What is “Equitable Liability”?
“Equitable Liability” is a practice whereby HMRC will in certain circumstances collect less than the amount of tax that is legally due. It originated in the days when HMRC stood in front of other creditors in the queue when a company or an individual became insolvent, and was originally more concerned with fairness to the other creditors than to the unfortunate taxpayer concerned.
In the days when the doctrine was first developed tax was charged by assessment, and the taxpayer had to appeal against that assessment and then produce accounts to justify the appeal.
In a case where the taxpayer neglected to appeal within the time limit, or failed to produce accounts so that the estimated assessment produced by HMRC was “confirmed” by the General Commissioners, it could happen that the tax legally due as a result of this process was much more than the amount that would have been due if the proper returns had been filed, and in law it was by then too late to do anything about this.
At this point “Equitable Liability” meant that in practice HMRC would only seek to collect the amount that would have been payable if the proper procedures had been followed, rather than pursuing the taxpayer for the full legal debt.
Although tax is generally not collected by this assessment procedure any more, it is still possible to find yourself owing more tax than you should and having no legal way to reduce it – for example, if you fail to file a self-assessment return, HMRC can “determine” how much tax you owe, and if you delay filing your return until more than five years after the filing date for the return (or more than three years, after new rules come into effect in April this year), then it is too late to alter the “determination” by filing a return.
“Equitable Liability” survived HMRC’s loss of special status as a creditor, and was a life-saver for some taxpayers who had let their affairs get into arrears – it was particularly helpful for those who had been unrepresented, or incompetently represented, or were just confused.
Unfortunately, HMRC have in the past been guilty of failing to publicise the existence of this practice, to the extent that there was a time where HMRC officials were specifically forbidden to mention the practice unless the taxpayer raised the issue first.
In the last year or so, a new threat emerged, in that some decisions in the Courts suggested that it was possible that HMRC had no legal authority to decide not to collect tax that was legally due, and for a while it looked as though Equitable Liability might be abolished rather than merely being kept semi-secret.
Equitable Liability to Continue
In the Pre-Budget Report, it was announced that the practice of Equitable Liability would be enshrined in statute. Under the proposed legislation, a taxpayer can get his liability revised to the “correct” amount if he can show that the amount charged is greater than the amount that would have been due if he had filed his returns correctly, and if he agrees to bring his tax affairs up to date by paying the tax and any interest and penalties that may be due. Until this becomes law the same treatment will apply by concession, as it has in the past.
Practical Tip
This move is doubly welcome – it preserves an important relief for those who, for whatever reason, have been unfairly treated by the system, and as it will be a statutory relief, it is to be hoped that there will be fewer cases where those who should have been told about it are left in the dark.
James Bailey
