Inland Revenue - at wit's end. Is there honestly NOTHING we can do?

[twoisenoughmum]

DH and I are desperately worried and stressed by an unexpected tax bill. We might have to sell our house! Having checked with DH's accountant and a kindly Mumsnetter and Taxaid, it seems that although the method the Revenue have used to calculate DH's tax is grossly unfair it is just the way they always do it in our circumstances, and so now we are being chased for payment of a considerable sum which we had absolutely no idea we owed.

What would you do if you felt you were being forced to pay money which you truly believe you don't owe, but you have to do it just because the revenue is an impervious monolith and the law is on their side.

Would you just pay up and suffer the consequences? (Like perhaps selling your house).

Or would you go down every route of appeal you could think of?

TIA.

Will they give you time to pay over a long period?

If one of you is working, they might agree to collecting the money from you by reducing your tax free allowances through the PAYE system?

Worth asking, anyway, as CAM suggested

I'm not sure we have enough information to make a valid judgment, but I have challenged the revenue before and received an apology...

The Revenue will accept payment overtime but would add interest. They wouldn't want you to sell your house i'm sure. They would want some kind of payment plan. If you don't think it's owed then challeng it. I would not pay money until they prove you owe it.

Can you give anymore details?

Surely you dh's accountant would be able to say if it is correct or not however unfair? and do they not tell you what tax you have to pay anyway? As if they do they should've known about it or be able to explain it at least

Thanks for your messages.

If you are interested, this is how it came about:

DH has been self employed for many years. But in Feb 2005 he was offered a full-time PAYE job, which he accepted.

From April 2004 to Feb 2005 (his last 10 months self employed) he earned £40 something thousand, with profits of about £33,000. So we expected to pay tax on that £33,000 and saved the requisite £8,000.

However, because the tax he owed on those self employed earnings wasn't actually calculated until April 2006, the Inland Revenue added that £33,000 to the £85,000 he earned in his PAYE job making a total of over £128,000 and taxed him on that. So all the tax free allowances and incremental increases up to the 40% tax band were lost.

In effect, the looked at his earnings over 22 months and taxed him as though he had earned them over 12 months. So we received a tax bill of £15,000 when we were expecting something in the region of £8,000.

Horribly complicated, I know, and congratulations if you are still with it so far.

They will allow us to pay it off over 12 months - but that's still £600 per month for the next year which we simply didn't realise we owed. And we don't believe its fair.

He's being taxed as though he earned well over £100,000 in a 12 month period, when in fact he earned £85,000 in 12 months (and paid the tax through PAYE) and £33,000 in the preceding 10 months.

Its just not right. And we are broke, broke, brokety, brokety broke.

I don't want to pay that spurious £7,000 tax, whether over 12 months 24 months or the rest of my life.

It just sucks.

That doesn't sound right - are you sure there's nothing you can do? Why was the tax only calculated in April 2006?

Surely he would have paid an estimate of tax during 2004/5 based on his earnings from 2003/4, and would then have submitted his 2004/5 tax return in Jan 2006, and paid/received a rebate for any difference, all before his started his PAYE job?

doesn't sound right to me - agree with cantslimwontslim. Is there any chance the accountant is responsible for a cock-up back then and is covering himself?

You are taxed on your income according to the tax year it arises. So for the income arising in 2004/5, if your dh had profits below the 40% band, he should be being taxed at the 22% rate. Did he delay invoicing this income until 2005/6? Did the Inland Revenue calculate the tax owed for 2004/5 and add it to his tax code for 2005/6?

Assuming your dh had no other income in 2004/5, very basic tax calc as follows:
£33,000 profit
(£4,745) personal allowance
£28,255 taxable profits

£202 tax at 10% band
£6,171.66 tax at 22% band
£2,537.60 Class 4 NIC
£106.60 Class 2 NIC

£9,017.86 total payable

Even if the tax was not calculated until 2005/6, surely he is entitled to use up his 22% band? The calculations don't sound right. Even if the tax owed was collected through his PAYE, the amount owed should have been grossed up by 40% to give the correct sum payable ie income of £22,544.65 should have been added to his tax code to give the correct tax payable of £9,017.86 if he is being taxed at 40%.
Sorry if this makes no sense at all! and obviously the figures may not correspond to yours as I don't have all the information!

I think he is being caught by the opening and closing rules, as he effectively ahd a business cessation.

Beyond that I've know little more

But that is why Wombat's calculations probably don't apply in this case.

I would appeal if your accountant thinks that is reasonable, but not spend any money on it!

Then I would just re-mortgage and pay the bill. Adding 7k to your mortgage won't be a disaster, even if you are broke - it will be about 70 quid a month.

I would also get another accountant.

In any case, if it has been added to his tax code, you will already have paid the tax, so that can't be what happened. Sorry. I would definitely try appealing!

I couldn't remember the opening/closing rules either Soapbox, but I closed my business last year (though didn't go into employment subsequently) and didn't encounter anything untoward.

Sorry Soapbox, had not appreciated that business was closing.

We had an extra bill from the IR and as we are skint, he went and saw somebody there and pays it back monthly. They are extremely helpful if you stay in contact, but the minute you don't answer a letter etc, they are up your bum for everything you posess IMO>

What was his normal year end? He should have been taxed on his self employed earnings to Feb 05 then only one month of employed income.

I complete lots of returns each year so feel free to ask me some more questions i'll try to help

And if it helps just from what you said it sounds like they are wrong. Did you say he'd finished self employment? They aren't asking for payments on account plus the tax owed are they?

Must read my posts and make sure i've finished before posting it! What i meant by did you say he'd finished was did you tell the Revenue? Obviously you stated that he'd finished!!!!!

I suspect that your dh had a business accounting date of 30 April (quite common as it allows you to postpone paying tax for the longest period. His tax for self-employment for 2004/2005 would therefore be based on the 12 months to 30 April 2004. Similarly for 2005/06 his self-employment income would be based on the 12 months to 30 April 2005. Of course he was also earning PAYE income in 2005/06, but has benefited from delayed tax payments throughout the rest of his self-employment.

If the change in status had been anticipated then I suspect his acountant should have advised a change in accounting date for him.

He should only be taxed on his business income once throughout the course of the busienss's lifetime. By benefitting by delaying tax for the previous years he has unfortunately been caught out in this year, buy having to pay tax on 2 tax years at once. It may be hard for him to remember but he would have had a year at the start where he didn't pay tax.

It is definitely unfotunate that he has had such a high income in the year where both employments were taxed. But if he did earn £85k are you really going to have to sell your house to find the £7k? I would have thought that there were other options.

Tbh I can't think of any grounds of appeal if the circs are as I suspect, so I wouldn't throw any more money at it. I suspect you would have to go to the European court which isn't cheap.

Just got in from work - thanks so much for your efforts!

Yes, his year end was 30th April.

He didn't "wind up" his self employed status when he got the PAYE job - his accountant advised him to keep it up incase he got offered any more freelance work, and in fact he did do a tiny bit self employed (just a few thousand) in the early months of being employed as well. This means that we are looking at facing the same tax situation next year I think.

We can't find a spare £7,000 I'm afraid, even though he did have high earnings for the past two years. The subject of how a family of 4 can find it difficult to live on an income of £85,000 has been covered on other threads (usually met with outrage and scorn) but suffice to say we live in London, have a large mortgage (£180,000) and live very carefully. We live in an extremely tatty 3 bedroom terraced house and have been slowly making improvements to it (expensive) and only re-mortgaged a year ago to pay for a new boiler and bathroom.

However, he has now been made redundant. The redundancy came 2 weeks after the tax bill!

We have changed accountants.

He has gone back to self employment but we are only just making enough to cover our costs - even with me now working 2 days a week.

I could work more, but I think I'd rather sell up and move to a cheaper area than become a full time working Mum! (also the subject of countless other threads).

Your input is very much appreciated and I will show it to DH who understands better than me exactly when he has been taxed etc, just incase anything any of you has said will make any difference.

Thanks so much.

I was going to mention overlap relief but since he did not cease self employment that won't help.

Did the calulation include payments on account? I'd imagine it would. If you calc his earnings for the current tax year when he was employed and only earning small self employed income then surely he can decrease these payments on account on the basis that they aren't needed?

Mind you his accountant would be telling you this if they are any good so i'd imagine you may have done all you can. Just trying to help

Eddas - thanks for staying with this! I've never heard of overlap relief. Can you just tell me a little bit about it? In case we can argue along those lines ...

Also might have to argue the case that he was ill-informed by previous accountant so to know something about overlap relief, whether we are technically entitled to it or not, might help us a little.

That's ok

Overlap relief happens when your accounting date is not 31 March or 5 April. Basically in the first year of the business or the first year of self assessment if the business started pre 1997(i think? might be a few years out!!) you get taxed from the start date to 5th April. Then the next tax year (ie 2nd tax year) you get taxed on the profit from the start date to the accounting date(in your case 30th April). So you effectively get tax on some of the profit twice. But when the business ceases the bit that was taxed twice then gets taken off the final year

but as dh didn't actually cease you can't use overlap relief so that doesn't really help Sorry!!!!

But if he changes his accounting year end to 5th april or 31st March he will be able to use the overlap relief.

Tax is bloody complicated to explain in the written word Actually, it's just bloody complicated!!!!

Not that i know of, unless i'm reading your post wrongly.

The first year it's from start date to 5th April. The 2nd year and all subsequent years it's the accounting year that you choose, eg, y/e 31 March etc.

So therefore, if your y/e is not 31 March or 5th April you create overlap profit.

This is much easier to explain with a time line but really wouldn't know how to do that without a pen and paper