Tax period blunder

jimmo

With the figure for y/e 31/8/04 we can now see that your step dad
underpaid tax for 2004/05 and 2005/06. John Pierpoint was right about the basic rate being 22% in those years but in this case it doesn't really matter so I am not going to refine my figures.
You wouldn't want to re-open those years and HMRC cannot.
For 2006/07 the overpayment is ([EMAIL="7834@22%"]7834@22%[/EMAIL]) £1,723.48.
For 2007/08 the underpayment is ([EMAIL="16531@22%"]16531@22%[/EMAIL]) £3636.82
for 2008/09 the overpayment is ([EMAIL="3274@20%"]3274@20%[/EMAIL]) £654.80
So the balance for those 3 years is that there is tax outstanding of £1258.54

Turning now to the cessation of the business I assume that whilst you have said that the final accounts were for the year to 31/8/10 they were, in reality, accounts for the period 1/9/09 to November 09 when the business was sold.
The basis period for 2009/10 then is 1/9/08 to say 30/11/09. Yes that is more than 12 months but overlap relief or transitional relief were intended to take care of that and I will come back to that later.
So, to cover the whole of the basis period we have
year to 31/8/09 £11589
period to End of trading loss £6146
net assessable profit £5,443.
Now, just picking up on another point from the post by John Pierpoint, he referred to your step dad as a pensioner. I can't see where he got that from but is it true?
My reason for asking is that if your step dad's sole source of income was his business then the taxable profit of £5,443 for 2009/10 is below the Income Tax personal allowance of £6475 and there is no tax to pay. There would then be no point in us trying to establish what the overlap or transitional relief should be.
On the other hand, if your step dad had other sources of taxable income it could be worth pursuing.
Subject to what you say about other sources of income you seem to have a situation where there is no Income Tax liability for 2009/10, I seem to remember that you also had a Capital Gains Tax problem to deal with but that is another matter.
However there is a very real danger that HMRC will come looking for the £1,258.54 that we believe your step dad underpaid.
I am really sorry to do this but, quite frankly, the facts that your step dad got the basis periods wrong casts doubt on his abilities to handle his tax affairs and by implication, casts doubt on his abilities to maintain correct business records. In my days at HMRC if I had to open an Enquiry into a deceased case I could choose how to approach the enquiry. I would invariably opt for the simple approach, recover the £1,258.54 plus interest in the shortest time possible without looking at the books and records of the business. Those still at HMRC may not have the same freedom of choice that I had.
So, HMRC already know that your step dad has made erroneous Returns and it will not be difficult for them to do the same calculations that we have done here.
The £1,258.54 is easy pickings for HMRC if they choose to go for it. If they do go for it, it will be up to them how deeply they investigate.
Just as a "bye the way" a relative of mine is a police officer who works in the ARU (Armed Response Unit). He is a very highly trained driver and marksman and spends most of his time on motorway patrol booking people for speeding etc but at the end of each shift he often has more tickets than he can cope with so some have to be consigned to the bin.
So it is with Taxes. Are HMRC going to take this case up or not? I really cannot tell you. All I can do is point out the dangers.
You, on the other hand as personal representative, or someone helping the personal representative of the deceased, have your own worries. Will they, wont they? Who can tell?
Do you sit back and let time pass waiting to see if HMRC take an interest? Do you try to force the issue by asking for clearance when you know something is wrong?
I really don't know what is best for your family.

joejtd

joejtd wrote: »

Irony is my mum tried to get my stepdad to retire 15 years ago at 65 before this quagmire was entered into.

I said this in the post before John_Pierpoint posted. My stepdad was 80 when he died. He had income of approximately £8000 a year from pensions etc.

The CGT related to the sale of the business.

Other than the confusion over dates I think the accounts were solid. The business was using pc accounts software for the last 8 yrs, after his book keeper retired. It was then the date discrepancy occurred. As I was the computer geek I helped him do the online self assessment, not knowing any better and not seeing anything to the contrary I just entered the details for the year upto August 31 as invariably that was when we were submitting them. I think it would have been a lot easier and less stressful doing them the way they were supposed to be done.

Anyway £1258.54 seems fair enough, if HMRC feel they have the time and resources to launch a full on investigation with all they've got on their plate at the moment so be it. It's worth bearing in mind that if he was incompetent in keeping his accounts, he could just have well have overpaid.

I think I'd rather it was all out in the open as there has never been an intention to deceive, and it would be a shame to start now.

jimmo

joejtd wrote: »

I said this in the post before John_Pierpoint posted. My stepdad was 80 when he died. He had income of approximately £8000 a year from pensions etc.

Now you have pointed that out I cannot understand how I missed it , sorry.
That does require some amendments to my figures for 2009/10.
We still have a net assessable profit of £5443 but there is also the pension(s) of £8,000. That is total assessable income £13,443
The personal allowance for over 75s was £9,640.
That leaves leaving £3,803 chargeable @20%
That tax is £760.60.
The married couples allowance is something I have no experience of but if I have read it correctly that tax is reduced by ([EMAIL="6965@10%"]6965@10%[/EMAIL]) £696.50
That leaves net tax payable of £64.10.
There is then some potential to avoid that £64.10 by establishing the appropriate amount of transitional relief or overlap relief.
Transitional relief came about in 1996/97. Overlap relief arose from the first 2 years of trading if they were after 1996/97.
If you know the profits for whichever years are relevant then it will be fairly easy to calculate the relief due but it is almost certain that HMRC will not have records going back that far so it is up to you to justify any relief claimed.
Now, speaking as a former Inspector of Taxes I like to think that in the circumstances you describe, I would readily the principle that either transitional relief or overlap relief is due, no matter how long your step dad has been getting his Returns wrong and arguing about the amount when the tax at stake is £64.10 really is not worth it.
In terms of Self Assessment, you have to do the positive thing. When completing the Return for 2009/10 you either claim transitional relief or overlap relief reducing the tax due to nil, or you omit to claim and pay up the £64.10.
If I were in your position I like to think that I would include an overlap relief claim of an estimated amount of £4000 to reduce the assessable profits from the business from £5443 to £1443 with the result that no tax is payable. Your explanation, on the Return of why you have used an estimate of the overlap relief will clearly point to your step dad's failing to declare the correct profits in quite a number of Returns and I would definitely not write separately on that.
Then, certainly in the first instance, the ball is in HMRC's court and it is up to them to challenge or not. All the information is there.
Give it a couple of months for the wheels to grind ant then send a letter, from the personal representative of the deceased requesting clearance.
I think that is the best you can do.

Cook_County

You will also need to address the figures for pensioners tax credit purposes as well as it sounds like your parents should have qualified to claim. These numbers may also need to be re-visited.

Don't forget that a computer program keeping accounts won't get capital allowances and capital allowances basis periods correct and won't claim the £3 a week use of home unless this is entered in the software somewhere.

joejtd

Jimmo, I will post how we get on and let you see the conclusion of this comedy of errors. Happy New Year and again thanks for all your help.

jimmo

Cook_County wrote: »

You will also need to address the figures for pensioners tax credit purposes as well as it sounds like your parents should have qualified to claim.

Pension Credits!
Never thought of that.
When talking about an estimated overlap relief of £4,000, I just plucked a figure out of the air because the only tax at stake was £64.10.
If Pension Credits are involved as well you may well need to be rather more careful because both the tax and Pension Credits at stake will both be reviewed in the risk assessment procedure.

joejtd

Postscript: Letter came to day thanking us for our letter of 28 December. It apologised for delay and said on looking at all details they would no longer be pursuing tax matters relating to my step dad and were happy that their was nothing owing to them. My Mum is very happy and I'm relieved that a line has been drawn under what could have been a bit of a mess.

Thanks for all your help.