Voluntary Restitution & Making Voluntary Tax Payments
When a taxpayer has been found to owe tax, HM Revenue & Customs (HMRC) will consider the application of interest (because the tax is being paid late) and a financial penalty for getting it wrong.
However, there are occasions when interest is not due, for example: Voluntary Restitution.
What is Voluntary Restitution?
Voluntary Restitution is where a taxpayer voluntarily pays any liability to tax or National Insurance Contributions (NIC) when they are not required to do so by law.
When taxpayers are challenged by HMRC, they can normally rely on the taxpayer having committed an offence to allow them to recover past liabilities.
But there are a few occasions why this may not be the case, including where the taxpayer submitted a correct return, on time, and HMRC failed to act in time.
When does Voluntary Restitution apply?
HMRC are required to “protect” any open tax year.
As soon as they become aware that an amount of tax has not been paid, they should seek to raise an assessment within the statutory time limits for the unpaid tax, and in doing so, put the tax into “charge”.
When this has been done, interest can be calculated as part of any Settlement terms.
If HMRC is unable to put the tax into charge due to the time limits having expired, then neither the tax nor the interest can form any part of a Settlement in law.
However, a taxpayer may wish to pay the amount of tax stated in order to avoid incurring any other tax liabilities by making a voluntary payment.
Why would a taxpayer make a voluntary tax payment?
Ordinarily taxpayers wouldn’t be queuing up to pay voluntary tax to HMRC.
But there are occasions when they might. For example, a taxpayer who has participated in a tax avoidance scheme may have received a loan from the structure.
If HMRC were unaware of the loan and failed to raise an open enquiry in time, the taxpayer may wish to make a tax payment now and claim Voluntary Restitution in order to avoid the Loan charge. In doing so, providing the claim is valid, no interest will be payable.
If the loan was taken out in 2005 and a Settlement was reached in 2019, 15 years of interest could be saved.
What should taxpayers do?
Voluntary Restitution has to be claimed. To be a valid claim, it must be demonstrated that:
• There was no enquiry opened within the statutory time limit and HMRC is now time barred to do so;
• No assessment or determinations were raised (for PAYE under Regulation 80 of the Income Tax (Pay As You Earn) Regulations 2003 (SI2003/2682) and for National Insurance Contributions (NIC) under Section 8 of the Social Security Contributions (Transfer of Functions) Act 1999.
Moreover, any claim for NIC must also follow strict County Court proceedings and must be revisited every 6 years to be valid.
This area of tax can be extremely complex. You should always seek professional advice when considering a claim.
Read more about making disclosures to HMRC here.
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