Recovery of overpaid tax
Interesting news in the press about a businessman who has had to forfeit a tax overpayment of £846,000. According to the Daily Telegraph, this was because he had tried to claim it after the one year deadline for amending tax returns had expired.
True, but that is not the whole story. In fact, his appeal to the High Court did not even hinge on that point. His lawyers knew there was no hope of the one year deadline being disturbed, whatever the facts of the case, so they did not base their arguments on that. That issue did not even arise in the case, save for a few passing comments by the judge, Sir Andrew Morritt. He signposted the futility of bringing an action on that point. The deadline had passed, and that was that.
The case instead centred on section 33 of the Taxes Management Act 1970. In broad terms, that section provides for repayment where tax is overpaid as a result of error or mistake. However, sub-section (2A) of that section denies relief if the erroneous tax was computed on the basis of practice generally prevailing at the time the tax return was made.
True, but that is not the whole story. In fact, his appeal to the High Court did not even hinge on that point. His lawyers knew there was no hope of the one year deadline being disturbed, whatever the facts of the case, so they did not base their arguments on that. That issue did not even arise in the case, save for a few passing comments by the judge, Sir Andrew Morritt. He signposted the futility of bringing an action on that point. The deadline had passed, and that was that.
The case instead centred on section 33 of the Taxes Management Act 1970. In broad terms, that section provides for repayment where tax is overpaid as a result of error or mistake. However, sub-section (2A) of that section denies relief if the erroneous tax was computed on the basis of practice generally prevailing at the time the tax return was made.
That was what had happened in this case. The taxpayer was the Chief Executive of a company. He was granted an option to acquire shares in that company at no cost, which he exercised two days later.
He paid the income tax due on the exercise of the option. He later sold some of the shares. In accordance with prevailing practice, he computed the gain by deducting the base cost attributable to the shares sold from the proceeds of sale. The sale took place in the 1999/00 tax year.
However, in the 2003 case of Mansworth v Jelley, the Court of Appeal held that this was the wrong way the calculate the gain. The taxpayer was entitled to deduct the base cost, but he was also entitled to deduct the amount on which those shares had been subject to income tax. The effect of this was that the chargeable gain was less than it would have been under the previous method. In Mr Monro's case, it meant that he had paid £846,000 more than he should have.
Following Mansworth v Jelley, many taxpayers amended their returns in order to claim back any capital gains tax overpaid. Mr Monro's accountants tried to amend his 1999/00 tax return, but the Revenue (as it then was) refused on the basis that the one year period within which a return could be amended, had elapsed. He subsequently brought an action to recover the overpaid tax as having being paid under a mistake of law, or as tax paid pursuant to an unlawful demand.
On the mistake of law claim, the taxpayer acknowledged that the overpaid tax could not be reclaimed under section 33, because it was precluded by the proviso in sub-section (2A) relating to practice generally prevailing at the time. The tax had been calculated in the pre-Mansworth v Jelley days, so even though the calculation was wrong, it was done according to the prevailing practice at the time. However, he argued that the common law restitutionary claim for recovery of money paid under mistake should not be precluded by the existence of the Taxes Management Act. However, Sir Andrew Morritt, while expressing sympathy for the taxpayer, disagreed with his argument. He did not agree that the proviso in sub-section (2A) could be got around simply by recognising the common law remedy for restitution. This, in his opinion, would be inconsistent with section 33 overall.
The taxpayer also argued that the tax could be recovered as tax paid pursuant to an unlawful demand. He cited the case of Woolwich, which approved the recoverability at common law of money paid to a public authority, following an ultra vires demand. However, Sir Andrew Morritt held that section 33 of the Taxes Management Act 1970 applied to all cases of overpaid capital gains tax. If overpaid capital gains tax was to be recovered, it must be recovered under the terms of section 33. This meant that it must therefore be subject to the proviso in sub-section (2A) about the prevailing practice at the time. There was no remedy outside the terms of section 33, and therefore, the taxpayer's claim would fail.
The idea that there is no remedy for overpaid tax, other than within the terms of section 33, is a very interesting one. It would have been exciting to see that challenged in the Court of Appeal. Unfortunately for Mr Monro, leave to appeal was not granted. Sir Andrew's opinion is basically that such matters are the proper business of Parliament.
So there we are; the law is the law, and quite severe it is in this instance. Will Parliament take up Sir Andrew's challenge? Somehow I doubt it. I would be very surprised to see any such change in the forthcoming Finance Bill.
Post script. The Finance Act 2003 later superseded Mansworth v Jelley, with retrospective effect from 9 April 2003, and reinstated the pre-Mansworth position. The effect is that the more generous method of computation now applies in very limited circumstances.
(Case name: Monro v Revenue and Customs Commissioners)
He paid the income tax due on the exercise of the option. He later sold some of the shares. In accordance with prevailing practice, he computed the gain by deducting the base cost attributable to the shares sold from the proceeds of sale. The sale took place in the 1999/00 tax year.
However, in the 2003 case of Mansworth v Jelley, the Court of Appeal held that this was the wrong way the calculate the gain. The taxpayer was entitled to deduct the base cost, but he was also entitled to deduct the amount on which those shares had been subject to income tax. The effect of this was that the chargeable gain was less than it would have been under the previous method. In Mr Monro's case, it meant that he had paid £846,000 more than he should have.
Following Mansworth v Jelley, many taxpayers amended their returns in order to claim back any capital gains tax overpaid. Mr Monro's accountants tried to amend his 1999/00 tax return, but the Revenue (as it then was) refused on the basis that the one year period within which a return could be amended, had elapsed. He subsequently brought an action to recover the overpaid tax as having being paid under a mistake of law, or as tax paid pursuant to an unlawful demand.
On the mistake of law claim, the taxpayer acknowledged that the overpaid tax could not be reclaimed under section 33, because it was precluded by the proviso in sub-section (2A) relating to practice generally prevailing at the time. The tax had been calculated in the pre-Mansworth v Jelley days, so even though the calculation was wrong, it was done according to the prevailing practice at the time. However, he argued that the common law restitutionary claim for recovery of money paid under mistake should not be precluded by the existence of the Taxes Management Act. However, Sir Andrew Morritt, while expressing sympathy for the taxpayer, disagreed with his argument. He did not agree that the proviso in sub-section (2A) could be got around simply by recognising the common law remedy for restitution. This, in his opinion, would be inconsistent with section 33 overall.
The taxpayer also argued that the tax could be recovered as tax paid pursuant to an unlawful demand. He cited the case of Woolwich, which approved the recoverability at common law of money paid to a public authority, following an ultra vires demand. However, Sir Andrew Morritt held that section 33 of the Taxes Management Act 1970 applied to all cases of overpaid capital gains tax. If overpaid capital gains tax was to be recovered, it must be recovered under the terms of section 33. This meant that it must therefore be subject to the proviso in sub-section (2A) about the prevailing practice at the time. There was no remedy outside the terms of section 33, and therefore, the taxpayer's claim would fail.
The idea that there is no remedy for overpaid tax, other than within the terms of section 33, is a very interesting one. It would have been exciting to see that challenged in the Court of Appeal. Unfortunately for Mr Monro, leave to appeal was not granted. Sir Andrew's opinion is basically that such matters are the proper business of Parliament.
So there we are; the law is the law, and quite severe it is in this instance. Will Parliament take up Sir Andrew's challenge? Somehow I doubt it. I would be very surprised to see any such change in the forthcoming Finance Bill.
Post script. The Finance Act 2003 later superseded Mansworth v Jelley, with retrospective effect from 9 April 2003, and reinstated the pre-Mansworth position. The effect is that the more generous method of computation now applies in very limited circumstances.
(Case name: Monro v Revenue and Customs Commissioners)
0 TrackBacks
Listed below are links to blogs that reference this entry: Recovery of overpaid tax.
TrackBack URL for this entry: http://www.pluckedgoose.com/cgi-bin/mt/mt-tb.cgi/46
Leave a comment