Announcing the legislation, the Paymaster General said: "For many years there has been symmetry within the direct tax system: the Inland Revenue normally has the right to go back for 6 years to assess outstanding tax and those who have overpaid tax have the right to make claims to repayment for a similar period. A recent High Court case has the potential to upset this balance. The proposed legislation is designed to restore this."
The legislation will apply to proceedings for relief from the consequences of a mistake of law that are commenced in the courts today or after today.
DETAILS
1. Direct tax legislation enables claims for overpaid tax to be made for years which normally end less than 6 years prior to the date of the claim (5 years 10 months for income tax and capital gains tax). Similarly, the Inland Revenue can normally go back for a similar period to assess tax that is discovered to be outstanding.
2. Deutsche Morgan Grenfell (DMG) successfully argued in the High Court recently that the English common law remedy of restitution of a payment made under a mistake of law applied to payments of tax.
3. This means that where, for example, the view of the law changes as a result of a court decision, then within 6 years of that decision, proceedings could be commenced in the courts (referred to in the draft legislation for England, Wales and Northern Ireland as an action being brought) for repayment of tax paid under a mistake of law and could be made for all back years. (The judgement has no binding effect in Scotland, and the time limits for common law claims are different in Scotland.)
4. The Inland Revenue will appeal to the higher courts against the High Court decision in the DMG case.
5. To ensure that tax revenues are protected, the Government intends to include in Finance Bill 2004 legislation to ensure that, for Inland Revenue taxation matters, the same time limits apply to common law actions for relief from the consequences of a mistake of law as apply for many other common law claims. The change applies to court actions brought today or after today. The effect will be to restore balance to the tax system so that broadly similar time limits apply to assessments and repayments.
6. The proposals mean that for England and Wales and for Northern Ireland, court actions for restitution based on mistake of law (on the assumption that the appeal courts uphold the High Court decision) must generally be made within six years of the payment of direct tax that is the subject of the claim. The period in Scotland for relevant claims based on error of law (the Scottish law equivalent of mistake of law) will generally be five years, in line with the time limit in Scotland for other equivalent common law claims.
7. Draft clauses for inclusion in Finance Bill 2004 can be found below. Because of the differences between the law applicable to Scotland and that applicable to England, Wales and Northern Ireland, separate clauses are necessary - one for England and Wales, and Northern Ireland, and another for Scotland.
