay income tax?

The most common example is where an employee underpays income tax because they have been given the wrong tax code. The standard tax code is 1257L, with the number 1257 representing the tax-free personal allowance of £12,570, and the letter code L representing a ‘normal’ tax code.

A taxpayer can validly end up with a different tax code to this for a number of reasons, for example:

  • A taxpayer with multiple jobs may have their personal allowance split across employments, or may have a tax code in secondary employments to signify income tax should be charged on the total income (e.g. a BR tax code will mean all income is charged to tax at the basic rate of 20%);
  • A tax code might be adjusted where an individual changes jobs or salary within the tax year;
  • A taxpayer might have other sources of income (e.g. rental or investment income) that are reported via self assessment but they have agreed that HMRC can collect the additional tax due via PAYE;
  • A taxpayer earning over £100k will have their personal allowance reduced and their tax code updated accordingly;
  • The amount of personal allowance will be amended for tax-free allowances (e.g. gift aid contributions could increase your personal allowance) and benefits (e.g. an employer benefit reported on a P11D will reduce your personal allowance).

There is therefore scope for an HMRC failure, where HMRC do not act on information given to them, or an administrative error, where HMRC may miscalculate the personal allowance due. There is potential for the taxpayer to underpay income tax as a result, and not notice the tax deductions are not high enough.

Importantly any income tax can only be written off by HMRC if an HMRC failure has taken place – if your employer has made the error leading to the wrong tax code then your employer will be pursued for the income tax so always check with your employer if you think there is a mistake in your tax code.

Criteria for HMRC to write off employee income tax – ‘timely’ use of information supplied to HMRC

HMRC can write off historic underpaid income tax where HMRC has failed to make proper and timely use of information supplied by the taxpayer, an employer, or the Department for Work and Pensions (DWP).

In this case ‘timely’ means HMRC must act within 12 months of the end of the tax year in which HMRC received the information that indicated more tax was due. In practice this means you cannot claim to have tax written off for the current year or prior year. Only in exceptional circumstances will HMRC write off tax for the prior year, and this would be where the HMRC failure arose in a historic period but they continued to fail to rectify the position.

Criteria for HMRC to write off employee income tax – the ‘reasonable’ test

The second and important criteria to make a claim under ESC A19 is that the taxpayer could reasonably have believed that their tax affairs were in order i.e. it is reasonable that they did not notice they were underpaying tax. When considering the reasonable test HMRC will look at the following factors:

What is the size of the historic tax due and what caused them?

For example, if you change job partway through a tax year and your salary is the same but your net take home pay is significantly more, HMRC might argue you should reasonably have known that you were underpaying tax in your new role and deny a claim under ESC A19. HMRC will consider the materiality of the tax due in the context of whether an individual is an ‘average’ or ‘wealthy’ taxpayer.

What information has been given to the taxpayer?

HMRC will check whether the taxpayer has been sent tax code notices in the post, or any other explanatory leaflets or letters, and whether there have been any phone calls between the individual and HMRC.

What is the taxpayer’s understanding of tax?

If you make a claim under ESC A19 HMRC may consider your background (e.g. are you an accountant?), how you have previously been paying tax (e.g. is PAYE new to you?), and if necessary your state of health.

Has HMRC given any misleading information to the taxpayer?

For example, if HMRC have advised the tax code is correct, it will be hard for them to later deny a claim under ESC A19 where the tax code then led to underpaid tax. There may also be scope to make a claim where HMRC have sent multiple and / or incorrect tax code notices.

Does the taxpayer have professional representation?

HMRC make the point that if you have an accountant then they should have spotted the error on your behalf. It’s therefore important to always ask your accountant first if you have one as they may be able to help clarify the position.

After considering all the available information, where the issue is finely balanced HMRC should offer the benefit of the doubt to the taxpayer.

How can Menzies help?

If HMRC have written to you to notify you of underpaid income tax, or with a tax code notice you don’t fully understand, it’s vital to seek advice as soon as possible.

Our team of experts can support in a number of ways, whether it’s helping you understand your tax code, ensuring you are given the correct tax code, or making a claim on your behalf under ESC A19 where HMRC have failed to collect the tax on time.

If you have any queries regarding the above, please do not hesitate to get in touch with us via our free confidential hotline, or contact us via the form below.

Call our free confidential hotline – 07813003194

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