HMRC trying to charge tax I've already paid!

TaxedLoafer

First an apology, I am not a newbie to MSE, but I wish to keep the issues I am about to detail anonymous and separate from my normal account. Now the story:

At the end of 2007 I left my job to spend time devoted to my passion of travel, mainly funded by the exercising of share options that were held in the USA - I have always worked solely in the UK, but the shares are traded in the US as its parent company is a large US organisation. As with any US stock, I made sure that the appropriate non-domiciled certificates were up to date and registered so that I qualified for US tax exemption under the Double Tax Treaty that the UK holds with the US. Therefore UK tax was withheld at source by my US stock broker when I exercised the options and I have statements showing this deduction. As a 40% tax payer, I was able to see that this had happened as the deductions were 40% not 28% which I believe is what a US tax withholding would be.

Fast forward 2 years and I am now in dispute with HMRC who claim that I have not paid around £6,000. This figure is based on the details given to them by my last employer. On examining their numbers, they claim I only paid tax at the basic rate for my options, where my actual statements show that I paid the correct amount. I sent HMRC all my details including copies of statements showing the tax withholding and they have simply replied restating my last employer's figures and asking me to now agree to those figures. Obviously I will not do that as I am still positive they are in error. They seem to think that I am deliberately out to defraud them and they have not even acknowledged, let alone challenged, what I have sent them to show the correct withholding.

Because of the worry of all this, I have had to cancel my plans to spend some months traveling around the Middle East this year as £6,000 is the yearly travel budget I set myself and I do not know what else I can do to persuade them I am correct.

My question to the wise people here is two-fold: Should I seek professional advice while continuing this dispute and exactly what sort should I seek? I believe the answer to the first part is probably yes, but I am loathe to pay out money because of someone else's mistakes. While I accept it is better to lose a little than a lot, I can't afford to lose either without ruining a lifestyle that I worked 20 years to achieve. Because I have never felt the need to engage a tax advisor or accountant and do not have any friends that could recommend one, I have no idea of what sort of advice I should seek or with whom. When I did some internet searches, they all seem very good at filling in your self assessment forms for you or telling you how to avoid tax but none seem to have anything to say about tax disputes from the past and especially not ones dealing with the Double Tax Treaty and foreign holdings. So any pointers as to where to start looking and what specifically to search for would be gratefully received.

As secondary questions: if - despite the proof I have of payment - HMRC insist I need to pay again, how long will this decision take to become final? I have heard about these things dragging on for years, but is that an urban myth? And, as I am not earning any more, can they take money from my bank accounts without a lengthy court battle?

Thanks In Advance

dori2o

Were the funds from these options paid along with your normal salary, i.e. did they form part of the income on your P60/P45

TaxedLoafer

Hi dori2o,
Thank you for your reply.

The money from the options was paid directly to me (after tax was withheld) not through my employer, and was not on my P45.

dori2o

TaxedLoafer wrote: »

Hi dori2o,
Thank you for your reply.

The money from the options was paid directly to me (after tax was withheld) not through my employer, and was not on my P45.

OK,then what information are the using from your employer?

If you sold the shares in a private transaction what information could your ex employer be giving to them?

It may also be worth while speaking to your ex employer. If they are giving HMRC duff information then maybe this is whats causing the confusion.

noh

TaxedLoafer wrote: »

...........................................
As with any US stock, I made sure that the appropriate non-domiciled certificates were up to date and registered so that I qualified for US tax exemption under the Double Tax Treaty that the UK holds with the US. Therefore UK tax was withheld at source by my US stock broker when I exercised the options and I have statements showing this deduction. As a 40% tax payer, I was able to see that this had happened as the deductions were 40% not 28% which I believe is what a US tax withholding would be.

I wasn't aware that US brokers acted as income tax collectors for HMRC.
I can't find any info to suggest they do.
I would have expected any income from share options to be taxed via PAYE and/or self assesment.

dori2o

noh wrote: »

I wasn't aware that US brokers acted as income tax collectors for HMRC.
I can't find any info to suggest they do.
I would have expected any income from share options to be taxed via PAYE and/or self assesment.

Exactly how I thought it would have been done, hence why HMRC is taking information from the employer.

As I said above, speak with your former employer and find out what information they have sent to HMRC.

noh

Having looked at HMRC website I see that income tax is payable on the difference between the option price and the market value at date of exercise.
This is the information that the employer should be passing on to HMRC. Along with the amount of tax they have deducted.

TaxedLoafer

Thank you for your replies,

Just to clarify, this was a company option scheme and the company is supposed to forward both the gain and tax paid to HMRC. The US and UK have a specific treaty: the Double Taxation Treaty (see: www. hmrc. gov. uk/ international/ treaties1. htm) this in conjunction with a non-domicile declaration (W-8BEN) requires the agent - in this case, my stockbroker - to withhold the amount of tax due to the foreign state, ie the UK. This is then paid via the respective governments. The exact mechanism of which I do not know about. But I do know it is done to try and reduce tax evasion, there was no way for me to get my hands on the money without having tax withheld somewhere.
I also have no idea about why (or why not) it would be on my P45, though it isn't, on the note they passed on to HMRC it was explicitly referenced as "Share Option Gain" As this caused no interest in HMRC, I can only assume that it was expected. What is more, the share option gain is correct, only the amount withheld for tax is wrong (and conveniently exactly the base tax rate to the penny, leading me to believe they calculated the tax and only retrieved the gain from the broker as there are exchange rates to consider). The share option scheme at my old company has been running like this for many years and I never heard of any problems like mine while I was there. I am as sure as I can be - not being an expert in the matter - that the basic series of actions followed by me, my broker and my old employer are correct, it is not the process it is the amount that I dispute.
To be honest, the comments about whether my employer should be telling HMRC highlights one of the problems I am having with regard to getting some advice. I seem to know more about the topic (and that is very little) than the tax advisors I have tentatively made inquiries to. This is not a dig at those posts, everything is appreciated. It is one thing to have someone on this forum saying they haven't heard of the thing: that is fine but it is totally different to have a paid professional tell you they haven't heard of it when you are looking to hire them.
I am also having trouble getting someone to talk to me about this at my old company. They outsourced all their payroll services several years ago and now have no one there, it appears, to deal with this sort of issue, while the company they outsourced to have not been forthcoming about dealing with a former employee.

dori2o

As it is a share option dealt with via your ex employer HMRC will always accept their figures and their figures only.

You need to resolve this matter with the ex employer, and get them to send the correct information to HMRC.

If you have no luck with the payroll company write directly to someone in authority of the company. They are ultimately responsible for anything to do with the company, whether it is outsourced or not.

noh

I understand that you will have more knowledge of how the scheme works than I as you have been involved with it.
I did skim through the double taxation treaty between the US and UK before making my previous post.
http://www.hmrc.gov.uk/international/usa-consolidated.pdf
I could not see any reference to tax being collected on behalf of the other state. Nor could I see such a reference in the W-8BEN or in its instructions.
If you can find reference please point it out to me.

http://www.irs.gov/pub/irs-pdf/fw8ben.pdf
http://www.irs.gov/pub/irs-pdf/iw8ben.pdf

I don't understand what you have written here:-

What is more, the share option gain is correct, only the amount withheld for tax is wrong (and conveniently exactly the base tax rate to the penny, leading me to believe they calculated the tax and only retrieved the gain from the broker as there are exchange rates to consider)

What do you mean by "gain from the broker"? do you mean the figure for the gain was obtained by your employer from the broker?

As I understand it exercised share options for employes are treated as income and as such should be declared to HMRC by the employer and PAYE and NICs deducted by the employer.

Here is the form I believe the employer should have submitted to HMRC.
http://www.hmrc.gov.uk/shareschemes/without-advantages-form-42.pdf

TaxedLoafer

Hi noh,

I'm sorry but I can't give you exact detail of how and why these procedures operate. All I know is that it is something to do with Non-Resident Alien tax withholding in the US, Foreign Tax Credits and the streamlining of these through the Double Taxation Treaty, there may be other things at play here too, I just don't know, hence this post. If I knew all these details I imagine I would be able to answer my own questions. All I know is that the exact same procedures have been in place at my old employers and have worked for thousands of employees over the course of the last decade or more. I don't believe it is the actual system at fault, just some of the numbers that are being entered into it in my specific case.

What do you mean by "gain from the broker"? do you mean the figure for the gain was obtained by your employer from the broker?

Exercise Price - Grant Price = gain and yes, my employer could only have got this through the broker as they took no part in the transaction, so would otherwise not know how much my gain was to inform HMRC.