Equitable liability - petition

Not before time, we may now be seeing the early signs of a concerted move to lobby for the continuance of the doctrine of equitable liability, which the government is seeking to withdraw on the quiet via the introduction of the new rules for time limits on claims effective from April 2010 and what appears, frankly, to be a disingenuous reliance on the decision in Wilkinson combined with a wilful blindness to FA 2008, section 160.

For those unfamiliar with the doctrine, it was best explained by the Inland Revenue, as was, in 1995, in the their now defunct Tax Bulletin.  A reproduced version of the Revenue's two page statement can be downloaded here, or, alternatively, can be read below.   The publication was  officially withdrawn by the Revenue in 1997 as being no longer current but the practice has, nevertheless, continued to be applied up to the current day; and most typically  at the behest of tax experts acting pro-bono for the benefit of the most needy and disadvantaged in society. 

Whilst, at first blush, this may seem like nothing but an obscure and non-sexy issue for unsympathetic professionals to complain about, that is most definitely not the case.  One hopes that the majority  of lawyers and accountants will take a few minutes to lend their support and that, elsewhere, those political commentators who lobby about the lack of fairness in the UK system of taxation will see fit to lend a voice in helping to bring this issue to the widest possible audience.

Keith Gordon has started a petition which can be accessed HERE .

__________________________________________________________________________________

EXCESSIVE ASSESSMENTS: THE PRACTICE KNOWN AS 'EQUITABLE LIABILITY'

Most people keep their tax affairs up to date and pay their tax at the right time. If people have genuine difficulties in meeting their payments they should let us know as soon as possible.  The more we are kept informed, the more we are likely to be able to help.

If a taxpayer receives an assessment and does not think it is right, he or she can appeal against it and has thirty days from the date on which the notice of assessment was issued to do so. Inspectors will accept appeals once that time limit has passed if they are satisfied that there was a reasonable excuse for not making the appeal within the time limit and the application to admit the appeal late was made without unreasonable delay thereafter. If the Inspector does not think these requirements have been met, the application must be referred to the Appeal Commissioners for a decision.

The Appeal Commissioners are completely independent of the Inland Revenue and their decision on this matter is final.  Otherwise, an assessment is final and conclusive and the Inland Revenue is able to take
recovery proceedings -- through to bankruptcy if necessary -- for the full amount. There is no legal right to adjustment of the liability.

However, where the taxpayer has exhausted all other possible remedies, the Inland Revenue may, depending on the circumstances of the particular case, be prepared not to pursue its legal right to recovery for the full amount where it would be unconscionable to insist on collecting the full amount of tax assessed and legally due.

This practice is known as 'equitable liability' and was originally introduced to protect other creditors in a bankruptcy at a time when, prior to the 1986 Insolvency Act in particular, the Inland Revenue's preferential rights were wider. Crown preference meant that, if the Inland Revenue maintained an 'excessive' claim for a sum above that which would be due if based on the true profits, other creditors would be at a disadvantage. The term 'equitable liability' therefore reflects the original principle of fairness to other creditors.

It has become increasingly apparent to us that, while many practitioners know of this practice, some do not. To remedy this apparent unfairness, the Chairman of the Board of Inland Revenue confirmed in evidence to the Select Committee on the Parliamentary Commissioner for Administration that we would publish an explanation of the practice in an article in Tax Bulletin.

The Inland Revenue may be prepared to consider applying 'equitable liability' where, in the circumstances of the particular case and in the light of all the evidence, it is clearly demonstrated that:

• the liability assessed is greater than the amount which would have been charged had the returns, and necessary supporting documentation, been submitted at the proper time, and

• acceptable evidence is provided of what the correct liability should have been.

In such cases the Inland Revenue may be prepared to accept a reduced sum based on the evidence provided, and not to pursue its right of recovery for the full amount.

This treatment will depend on the circumstances of the particular case, and is conditional on the taxpayer's affairs being brought fully up to date. The Inland Revenue would expect full payment to be made of the reduced sum. Furthermore, it would be most unusual for such treatment to be applied more than once in favour of the same taxpayer.

In determining the revised liability, the Inland Revenue will have regard to all the relevant circumstances of the case. Acceptable evidence of the reduced liability must be produced. It will not be sufficient to seek to replace the assessment merely with the taxpayer's or the accountant's estimate of the liability.  Cases are dealt with in the Inland Revenue's Enforcement Offices in Worthing and Belfast and Enforcement Section in Edinburgh, but Inspectors in local offices will be involved in considering the quantum of any claims for reduction of liability and the acceptability of the supporting evidence.

POSITION UNDER SELF ASSESSMENT

Self Assessment will change the way in which liability is established and will remove the Inland Revenue's reliance on estimated assessments. The liability that taxpayers declare on their returns should normally reflect their proper liability and there should be no need for the Inland Revenue to review those cases in the way described above.

However, where a taxpayer has not submitted his or her return, the Inland Revenue can determine the taxpayer's likely tax liability so that the tax can be pursued. There is no right of appeal against such determinations, and the tax determined is legally enforceable. Taxpayers can displace the determination with their own self assessment at any time up to the fifth anniversary of the statutory filing date for the year of assessment in question (or one year after the determination was issued, if later).

It is unlikely therefore, that the point will often be reached where a determination can no longer be displaced. Where exceptionally that does occur and the conditions of the practice described are fulfilled, then the Inland Revenue will be prepared to consider extending their practice to meet this situation.

Source: Inland Revenue Tax Bulletin, No. 18, issued August 1995