In Heather Jones v The Commissioners for HM Revenue and Customs: [2020] UKUT 0229, the Upper Tribunal allowed an appeal against a discovery assessment for higher rate tax on a severance payment. HMRC had not proved that the assessment was valid.

Income Tax is due on termination payments over £30,000.

  • A P45 should be completed on the date of the employee's final day at work and payments made after this date should have tax deducted at the basic rate in force.

Where a discovery assessment is issued the burden on proof is on HMRC to show that the taxpayer failed to take reasonable care and caused an insufficiency of tax.

Miss Jones left her employer on 31 October 2010 after entering into a compromise agreement under which she was to receive a redundancy payment of £36,700, payable in four monthly instalments.

  • Under the relevant PAYE Regulations, her employer was liable to deduct tax at the basic rate from the taxable part of the payment, with additional tax to be reported under Self Assessment.
  • A deduction of 39.7% was made from the final instalment payment which was made after the P45 was issued. No breakdown of the deduction was provided to Miss Jones. The employer reported and accounted for tax deductions at the basic rate to HMRC.
  • Miss Jones did not declare the taxable portion of the severance payment on her tax return.
  • HMRC raised a discovery assessment for the higher rate tax due and Miss Jones appealed.
  • The FTT dismissed the appeal. The burden was on her to show that the figures in HMRC’s assessment should be reduced or the assessment set aside and she had not discharged it and as the deduction was not at 40% it could not be for tax.
  • The employer company was in liquidation and the liquidators would not provide records to explain the deduction. The FTT refused to issue a witness summons to the liquidators, discounting documents she provided as part of her case, including emails to her from the employer which stated that the last instalment payment was 'partially taxed'. They also misread bank statements she had provided.

The Upper Tribunal allowed Miss Jones’ appeal. HMRC had not discharged the burden of proof to show the discovery assessments were valid as they had not shown careless or deliberate behaviour by Miss Jones. The UT refused to remit the case back to the FTT to allow them to do so. It would not be in the interests of justice to allow HMRC to make a case which it ought to have made the first time around.

  • As the payment from which the deduction was made was processed outside of the payroll it was more prone to error. There may have been a reason for the deduction not being exactly 40% such as the personal allowance.
  • The email evidence should have been regarded as highly relevant by the FTT in deciding whether or not the deduction was made for or on account of tax. The FTT had erred in law in dismissing it and had allowed the UT to remake the decision.

The UT pointed out that the FTT had failed to consider the main issue:

  • Was Miss Jones entitled to take into account the amount deducted in excess of the basic rate in calculating her liability to Income Tax when, under Regulation 37 of the PAYE Regulations, her employer was only entitled to deduct tax at the basic rate? There was nothing to suggest that more than the basic rate had been paid over to HMRC.
  • In the alternative, to the extent the deduction exceeded that which the employer was legally liable to deduct by way of PAYE, was Miss Jones was left with a claim against the employer rather than a credit for tax deducted at source on her Self Assessment?

Comments

These questions did not need to be answered by the Tribunal due to them finding that the discovery assessments were not valid, a shame since the case has legal precedent and a definitive answer on these points might have helped others finding themselves in a similar predicament to Miss Jone.

Links

Termination, redundancy and leaving payments (from 6 April 2018)
How are redundancy and termination payments taxed? What amounts can be paid tax-free? What amounts are taxable as earnings?

Discovery assessment and time limits
What are the steps in making an appeal? What should your appeal cover? What does recent case law say on this topic?

External links

Heather Jones v The Commissioners for HM Revenue and Customs: [2020] UKUT 0229 (TCC)

FTT decision Heather Jones v HMRC [2017] TC6267

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