Robert E Clark v HMRC: "Coding out" and the meaning of "assessment"

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01 July 2011

Introduction

The recent judgment of RE Clark v HMRC (9 May 2011) and HMRC's consultation document (published 28 June 2011) have provided an interesting debate on HMRC's common practice of "Coding out" (ie. currently HMRC can collect small underpayments of income tax and capital gains tax by an adjustment to a taxpayer's PAYE tax code), and a taxpayer's right of appeal against "informal assessments" issued by HMRC. 

Case Summary

Mr Clark, a pensioner, had received pensions from three different former employers.  For part of 2009/10 tax year, HMRC had set his personal allowances against two of these sources, leading to an underpayment of tax.  HMRC sought to collect the tax by issuing a tax calculation notice (P800) stating that there had been an underpayment of £808.60. 

Mr Clark appealed to the First Tier Tribunal.  However, HMRC applied to the Tribunal for the appeal to the struck out under SI 2009/273 rule 8, contending that it was "plain and obvious" that there was no right of appeal against a form P800.  HMRC based their argument on the fact that a P800 was not an "assessment" for the tax appeals legislation under s.31 Taxes Management Act (TMA) 1970. 

The Tribunal found, inter alia, that the calculation notice may actually be an assessment against which the taxpayer was allowed to appeal.  The Tribunal therefore concluded that it was not “plain and obvious” that Mr Clarke’s appeal would fail and therefore directed the case to be listed for a public hearing. 

Meaning of an "assessment"

The outcome of this case rests heavily on whether an "informal assessment", such as a P800,  issued by HMRC carries any statutory right of appeal.  HMRC's position on this has been made clear in their "hot off the press" consultation document: a taxpayer does not have a right to appeal against a "Coding out" notice. 

However, under section 31(1)(d) TMA 1970, taxpayers have a right of appeal against "an assessment which is not a self-assessment", which suggests that they do.  But the question which first needs answering is what constitutes an "assessment" in these circumstances?

Unfortunately, there is no definition of "assessment" in TMA 1970.  In RE Clark v HMRC, Judge Redston did comment that "the existence of an appeal right would satisfy the requirements of natural justice and human rights law", but that this point can be argued fully between the parties in the appeal hearing.  It is clearly arguable that an "informal calculation" is an "assessment" other than under self-assessment, as referred to in TMA s.59b(6), perhaps a "discovery assessment" falling within s.29 TMA 1970.  If HMRC are correct on this point, then this would mean that they are acting intra vires when they use "their residual discretion to issue informal assessments and thereby bypass taxpayer appeal rights".

It will be very interesting to hear the appeal hearing's judgment on this point, in light of HMRC's comments in their consultation document.  Either way, the judgment will no doubt continue the debate on a taxpayer's right of appeal against an "informal assessment" issued by the Revenue.     

Coding Out

In April 2011, HMRC launched a consultation on collecting tax debts of up to £3,000 via the process of "Coding out".  As has already been mentioned above, the consultation has outlined that a taxpayer will have no right to object or to appeal against a "Coding out" notice.  

The consultation also comments that the practice of "Coding out" is applied at the Revenue's absolute discretion.  Under section 684(2)(a) ITEPA, HMRC can "code out" an underpayment "if and to the extent that the payee does not object".  This means that when determining a code, HMRC must have regard to tax unpaid for previous years, which is conditional on the taxpayer not objecting.

Secondly, there is a more fundamental point.  Regulation 14(1)(d) of the Income Tax (Pay as You Earn) Regulations 2003 (the "Regulations") allows HMRC to code a tax which "remains unpaid".  Does this include tax not collected by way of PAYE coding notice in a previous year?  The use of the word "unpaid" implies that the tax must first have been "payable".  Non self-assessment tax is only "payable" by an individual, according to TMA, if it is the subject of an assessment of s.59B(6) TMA 1970.  Therefore, if HMRC are right in that the P800 is not an "assessment", then there may be no tax "unpaid" within the meaning of the Regulations so precluding its collection by "Coding out".    

Conclusion

RE Clark v HMRC is interesting given HMRC's widespread use of "Coding out" of underpayments of income tax.  This practice will become more common in future given the government's initiative to extend PAYE coding to include other taxes, and to increase the maximum which can be collected in this way from £2000 to £3000 from April 2012.

The recent judgment of RE Clark v HMRC (9 May 2011) and HMRC's consultation document (published 28 June 2011) have provided an interesting debate on HMRC's common practice of "Coding out" (ie. currently HMRC can collect small underpayments of income tax and capital gains tax by an adjustment to a taxpayer's PAYE tax code), and a taxpayer's right of appeal against "informal assessments" issued by HMRC. 

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