EP6618 - Underpayments/Overpayments: ESC A19: Reasonable Belief

For tax to be given up under ESC A19 the "reasonable belief" test must be satisfied. The important point to remember is that the test is not whether the taxpayer believed his tax affairs were in order, but whether it was reasonable for him to believe it.

You will meet cases where the taxpayer might genuinely believe that he does not owe any further tax, but where it was not reasonable for him to hold that belief, given all the circumstances. This is a matter of judgement and you will need to reach a decision taking into account all the surrounding factors, for example, the taxpayer's likely level of understanding of tax matters, his state of health and his age. The serious ill health of a close relative should also be taken into account, but not claims that the taxpayer was too busy or otherwise preoccupied to pay full attention to his tax affairs.

In all cases your aim should be to reach a common-sense decision using all the known facts, and you should always make a brief note of your reasoning on the taxpayer's record (EP6622).

There will not always be an obvious answer, but in a great many cases it will be clear at once that the test is not satisfied; for example, a large car benefit not coded out or an obviously unjustified repayment. Where the issue is less clear-cut you will need to take account of a range of factors, including

• The nature of the arrears and what caused them.

• The size of the arrears. Generally speaking, the larger the sum the less likely it is that the reasonable belief test will be satisfied, but you will need to take account also of the taxpayer's own particular circumstances. What might be a substantial sum to the average taxpayer may be less so to a wealthy individual with several sources of income and gains.

• What information had been given to the taxpayer over the relevant period, for example notices of coding, explanatory leaflets such as P3, letters, phone calls etc? You will have to weigh up what the taxpayer has, or has not, been told and form a view as to whether it was reasonable for him to believe his tax affairs were in order.

• Had we given any misleading information to the taxpayer, for example, telling him repeatedly that his code was correct, and then belatedly discovering that it was not? In these circumstances it will often be hard to resist a claim that the reasonable belief test has been satisfied.

• Had our actions caused the case to become especially muddled or hard to follow? (It is not normally enough that a taxpayer's affairs might be complex anyway).

• If the taxpayer has been professionally represented then it will usually be harder to claim that the reasonable belief test is satisfied, because we would expect an agent to spot failures or errors more readily.

• Reasonable belief may change over time. For example, an incorrect code may continue without change beyond the point when it is reasonable for the taxpayer to believe his affairs are in order. The reverse may apply if, during the build-up of the arrears, an event took place that caused the taxpayer's reasonable belief to change, such as a letter from the tax office telling him that his affairs are in order. In any case where you consider there has been a change over time in what it was reasonable for the taxpayer to believe, or if he makes such a claim, seek the advice of PAYE Technical Advice - Shipley before agreeing to any time apportionment.

This list is not exhaustive and you will come across other factors that you feel should have a bearing on your decision. Where the issue is so finely balanced that you find it hard to form a judgement, give the taxpayer the benefit of the doubt. BS Shipley will advise in any case of difficulty.