Proposed changes to ESC A19

Extra-statutory concessions apply where an equitable solution is required to correct a gap in tax law. In other words, they apply where the strict application of the law would produce an inequitable result. Many of them have disappeared as a result of the tax law rewrite exercise, which incorporated them into the tax legislation.

One of the more popular concessions is ESC A19, which applies where HMRC has received information from a taxpayer and failed to act upon it within a reasonable time. In such a case, the outstanding tax would be written off.

One case in which the taxpayer failed in his bid to use ESC A19 was Langham v Veltema CA 2004, 76 TC 259 [2004] STC 44. Mr Veltema acquired a house from a company of which he was director. He was advised that the value at the time of acquisition was £100,000 and included this in his income tax return for 1997/98, submitted on 8 July 1998.

In October 1999, the company filed its corporation tax return and included the value of the property at £100,000. The Revenue subsequently decided that the value should have been £145,000 and issued an assessment on Mr Veltema for the additional amount. Mr Veltema appealed contending that the issue of the further assessment was not justified, but this was rejected by the Court of Appeal and upheld the further assessment on the grounds that the inspector of taxes was not reasonably expected to know the value of the property.

This case stood the test of time for some years, but in 2006/07 Dr M Charlton entered into an avoidance scheme and in July 2009, HMRC issued an assessed a ‘discover’ assessment under section 29 TMA 1970. Dr Charlton appealed and the first-tier tribunal accepted that the assessment had been issued outside the statutory time limit. Judge Nowlan held that there had been a discovery but, distinguishing Veltema, the information provided on C’s return had been sufficient to show that ‘no officer could have missed the point that an artificial tax avoidance scheme had been implemented’. Dr M Charlton v HMRC (and related appeals) FTT [2011] UKFTT 467 TC).

HMRC has reacted with alarm and have issued a consultation document, seeking to:

• introduce the concept of ‘taxpayer responsibilities’ in respect of claims against the recovery of underpaid income tax in line with the HMRC charter;
• remove reference to capital gains tax, on the basis that the requirement for individuals to self-assess for capital gains tax makes the concession redundant.

Since individuals are also required to self-assess for income tax, it is puzzling why the concession would apply for income but not capital gains!

ESC A19 can be used by taxpayers to have outstanding tax written off where:

• HMRC has failed to act on information received from the 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 the information was received; and
• the taxpayer could ‘reasonably have believed’ that their tax affairs were in order.

The consultative document also seeks to remove the reference to taxpayer’s ‘reasonable’ belief and believes that this will clarify the legislation.

The ESC in its current form also deals with ‘exceptional circumstances’ in which tax arrears notified within 12 months after the end of the tax year can be considered in prescribed circumstances. The circumstances which make a case ‘exceptional’ are that HMRC:

• failed more than once to make proper use of the facts they had been given about one source of income;
• allowed the tax arrears to build up over two whole tax years in succession.