H M Inspector of Taxes v Keeling

The PAYE code may be determined provisionally using information available to the Inspector. The Inspector may take account of a future entitlement which will ultimately affect the taxpayer’s liability for the relevant year, even though the statutory claim for relief cannot yet be made. Regulation 7(2)(f) permits adjustments needed to secure, so far as possible, a fair and realistic deduction of the tax ultimately payable. The procedural rules governing a claim for loss relief do not prevent the loss being reflected in a PAYE code where the Inspector considers the information reliable. The PAYE regime operates independently of the ordinary assessment and loss-relief procedures.

The taxpayer, a Lloyd’s Name, anticipated losses from underwriting activities which would be declared in May 2003 and relate to the 2003/04 year of assessment. He appealed against the refusal to amend his PAYE code so that the anticipated losses would be reflected against his pension income. The General Commissioners allowed that appeal and determined an amended code. The Revenue appealed by way of case stated under section 56 of the Taxes Management Act 1970. The central issue was whether anticipated losses could be taken into account in determining a PAYE code before the loss-relief claim was procedurally available under section 380 of the Income and Corporation Taxes Act 1988.

The appeal was dismissed. The General Commissioners had reached the correct decision in directing that the taxpayer’s PAYE code should reflect the anticipated losses.

1. Tax liability ordinarily depends on an assessment, and tax cannot generally be charged in advance of that assessment. The PAYE system is, however, a provisional assessment and collection regime. It estimates and recovers tax during the year. The court relied on Jones (HMIT) v O’Brien 60 TC 706 at 714–715 for that conceptual distinction.

2. Although regulation 7(2)(a) of the Income Tax (Employment) Regulations 1993 refers to reliefs to which the employee is entitled for the year, that does not prevent the Inspector from considering a future entitlement which will ultimately affect the tax position for that year.

3. Regulation 7(2)(f) is a general power to make such adjustments as are necessary to secure, so far as possible, the fairest and most realistic PAYE code in light of the information available when the code is prepared. That power may include anticipated losses which are sufficiently established on the available information.

4. The formal procedure for claiming loss relief under section 380 of the Income and Corporation Taxes Act 1988 and Schedule 1B paragraph 2 of the Taxes Management Act 1970 does not prevent the loss being treated differently for PAYE purposes. Section 203 of the Income and Corporation Taxes Act 1988 makes the PAYE regulations effective notwithstanding anything in the Taxes Acts.

5. The approach does not create an automatic entitlement to an amended code. The Inspector must assess the information fairly, and may refuse an alteration if the alleged future entitlement is not satisfactorily established. The appeal was accordingly dismissed.

The judgment does not state the prior General Commissioners’ case citation. The General Commissioners allowed the taxpayer’s appeal concerning his PAYE code. The Revenue appealed by way of case stated under section 56 of the Taxes Management Act 1970.