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Self-Assessment Tax Overcharge


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I've been self-employed since 1 October 2011 until now as a sole trader. I run a small business from home and I’m on small earnings… not enough to be paying tax yet. When I completed my online self-assessment for 2011-2012, an outstanding amount of unpaid tax was flagged up from the year 2009-2010 (when I wasn’t self-employed, but on incapacity benefit and not working in any capacity), so I’m at a loss. I’ve had a think and there are 2 possible situations that could have caused this amount to occur, but I don’t know which for sure or if at all.

 

SITUATION 1

With the online self-assessment submitted I sent a ‘Compromise Agreement’ from a previous employer that paid me a lump sum and terminated my employment due to incapacity in 2009. The lump sum was under £30K. The CA states the following, so I didn't think I was liable to pay tax on it:

 

“The Company understands that HM Revenue & Customs allows ex gratia payments in compensation for loss of office to be made tax free up to a limit of £30,000. Accordingly the Company believes that the first £30,000 of the Termination Payment is not subject to deductions for tax and National Insurance contributions although it gives no warranty in this regard”.

 

I pointed out this section on the self-assessment and asked if I could be advised on whether this is where the excess came from as there shouldn’t be anything outstanding to pay. I haven’t heard back on this, but instead I received an invoice for the outstanding amount I supposedly owe. On this, I sent a letter and a copy of the CA with the same query, asking for advice again. In reply I received a self-assessment statement (with interest accruing) on the outstanding amount. I’ve called HMRC and the automated telephone system tells me that all appeals should be submitted in writing. So, I’m being suitable ignored and at a total loss of what to do next.

 

SITUATUION 2

In 2009 I started receiving home help, and to pay for this I was granted direct payments from my local council. The home help was paid by using a payroll company who deals with the tax and NI on my behalf. I still use this payroll company and as the outstanding HMRC amount is from 2009-2010 only, I don’t doubt that they haven’t been doing their job. As I’m also an ‘employer’, is this to be considered a factor?

 

Every time I hear from HMRC on this matter I become paralysed with fear and can’t function properly.

 

Is there a better approach of appeal I should be using?

 

Is there a procedure to follow with HMRC in gaining information on where this amount has come from or are their sums ‘gospel’?

 

Is anyone familiar with ‘Compromise Agreements’ and able to point out anything that I’m overlooking? Most of it doesn’t make any sense to me.. A copy should be attached with all personal entries omitted (I hope!).

 

Any insight appreciated.

 

Thanks, DK

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  • 2 weeks later...

Today I heard back from HMRC with an explanation of where the tax unpaid has come from. Apparently, it's from 2008-09 when I was in receipt of incapacity benefit. They believe that no tax was deducted, and a deduction not being entered in the tax code for the medical benefit in that year has resulted in the tax underpaid.

 

I'm still at a loss as how to proceed, but having spoken with my Jobcentre contact I've been advised to write to the Jobcentre to ask for tax information for 2008-09 (because my contact has no idea either).

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Was the incapacity benefit your only taxable income during the relevant tax year? If so, it was surely a sum well within the allowed personal allowance for that tax year? If you received it in conjunction with other income then I would guess that you'd have to declare it and then calculate your total income for that tax year and be liable for any tax due. They won't have deducted any tax from your benefit but it would be taken into account when assessing how much you're due to pay.

 

Feebee_71

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Hi, thanks for the reply.

 

The short answer is 'no'. I was employed from 2008 - March 2009 (although I wasn't physically working due to incapacity). I have payslips to cover the whole period with tax and NI contributions made and the payments were made by UNUM via my employer. I was also receiving incapacity benefit.

 

I've noticed on the last payslip I received, the lump sum from my then employer was added and went through on a basic rate tax code. Although the lump sum wasn't taxed, I was taxed on a smaller amount also on the pay slip (at the basic rate). This tax code wasn't my usual and I'm wondering if this is to be considered a factor at all?

 

I've written to Jobcentreplus asking about the period in question, if the incapacity benefit was taxable, but as you've stated above, as I was receiving an income as well, I might have to do some calculations(?)

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This is the exact explanation I received from HMRC:

 

The £**** is the tax underpaid from 2008 - 2009, which has not yet been recovered. The combination of having no tax deducted from the Incapacity Benefit, and a deduction not being entered in the tax code for the medical benefit in that year has resulted in the tax underpaid.

 

In my 2011 - 2012 self-assessment I entered all taxable benefits where required for 2011 - 2012, but on reading the above it sounds as if I should have done this in 2008 - 2009, which was impossible because I only became self-employed (to be able to complete a self-assessment) in 2011. Am I not understanding what they've written correctly? :noidea:

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I've sent copies of all payslips for 2008-2009, but I'm not hopeful this is going to work out in my favour. I haven't heard back as yet. At some point soon I expect to find out that I have to pay the outstanding amount. I'm not in the position to pay as each month it's a juggle between paying the rent or buying food. Is anyone able to tell me what happens when you're not in a position to pay, or say if I offer £1 a month. Is HMRC likely to accept?

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