Too Late To Claim? Not Necessarily!

Mark McLaughlin highlights overpayment relief in the context of tax return errors by individuals.

Mistakes can easily happen in tax, some of which may result in an overpayment by the taxpayer. For example, an individual may have made an error when completing their self-assessment tax return, resulting in tax being overpaid. The error is only discovered some time later. What can be done?

The tax legislation allows individual taxpayers (and trustees) to amend their tax returns to correct mistakes, etc. However, the amendment cannot normally be made more than twelve months after the filing date for the tax return. What if this time limit has passed?

That’s a relief!

Fortunately, a form of relief is potentially available in such circumstances. For individuals, the ‘overpayment relief’ rules apply for income tax and capital gains tax purposes (TMA 1970, Sch 1AB). Overpayment relief also applies to claims in respect of overpaid Class 4 National Insurance contributions (see HMRC’s Self-Assessment Claims manual at SACM12005). There are similar rules for companies (FA 1998, Sch 18, Pt IV), but this article concentrates on overpayment relief for individuals.

A claim for overpayment relief can be made, broadly, where a person believes that tax has been paid, assessed, determined or directed, which is not due. However, the relief is not available in certain specific circumstances, which are listed in the legislation as ‘Case A’ to ‘Case H’ (in TMA 1970, Sch 1AB, para 2). These overpayment relief restrictions are broadly as follows (see SACM12065 onwards for detailed guidance):

Case A: Mistake in claims, elections, etc. - where the amount in the overpayment relief claim arises broadly from a mistake concerning a claim, election or notice (e.g. failing to make a claim), or capital allowances;

Case B: Other relief available - where the person can correct the overpayment or over-assessment by other means (e.g. by amending a return, if within the time limits);

Case C: Other relief out of time - where the person could have obtained relief by other means when they first knew, or ought reasonably to have known, that the relief was available;

Case D: Grounds of claim considered on appeal - where a court or tribunal has already considered the grounds on which the overpayment relief claim is made; also, where HMRC has considered the grounds and settled the appeal by agreement;

Case E: Grounds of claim not considered on appeal - where the person knew (or should reasonably have known) the grounds for the overpayment relief claim at a time when they could have been put forward on an appeal to a court or tribunal;

Case F: HMRC proceedings - where HMRC has taken proceedings to enforce payment of the amount in the overpayment relief claim under an assessment or determination, or where proceedings have been settled by agreement; and

Cases G and H: Practice generally prevailing – overpayment relief is not available in respect of income tax or CGT that was understood to be due under the practice generally prevailing at the time the liability was calculated (Case G), or for PAYE income where the amounts were calculated in accordance with the practice generally prevailing 12 months after the end of the tax year (Case H). However, Cases G and H do not apply if the tax is charged contrary to EU law. In addition, the onus is on HMRC in any appeal hearing to demonstrate that there was a practice generally prevailing (SACM12105).

Overpayment relief is obviously helpful, but the above restrictions present high hurdles for the taxpayer to jump over when considering whether an overpayment relief claim is appropriate.

Example 1: Overpayment relief claim available

Joe understated an allowable cost when calculating his profits from self-employment, which resulted in an overpayment of tax. However, he only spotted the problem after the statutory deadline for amending the return had passed.

An overpayment relief claim may be possible (see the time limit for making claims below).

Example 2: No overpayment relief claim possible

Ken’s profit from self-employment was arrived at after deducting an expense which had been restricted in accordance with normal practice at that time. However, in a subsequent tax case, it was decided that this practice was wrong and that such expenses should not be subject to restriction.

Unfortunately, an overpayment relief claim is not available to Ken, due to restriction G above.

Practical Tip:

An overpayment relief claim cannot be included in a tax return. The claim must normally be made in writing within four years of the end of the ‘relevant tax year’. This is defined as broadly the tax year to which the incorrect tax return relates, or the one in which the tax was paid, or the one to which the excessive assessment, determination or direction relates, depending on the circumstances. However, there is an exception from the above time limit in cases of ‘special relief’ (under TMA 1970, Sch 1AB, para 3A). For HMRC guidance on the contents of a claim, see SACM12150.