Memorandum submitted by the Low Incomes
Tax Reform Group
1. The Low Incomes Tax Reform Group (LITRG)
is an initiative of the Chartered Institute of Taxation to give
a voice to the unrepresented in the tax system. The Group aims
to help people on low incomes to cope with their tax affairs and
campaigns for a simpler and more accessible tax and benefits system.
2. We would like to draw the Committee's
attention to an issue raised in the Comptroller and Auditor General's
Standard Report at paragraphs 3.47 to 3.53. This identifies that
some 420,000, as yet unidentified, pensioners are going to be
thrown into debt due to HMRC error.
3. We believe that the remedial action proposed
by HMRC to correct a series of its own failings will bear particularly
harshly upon those pensioners with lower or modest incomes. We
also believe that the administrative effort required to make the
retrospective corrections proposed is disproportionate to the
amount of tax loss.
4. The series of administrative failings
by HMRC leading to the current position is outlined in paragraphs
3.47 to 3.51.
5. In paragraph 3.52 remedial action is
proposed which consists in writing off any tax arising before
6 April 2007. This would have been necessary in any event as customers
of HMRC would have almost certainly had a right to remission of
this tax under the terms of Extra-Statutory Concession A19. Our
concern is for those low-income pensioners (probably the vast
majority within the estimated population of 420,000) who will
have an unexpected and unwelcome debt notified to them some time
in 2008-09 (or even 2009-10).
6. The debt will have been accruing since
6 April 2007 and is likely to accrue until April 2009 when it
will be included as an underpayment in the codings of the pensioners.
This will, of course, coincide with accurate collection of the
additional liability for 2009-10.
7. It is of course possible, with a diversion
of resources by HMRC, to ascertain from the major pension providers
the identities of the pensioners involved and to warn them appropriately
in the current tax year. Instead we have an accruing debt position
hanging over an unnamed group which will cause worry and distress
to an even wider group wondering if it applies to them.
8. The fair and reasonable approach to this
issue is to announce that no tax will be collected from a pensioner
up to the point that HMRC write to them to tell them that they
are one of the people affected. From that point on the pensioner
will, in any event, have to consider an adjustment to their lifestyle
to cope with the future additional tax liability.
9. It is likely that the amounts individually
will be small in terms of the administrative effort required to
correct matters. It will be an extremely time-consuming manual
process to identify the different categories of pensioner involved:
— Some will be non-taxpayers and will
remain so after investigation, but may need a home visit from
HMRC in order to ascertain their position.
— Others will have additional liabilities
which will then be the subject of a backdated claim to the Department
for Work & Pensions for their existing Pension Credit (tax
being deductible in arriving at income for Pension Credit purposes).
The liability will be collected by one government department and
repaid by another.
— Others will, for the first time,
be eligible to claim Pension Credit because of this new tax liability
which will reduce their income below the Pension Credit threshold.
— Some pensioners will already have
disclosed this income on Self Assessment returns; but, because
this particular source of pension may have been amalgamated already
with other pension sources on those returns, a detailed enquiry
will be necessary.
10. If HMRC feel that some significant pensions
may be being paid without tax deduction, then an immediate request
in October 2007 to the pension payers to notify the names and
addresses of those receiving annual payments over £1,000
(£220 of tax at risk) would enable the greatest risks to
be addressed today and not in a year's time.
11. At the end of this submission, we have
provided a hypothetical, but not untypical, example of the types
of problem which will be uncovered by the HMRC approach and the
efforts that will be required by multiple government agencies,
the taxpayer concerned and the voluntary sector. Whenever problems
of this magnitude emerge the hard-pressed voluntary sector has
a surge of pensioners wanting independent advice.
12. It may be that HMRC will say that they
have to collect the outstanding liabilities in order to be fair
to all taxpayers under their collection and management responsibilities.
The riposte to this is that they should have due regard to the
worry and distress brought to a particularly vulnerable section
of society and the high costs of collection. Materiality is an
important part of HMRC's duty of collection and management.
13. If HMRC wish to see a precedent for
writing off liabilities they should look no further than the amounts
of tax credits they are writing off due to official errors.
14. If HMRC wish to see how other government
departments deal with their most vulnerable customers they could
take a leaf out of the DWP's book who in July conceded that they
had failed to match records appropriately for recipients of incapacity
benefit. The DWP commented:
"These awards have been made, and payments
received, in good faith. People will have made their retirement
plans on the expectation of this level of income. For state pension
the regulations will ensure that state pension will continue at
the existing level and any subsequent benefit awarded to a surviving
spouse or civil partner, based on the deceased's contribution
record, will also be protected. No recovery will be sought for
past periods."
15. We have been authorised by Age Concern,
Help the Aged and TaxHelp for Older People to say that they have
considered this memorandum and are in agreement with its recommendation.
John Andrews OBE
Chairman
Low Incomes Tax Reform Group
October 2007
ILLUSTRATIVE EXAMPLE
Susan Smith is a widow aged 62. She has a basic
State Pension and income from a small part-time job. She pays
tax at a top rate of 10%. She has been receiving a small pension
of £10 a week which has been paid tax free (in error, but
authorised by HMRC). She has disclosed this pension to the DWP
and to her local authority for the purposes of her claims to Council
Tax Benefit and Housing Benefit. The DWP have told her that her
income is just too high for her to claim Pension Credit.
This pension will now generate an additional
tax liability of £52 for the current tax year and potentially
a higher liability in 2008-09 when the 10% lower rate band is
abolished and she becomes liable at 20%. She will not find this
out until some time in 2008.
When Susan finds out that HMRC have given her
a tax debt for the first time in her life she will also find that
this is just the start of her troubles. HMRC will attempt to collect
the debts for 2007-08 and 2008-09 from her part-time job income
in 2009-10 (should she still be working then).
The tax liability for 2007-08 reduces her income
for Pension Credit purposes in that year and makes her entitled
to the benefit. So in 2008 she will have to approach the DWP with
a back-dated claim for Pension Credit which will require her to
obtain from HMRC a certificate indicating that Susan did indeed
have a tax liability for 2007-08 (even though it was going to
be collected in 2009-10).
Susan will then complete an appropriate Pension
Credit claim form and the DWP will then make to Susan a retrospective
payment of Pension Credit for 2007-08. At the same time this receipt
of Pension Credit will, under the passporting rules mean that
Susan is entitled to enhanced awards of both Housing Benefit and
Council Tax Benefit, together with a range of other benefits,
such as free dental checks. She will have to approach her Local
Authority for retrospective claims and HMRC may have to provide
appropriate certification of the tax paid and the DWP of entitlement
to Pension Credit.
Susan's position will have to be re-evaluated
for both 2008-09 and 2009-10.
Of course, if HMRC only started to collect the
liability from the time that Susan is notified none of this complexity
caused by arrears would occur.
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