A profound change is under way at Britain’s tax office. In just under three years the amount that the taxman has had to hand back to those who wrongly paid the stamp duty surcharge or “emergency tax” on a pension withdrawal has reached half a billion pounds, figures released last week show.
It amounts to a policy of “tax first, ask questions later”, according to Steve Webb, a former pensions minister: HM Revenue & Customs is habitually collecting tax that was never actually owed to it and forcing taxpayers to apply for refunds.
This serves only to boost the Government’s cashflow at the expense of the British people and reflects a growing movement towards new taxes that have to be paid before the relevant liability has reared its head, according to Nimesh Shah of accountants Blick Rothenberg.
HMRC denied that the trend was growing, saying the vast majority of tax was paid through its “pay-as-you-earn” system in the same way it had been for 70 years.
But there’s no doubt that the volume of refunds in certain areas is growing.
In April 2016 George Osborne introduced a 3 percentage point stamp duty surcharge on additional property purchases. He meant to curb the buy-to-let market but the measure had the unintended consequence of hitting many regular home movers. The surcharge must be paid by anyone who already owns a property, but this draws in those who wish to buy before selling their previous home or those whose sale collapses.
These people must pay the surcharge upfront and claim a refund, and HMRC has handed £231m back to taxpayers who overpaid. Some experts have expressed concern that widespread confusion among solicitors over the rules could mean that some don’t realise they could be eligible and never claim.
For someone who buys a house worth £300,000, paying the surcharge would more than double their tax bill, from £5,000 to £14,000.
Helena Morrissey of Royal London, the insurer, said this could make the difference between someone being able to buy or not. “It was introduced to curb the buy-to-let market. There needs to be some understanding of whether a person intends to be a second home owner or not,” she added.
Another quirk of the system means that those who make use of the “pension freedoms” introduced in 2015 also face paying tax they will never owe.
Pension savers who make large withdrawals in a single month are massively overtaxed, as HMRC’s system assumes it’s a monthly income and applies tax accordingly.
These people too can apply for a refund, but it requires the filing of a “mini tax return” and there are fears that some may not even know they are owed money back. Since April 2015 HMRC has refunded £262m of this overpaid tax.
George Bull, of accountancy firm RSM, said the system was “completely inconsistent” with the stated aim of the policy. “Right from the word go it was clear there was more to these freedoms than met the eye,” he added.
Mr Shah said HMRC was under pressure to collect tax as early as possible. “I fear some people may not challenge HMRC,” he said. “You assume that if someone asks you for tax you’re not going to get it back. That’s not the way it should be – you should only pay tax that you owe.”
An HMRC spokesman said: “We do everything we can to make sure the correct tax is paid so taxpayers are not hit with unexpected tax bills later on. We are committed to making any repayments as fast as we can. Tax refunds from pension flexibility and stamp duty are generally received within a few weeks of the claim.”
Despite the scale of the problem, fixing it may not be easy. Taxpayers could be asked to tick a box when they buy a property, for example, pledging to sell their former main residence within three years. They could then be placed on a database and pursued if they hadn’t sold by the end of that period.
This approach would be supported by Andy Wood of Enterprise Tax Consultants. He said: “A lot of the onus is being transferred to the taxpayer. You would think it would be fairer to give the benefit of the doubt to the taxpayer and then, if they don’t sell their original home, for example, you can come after them three years later.”
However, this approach isn’t without its flaws, according to Lucy Brennan of accountants Saffery Champness. She said that while the fix seemed attractive, she could see people using it to defer tax or attempt to avoid it.
“The Government needs funding now, and HMRC is told to provide it”, she said. “A system like this would be open to abuse and could lead to more people getting late payment fines and penalties.”
Related Topics
- Tax returns,
- George Osborne,
- Stamp duty
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