Underpaid Tax on Redundancy Package

slimjimmer

Hi,

My father was recently contacted by HMRC about a fairly large underpayment of income tax (roughly £8000) for the tax year 2009/2010. This was due to him receiving a redundancy package on leaving employment which he should have paid the higher rate of tax at the time. My father was unemployed for a while after that and after a brief spell of employment again lost his job this Christmas. As such he would find it very hard to pay this sum (something the HMRC Enquiry Officer seemed to care little about) and would likely have to sell up the family home. Obviously we would like to avoid that and so I have been looking at ways to either pay the tax back at a slower rate or better yet, not at all.

According to HMRC, both my father and his employer did everything correctly at the time, but at the end of that tax year a change in rules occurred that changed the way redundancy packages were taxed and this was allowed to be applied retrospectively to the previous tax year.

Now, according to my own research and this site, you can avoid paying a tax demand such as this by using the 'ESC A19' concession. To do so you need to provide details of:

• the tax year in question.
• the underpayment the claim relates to.
• what information HMRC failed to make proper and timely use of (plus any supporting information).
• what date this information was provided.
• reason(s) why you thought your tax affairs were in order prior to receiving the Tax Calculation.

- We have details of the tax year in question and the underpayment, so that deals with the first two parts.
- The information HMRC have failed to use is the full details of my fathers total pay for the year (salary + redundancy package) and they have taken 3 years, with two full tax years in that period, before they used this information. Anything over one tax year qualifies as failed to make proper and timely use according to HMRC website.
- This information would have been supplied when my father was made redundant at the end of 2009.
-The final one is a bit harder to prove, but the reason we believed the tax affairs to be in order was because;
(a) He had paid clearly paid tax on the amount.
(b) The calculations were performed by the company accountant.
(c) As the rules stood at the time the calculation was correct and so no other action was needed to be taken.

On top of this as mentioned before, the Enquiry Officer himself said that this was neither my fathers nor his employers fault and was due to a rule change. This surely helps our case with the final point (for me that is nearly as good as HMRC admitting it was their error).

So basically, if anyone can confirm that my assumptions are correct and it would be worth fighting this, and if so any tips for how to go about doing it, it would be greatly appreciated.

Thanks in advance for any replies!

James

(sorry for the length of this post and if it is in the wrong place)

System

Are you sure about that bit regarding retrospective changes to the way redundancy payments are taxed - that doesn't sound right to me. There has been a recent ish change to the tax codes used to deduct tax from lump sum payments, but this wasn't retrospective.

As for ESC A19 - this only applies if HMRC has caused an underpayment by failing to act on information. If it didn't cause the underpayment, HMRC has four years from the end of the tax year to notify any underpayment.

From what you've posted it doesn't appear HMRC caused the underpayment. At the time the redundancy was paid his former employer would only have deducted basic rate tax from the payment. Your father would have needed to make his own arrangements with HMRC to pay any higher rate tax due after the end of the year.

You can check this by going back to the paperwork he received when the employer paid the redundancy. I'd have expected them to take any tax exempt part into account before deducting 20% tax from the balance.

Of course, there may be more to it, but I hope this helps.

slimjimmer

Ok, I'm a little confused. His employer has only applied the lower tax rate to the redundancy but he should have been taxed at the higher rate and so paid the rest of the pay at the end of the tax year? Why wouldn't it been done through PAYE like the rest of his tax? And how was he to know this?

And with regard to the rule change, the enquiry officer said something along the lines of that redundancy used to have a tax free portion and then the rest was taxed at the lower rate but was changed so that it was taxed at the higher rate if you were in that bracket and that even though the change came in at the end of the tax year (ready for 2010/11), it applied to the previous tax year (2009/10) as well. I may have this wrong but that is what I took from the explanation.

System

Well it's yes and no on the first point.
It's not an easy one to describe in a brief forum post but I'll give it a go.

Until April 2011 (I think). Employers took the tax free element into account and deducted basic rate tax from the difference using code BR. Leaving the scenario I set out.

Since 2011 - they still take the tax free element into account but now use non cumulative 0T Month 1. In very rough figures this would tax the first 3000 of the taxable element of payment at basic rate before going into the higher rates for the rest. But this change wasn't retrospective.

It seems like the adviser was explaining the underpayment might not have happened under the new rules, rather than the change causing the underpayment - but I could be wrong on that.

To be honest it's very rare that PAYE will ever collect the right tax on redundancy payments because this ultimately depends on the taxpayers total income for the year - including the period after the redundancy.

The change in policy was about striking a balance. Under the old way anyone with higher rate liability would have additional tax to pay at year end. Under the new way this is minimised but people could end up paying higher rate on the redundancy that turns out not to be due (if their total taxable income inc the redundancy payment is below £34K or so) - leaving them having to apply for a refund at the end of the year.

If I've understood your post correctly it seems no-one has made any mistakes. The employer has correctly deducted basic rate tax, your father hasnt done anything wrong - there's nothing he could do to change the tax deducted at source from the redundancy payment. HMRC haven't done anything wrong either - they weren't really involved in the matter. It just happens in your fathers case that after taking into account the taxable element of his redundancy and the other income he receIved that year - he's got some HR tax to pay.

Again, I wouldnt take my explanation as definitive, as it's all based on your post - I'd recommend going back to the original paperwork. I just hope my post has given some idea about what to look out for.

System

...the question about if/how your father should have known is a tricky one. But is unlikely to have any bearing on whether he has to pay the tax in question. It only becomes a factor if ESC A19 applies, and as I mentioned this will only be where HMRC have caused an underpayment of tax by failing to act on information in their possession.

I've seen quite a few employers provide excellent advice about situate treatment when making redundancy payments. On the flipside some say (next to) nothing.