The final income tax or corporation tax assessment has arrived in the post. Pay (or claim a refund for) the tax due as shown on the assessment, and another tax year is complete.
But what if it turns out that the tax assessment is incorrect?
Two options
There are, of course, two possibilities:
- you have underpaid your tax;
- You’ve paid too much tax.
If you have overpaid tax and the deadline for appealing against the tax assessment has passed, you have no formal recourse. Of course, you may politely ask the Tax and Customs Administration if you can be refunded the overpaid amount. The Tax and Customs Administration may then grant this ex officio. We do not discuss the conditions for eligibility for an ex officio tax refund in this article.
Additional assessment
If it transpires that you have underpaid tax, the Tax and Customs Administration has extensive powers to issue a new tax assessment. This is known as a supplementary tax assessment. A supplementary tax assessment may be issued if two conditions are met:
- the tax assessment is issued within 5 years after the end of the period on which the tax is levied;
- The Tax and Customs Administration has a new fact.
The five-year period is extended by the period for which the Tax and Customs Administration has granted an extension for the submission of the tax return. PLEASE NOTE: this does not refer to the period during which you actually benefited from the extension, but to the period for which the extension was granted.
If the item subject to tax was acquired abroad, the five-year period is extended to as many as 12 years.
New fact
For a long time, the Tax and Customs Administration was only permitted to issue a supplementary tax assessment if the underpayment of tax was due to a new fact. This refers to a fact of which the Tax and Customs Administration was not aware and could not reasonably have been aware. It has since been clarified that a ‘new fact’ also applies where the taxpayer acts in bad faith. This is the case, for example, where the taxpayer has deliberately withheld information from the Tax and Customs Administration or has knowingly provided incorrect information.
A supplementary assessment is certainly possible where:
- the set-off of a provisional assessment, withholding tax, provisional refund or loss carry-forward has not been carried out correctly;
- This concerns the allocation of income components and tax deductions between tax partners;
- it must be reasonably apparent to you that the tax assessment has been set at too low an amount (and this is presumed to be the case where the under-collected tax amounts to 30% or more of the tax due).
Error Theory
In addition to additional assessments, the Tax and Customs Administration has other ways of correcting errors in tax assessments and decisions. In such cases, the requirement for a new fact does not apply. The most important correction mechanism is the so-called ‘error doctrine’. Errors in the determination of business profits may be corrected without further ado if they affect balance sheet continuity.
Supreme Court
The Supreme Court recently ruled in two cases on the Tax and Customs Administration’s broad powers to make additional tax assessments. Both cases concerned rectifying issues that had arisen in the software used by the Tax and Customs Administration to issue tax assessments.
One case This concerns a self-employed person who claimed the self-employed person’s allowance and the start-up allowance in their tax return. These allowances were disallowed by the Tax and Customs Administration when the final assessment was issued. Consequently, the person was also not entitled to the income-related combination allowance (iack). However, due to a minor error in the Tax and Customs Administration’s software, this allowance was nevertheless included in the final tax assessment. The Supreme Court ruled that the Tax and Customs Administration should have investigated whether the iack, which was linked to the refused self-employed and start-up allowances, had been granted correctly. By failing to do so, the Tax and Customs Administration demonstrated a culpable error of judgement, as a result of which a subsequent assessment is not permitted.
In the other case The case concerns an audit initiated at an investor’s premises. The inspecting official fails to record in the Tax and Customs Administration’s computer system that the audit has been initiated. Before the audit is completed, final tax assessments are issued for the years under audit via the automatic assessment scheme. Naturally, the findings of the audit are not taken into account in this process. The Supreme Court ruled that this constitutes an error which the taxpayer must reasonably have been aware of, meaning that the tax arising from the audit can be collected by means of a supplementary assessment.