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HMRC Retains 'Equitable Liability' Practice

by Robin Pilgrim,, London

20 November 2009

The Chartered Institute of Taxation (CIOT) has welcomed the news that the UK's HM Revenue and Customs (HMRC) intends to retain the "equitable liability" practice, which often helps taxpayers with the least means to defend themselves against unnecessary enforcement actions.

HMRC has long had the power not to pursue tax in cases where it would be "unconscionable" (excessive and unfair) for them to do so. This is the "equitable liability" practice and applies in cases where, although an amount is technically due (typically because a taxpayer has missed the deadline for appealing against an HMRC estimate of their tax liability because of ignorance or misunderstanding about procedures), the taxpayer can demonstrate that the true amount of tax which should be payable is less. Often it is the most vulnerable taxpayers who have benefited from HMRC’s exercise of discretion in these cases.

A review in 2008 listed the practice among a number of concessions scheduled to be abolished from April 2010. This followed a court ruling in 2005 that HMRC had no power to alter tax demands unless there was specific legislative power.

However, following strong representations from the CIOT, led by the Institute’s President, Andrew Hubbard, and others, the government will be legislating “at the earliest opportunity” to retain the practice.

Welcoming the news, Hubbard said: “This is very good news indeed. The most vulnerable in society need protection when things have gone badly wrong, even when they themselves may have caused the problems by their own action – or more often inaction – and the equitable liability practice was an important safety valve of last resort. So I am delighted to have received confirmation directly from the Minister that a decision has been taken to introduce legislation to put this on a proper, permanent footing."

Hubbard said that the government was caught by surprise by the strength of the reaction to their proposal to abolish this practice, although he credited it with immediately holding discussions with tax professionals when concerns over its removal were raised.

“We presented a careful analysis of the legal background to the practice and suggested ways in which the practice could be given legislative effect, and we coupled this with a number of real examples of cases where equitable liability had been used to prevent what would otherwise have been a wholly inequitable result. We were considerably helped by the examples sent to us by our members," Hubbard explained.

In his letter to the CIOT president, Financial Secretary to the Treasury Stephen Timms stated that the new measure "will ensure that those taxpayers who have difficulty coping with the tax system and fail to meet their legal obligations will be protected formally in future.”

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