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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Close Companies: Protective Assessments or Jeopardy Amendments on the Company and its Directors

Where you believe that protective assessments and/or jeopardy amendments should be made, you should make them for Corporation Tax on the company, and for Income Tax on the directors, if appropriate. Protective assessments on the items in (b) to (d) of EM8610 should not normally be made unless the possibility of a negotiated settlement appears unlikely but you should include (c) and (d) in a jeopardy CT amendment and/or closure notice.

Directors may be prepared to see their companies disappear owing debts to HMRC. Having the option to proceed against the directors instead can frustrate this approach and making alternative assessments serves to keep open the settlement options. The circumstances in which you should seek settlement with the directors rather than the company are explained at EM8601+. Consequently, when discovery assessments and/or HMRC amendments are made on a company in respect of possible extractive irregularities you should, wherever possible, make discovery assessments on the directors on estimated employment income at the same time. You should explain to the directors and their agents that these are alternative assessments in order to keep the position open until all the facts become available. If the directors or agents object, you should refer to the cases mentioned in EM8800+. The discovery assessments and/or HMRC amendments made on the company should include CTA10/S455 liability. As Section 455 liability arises on each advance and there is no automatic entitlement to relief under Section 458 for credit balances the full amount extracted for each AP should be assessed.

You cannot make a ‘protective employment income assessment’ for a year of assessment where an enquiry under TMA70/S9A is open EM3265 or the enquiry window for the year has not expired. The employment income must be included in the TMA70/S28A closure notice and amendment for the year. This may mean widening the scope of existing director S9A enquiries or opening an enquiry under S9A.

It is quite likely that you will eventually vacate such assessments and/or amendments, but by raising them you strengthen HMRC’s position considerably. Any benefits in kind included in the estimated assessments/amendments on the directors should be shown separately from any estimated remuneration because until a direction under Regulation 72(5) Income Tax (PAYE) Regulations 2003 S.I. 2003 No 2682 (the regulations) is made credit must be given in the assessment/amendment for PAYE Income Tax even if subsequently withdrawn.

The existence of the employment income assessment means that the director has, or potentially has, a tax liability which has not been assessed, which is a necessary condition for use of information powers under FA08/Sch36/Para1 and Para2.

Where an employer fails to deduct tax under PAYE, Regulations 185 and 188 provide for the employee to be given a PAYE credit to prevent the employee having to bear the employer’s debt. On making a discovery assessment or closure amendment based on estimated earnings a PAYE credit has to be given, unless a direction has been made under Regulation 72. When such a direction has been given, Regulations 185 and 188 provides for the PAYE credit to be denied and, if already given in the assessment/amendment, to be clawed back. This credit can be withdrawn even though the assessment has become final and conclusive, Regulation 188(5).

In certain circumstances the PAYE credit due before a direction is given may not cover all the tax due. For example, tax may be chargeable at 40% but if no code number for the year had been notified to the employer, nor any P46 completed by the employer, deducts tax at the basic rate using the emergency code (Regulation 45 and 46) and there could still be net tax due. Also, the assessment may include, as a separate item, estimated benefits in kind or/and expenses payments, which are not subject to deduction of tax under PAYE.