Discretion not to collect tax following HMRC mistake: Proposed new rules

On 3 July 2012 the Treasury issued its consultation document on the proposed changes to ESC A19.

Currently ESC A19 gives HMRC the discretion to not collect income or/and capital gains tax where:

  • HMRC have failed to act on information received from taxpayer or a relevant third party in a timely manner, resulting in arrears; and
  • HMRC notified the taxpayer of the arrears more than 12 months after the end of the tax year in which information was received; and
  • The taxpayer could ‘reasonably have believed’ that their tax affairs were in order.

In addition, ESC A19 can apply in ‘exceptional circumstances’, even though tax arrears were notified within 12 months of the tax year end.  These are where HMRC:

  • Failed more than once to make proper use of the facts they were given about one source of income; and
  • Allowed the tax arrears to build up over two tax years in succession.

Proposed changes

It is proposed that ESC A19 should be put on a statutory footing but subject to the following, quite major, changes.

  • Introduction of HMRC and taxpayer responsibilities – HMRC will ensure that they “accurately record information and ensure either a tax code is issued or a tax code is amended to reflect the additional tax which should be corrected.”  Taxpayers must:

    • tell HMRC of any circumstances that will affect their payments or claims;
    • check that their tax code is correct; and
    • should keep a note of the date they contacted HMRC, the name of the person they spoke to, details of the change reported and provide records that support what they tell HMRC. 

  • Removal of the ‘exceptional circumstances’ test – it is considered that HMRC now have adequate systems in place so that arrears will not build up beyond two whole tax years.  Therefore no one will need to apply for relief under the ‘exceptional circumstances’ test.  As such, the proposal is for the ‘exceptional circumstances’ test to be removed.  
  • Removal of application to CGT – ESC A19 currently applies to income tax and capital gains tax. The proposals limit its application to income tax only.  This would mean that ESC A19 would no longer apply to individuals who have a capital gains tax liability of less than £2,000 which is collected through their tax code. 
  • Introduction of a time limit for a taxpayer to contact HMRC – it is proposed that the application of ESC A19 should be restricted to taxpayers who contact them “before the underpayment is collected within the next tax year.”

What does this mean?

The proposals narrow the scope of ESC A19 significantly and the circumstances when it will apply following enactment will be much more limited than at present.  Currently, ESC A19 is most likely to  apply where HMRC neglects to process the information it has been given and the taxpayer does not notice HMRC’s error.  The introduction of an obligation on the taxpayer to review HMRC’s tax codes will mean that many people that who currently qualify will no longer be able to do so.  

Is it reasonable to expect an ordinary taxpayer who is perhaps not professionally advised to have a sufficient understanding of PAYE codes to review whether HMRC have adequately processed a change of circumstances? This will no doubt hit the most vulnerable taxpayers the hardest. 

If you would like further information in relation to ESC A19 or the current proposals please contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.