Credit for tax paid by the wrong person

Trustees have (innocently - for reasons I won’t go into) not paid income tax for over 10 years.

Consequently, beneficiaries have received gross distributions and (hopefully) will have paid income tax without claiming any credits for tax paid by the trustees.

This means that, for the most part, HMRC will have received their tax, it is just that it has been paid by the beneficiaries rather than the trustees.

Do members have any experience or knowledge of HMRC agreeing to set this off (a) within the 4 year timeframe when the beneficiaries can recover overpayments or (b) beyond this by concession?

Time limits are of limited help as, believing there was no liability, the trustees did not file returns.

Andrew Goodman
Osborne Clarke LLP

The next returns to be submitted (2017/2018?) should be completed correctly and the “problem” noted in the “white box”.

I suggest that calculation be made for the period in which the returns were incorrect, to identify if there has been a net overpayment or underpayment of tax. If possible to have identified the position before the current returns are submitted, it would be useful for the net historic position to be included in the white box disclosure.

Experience to date shows a lack of consistency in how HMRC will respond. In some cases it has left the historic situation untouched, in others it has required revised returns for back years, refunding tax where appropriate and issuing assessments where the full tax has not been paid (to include interest and penalties).

I fear it is a case of submitting the correct returns now, providing full disclosure, and keeping your fingers crossed. If the trustees are professional trustees, they should probably notify their insurer (as might their tax advisers, if any).

Paul Saunders

I do not know if HMRC adopt any particular practice in the situation you describe.

The pragmatic approach would seem to be to set out the scenario in a letter to HMRC, including calculations over the 10 year period, to ascertain whether or not there have been underpayments/overpayments of income tax.

The strict position would be of course be to lodge 10 year’s worth of trust returns which HMRC may insist on.

I suspect their approach may depend upon the net income tax position and if they wish to follow the letter of the law or effectively agree a deal to resolve matters quickly.

Maybe others have faced this issue in practice.

Malcolm Finney

The other point to be aware of is the Trust Register. Presumably you/they have not completed this to date? In which case, I suggest, if you are thinking of follow Paul and Malcolm’s advice and doing a trust return for this year, make sure you can elect to only have a return issued for this year. Previously I had experience of old years’ Returns being issued because I put an earlier year start date.

Lucy Orrow
Lambert Chapman LLP

Many thanks to all who have made suggestions.
Unfortunately RTC appears to be in play so time is of the essence and we may need to use the WDF to buy a little more time.

Andrew Goodman
Osborne Clarke LLP

At the risk of seeming obtuse, if the trustees have not filed tax returns or paid any tax, I do not see how there could be any overpayments of tax, only (potentially) underpayments. Is this a discretionary trust on which RAT tax may be due or an IIP, where only basic rate tax would be due from the trustees? It sounds as if the trustees may have considered that the income was mandated to the beneficiaries and so did not need to be returned separately to HMRC. If so, then that may be a mitigating factor, unless they did not believe that to be the case. Although they would not need to return details of the income to HMRC if it was mandated, they would have had to return details of any chargeable gains and also should have advised HMRC of the position by ticking the relevant box and requesting in the white space that no further tax return notices be issued in view of the circumstances. My experience with HMRC in this respect has usually been favourable.
Until fairly recently all dividend income, both UK and foreign carried a non-repayable notional tax credit that satisfied the basic rate liability and REIT income is net of actual tax, as was bank interest. Any gilt interest or property rental income that was received gross should perhaps have been taxed first in the hands of the trustees, unless they thought it had been mandated.

As others have noted, the first step should be to ascertain what tax, if any, is at stake and to consider a voluntary disclosure to HMRC using their digital disclosure facility. The number of years to go back depends on the trustees self-assessment of their ‘behaviour’ taking account of any mitigating factors and indeed if they are aware of any actual underpayments.

Maxine Higgins
Citroen Wells


The problem was a belief (reasonable in the specific circumstances) that the trust was offshore and so no returns were filed. That may not be the case. The hope is that the tax paid by UK income beneficiaries could be set off against the RAT or basic rate tax that should have been paid if the trust was actually UK resident for substantial periods of time.

Andrew Goodman
Osborne Clarke LLP