SACM11020 - Claims involving two or more years: how is effect given to the claim

Throughout this manual legislative references are to the Taxes Management Act 1970 (TMA70), unless otherwise stated.

Schedule 1B Paragraph 2(6) sets out how effect is to be given to the claim. It reads

‘(6) Effect shall be given to the claim in relation to the later year, whether by repayment or set-off, or by an increase in the aggregate amount given by S59B(1)(b) of this Act, or otherwise’

So, that says we can give effect to the claim in one of four ways

1. by repayment

2. by set-off

3. by an increase in the aggregate amounts given by S59B(1)(b), or

4. otherwise.

Repayment

If the customer requests a repayment we are obliged to make it unless there are outstanding debts in which case we could set it off against those debts.

Set-off

We can cover outstanding debts as stated above or set it off against amounts becoming due and payable provided the customer agrees to that course of action.

An increase to aggregate amount given by S59B(1)(b)

That section relates to the aggregate of the payments on account made under section S59A and any tax deducted at source in respect of the year in question.

There may well be instances when it is to the customer’s advantage to have his claim given effect to in this way as it may ease the burden of any interest charges.

As that is so, it is necessary to consider each option when considering how to give effect to the claim and to give effect in the way that is most beneficial to the customer unless he has specified how effect is to be given to his claim.

Otherwise

A repayment, set-off or increase in the S59B(1)(b) amounts should cover most situations. However, the inclusion of the word ‘otherwise’ may enable us to give effect to the claim should a peculiar set of circumstances arise and the other methods of giving effect to the claim be impossible or against the wishes of the customer.

Lord Hodge, in the Supreme Court decision of R (on the application of De Silva and another) v Commissioners for Her Majesty’s Revenue & Customs [2017] UKSC 74 states

“Paragraph 2(6) includes the words “or otherwise”, which open the door to an adjustment of the amount chargeable to income tax by virtue of section 8(1AA)(a), which provides that the amounts in which a person is chargeable “take into account any relief… a claim for which is included in the return” and section 9(1)(a) which makes similar provision for the self-assessment.”

So where a claim is made in the earlier year, and, following an enquiry into the later year’s return, it is found relief is given in error, HMRC can amend the later year’s return by altering the amount chargeable in the later year to recover the wrongly paid relief.

What is the effect on the self assessment

There is no effect on the self-assessment for the earlier year.

The claim forms part of the self-assessment for the later year.

Are payments on account affected

The earlier year

A claim to carry back losses will not affect payments on account based on the self-assessment for the earlier year as that self-assessment is unchanged by the claim.

As that is so, the amounts due for that year remain payable on the normal due dates.

Payments on account should be made

  • on 31 January within the relevant year of assessment, and
  • on 31 July following the end of the year of assessment.

Any balancing payment remains payable on 31 January following the end of the year of assessment.

Late payment interest will be charged on amounts paid late under:

  • s86 TMA 1970 up to 30 October 2011
  • s101 Finance Act 2009 from 31 October 2011 onwards.

Late payment penalties may also be charged.

This is confirmed in the case of Norton v Thompson (SpC399)

Where the taxpayer has not paid the sums due for the earlier year, they will not be entitled to a repayment as HMRC will be able to set off the amount due to them against the outstanding liabilities.

Example for the earlier year (the year before the loss arises)

John’s tax return for the tax year ended 5 April 2019 is due on 31 January 2020.

John’s payments on account (PoA) for this tax year are due on the following dates:

  • PoA 1 - 31 January 2019
  • PoA 2 - 31 July 2019
  • Balancing payment - 31 January 2020

John must make these payments; even if he anticipates a loss during the tax year ended 5 April 2020 that he intends to carry back to the tax year ended 5 April 2019.

The later year

The taxpayer may claim to reduce the payments on account due for the later year because of the loss incurred.

As explained above effect may be given to the claim by increasing the aggregate amounts given by S59B(1)(b), that is

  • the aggregate of any payments on account made under section 59A, and
  • any tax deducted at source.

If the taxpayer chooses to have relief given in this way, it could be said that the payments on account, for the later year, have been affected by the claim.

But as the payments on account are based on the self-assessment for the earlier year (which is unchanged), these payments must still be made. It is only the aggregate amount that is increased.

Late payment interest will be charged on amounts paid late under:

  • s86 TMA 1970 up to 30 October 2011
  • s101 Finance Act 2009 from 31 October onwards

Late payment penalties may also be charged.

Example for the later year (the year the loss arises)

Nicola’s tax return for the tax year ended 5 April 2020 is due on 31 January 2021.

Nicola’s payments on account (PoA) for this tax year are due on the following dates:

  • PoA 1 – 31 January 2020
  • PoA 2 – 31 July 2020
  • Balancing payment – 31 January 2021

Nicola must make both PoA 1 and PoA 2, even if she anticipates a loss for this tax year, as these payments are due under s59A. If Nicola claims loss relief against these payments on account, this will be given by increasing the aggregate amount under s59B.