17. Before we decide if we should conduct a detailed investigation of a complaint, we look at whether there are signs the organisation has got something wrong. We do this by comparing what should have happened with what did happen. We have done this and have not found any indications that something has gone wrong in this case.
18. Mr N complains HMRC will not allow him to rectify a mistake he made when he withdrew funds from his UK based pension. Mr N said he believes HMRC has guidance that says it will allow a person to correct a mistake. He says in his case he made a genuine mistake as when he made the decision to make a lump sum withdrawal, he believed that he could reclaim the income tax HMRC would usually claim on such a withdrawal. This is because of the treaty in place between the UK and Switzerland.
19. Mr N also told us, ‘HMRC say that, despite acknowledging and even sympathizing with my genuine mistake, they cannot allow me to correct this by having my withdrawal spread over three tax years and taxed accordingly in the UK – which is what I most certainly would have done had I known this back in January 2023. I have also clear evidence of how genuine my mistake was by the letter I wrote back in January 2023 to the Swiss Tax Office fully declaring this withdrawal to them and getting them to sign and stamp the HMRC DTI claim form that I first submitted to get the tax that HMRC was withholding refunded to me. This clearly demonstrates my intent at that time and that this was a genuine personal mistake with serious and very, material consequences’.
20. In its complaint replies HMRC told Mr N, ‘I understand you do not dispute the treaty but propose that HMRC reassess the payment as if it were received over a four-year period based on exceptional circumstances as you were misadvised by your independent financial advisor. I have checked with the appropriate team and can confirm we are not able to do this. I understand you will find this news disappointing, but we have to apply current tax laws as they stand which do not cover these circumstances. In this case you received a lump sum pension payment which is subject to tax in the year it is received, I am not able to assist you any further’.
Our View
21. We understand that Mr N feels strongly that HMRC should allow him to correct a mistake he made in withdrawing his UK based pension in one lump sum.
22. We found the UK and Swiss tax systems take very different approaches to taxing lump sum pension payments. In the UK, if you withdraw a lump sum from your pension, it is taxed in the year you withdraw it along with any other income in that year. In Switzerland, lump sum withdrawals are taxed separately from ordinary income and are instead subject to a one-time capital withdrawal tax. This means typically a lump sum pension payment will incur a higher rate of tax in the UK than in Switzerland.
23. It was with this in mind that Mr N decided to withdraw the pension income from his previous UK employer in one lump sum. We can see that at the time Mr N believed this would be taxed under the Swiss system as that was the reason he submitted a DTI form. This would enable him to reclaim the income tax he had paid on the withdrawal in the UK.
24. We recognise Mr N took this course of action without realising the implications and can see this has caused him a significant financial impact. We are sorry this has been such a difficult time for him. Mr N does not dispute that it was his decision to withdraw the pension income in this way and there is no suggestion HMRC misadvised him in relation to this.
25. To consider if HMRC should have done more to allow Mr N to correct his mistake we have considered what relevant legislation or guidance there is in relation to this.
26. The guidance Mr N believes puts a duty on HMRC to allow him to correct a mistake is the HMRC ‘Self-Assessment tax returns guidance’. Mr N pointed out that this guidance says, ‘You can make a change to a tax return after you filed it, for example because you made a mistake’.
27. There is no definition within this guidance to say what a mistake is. HMRC has confirmed that when the guidance refers to a mistake it means an administrative mistake. An example would be a customer who has recorded their personal information incorrectly or included the wrong income details.
28. As we have no guidance that confirms the definition of a mistake, we have considered what the relevant legislation sets out in relation to things that can be classed as a mistake and changed. The ‘Taxes management Act 1970’ sets out that a person who had delivered a tax return under self-assessment can amend it within 12 months of the filing deadline.
29. This confirms the right to correct a mistake is specifically in relation to information provided in a tax return. This is not the kind of mistake that Mr N is referring to. The mistake he has made by his own definition was making the decision to withdraw his pension all in one tax year, which has meant he was liable to a higher rate of tax. This kind of mistake is not covered under the Taxes management Act 1970, and we have found no other relevant guidance or legislation that refers to the type of mistake Mr N is wanting to correct.
30. HMRC has confirmed that the information it holds for Mr N’s tax position in 2022-23 show the figures he disclosed to it for his pension lump sum were correct. This also matches the information provided by his pension provider. It also confirmed its 2022-23 tax calculation is correct and as Mr N’s 2022-23 declared income and position has not changed, it requires no correction.
31. We also have considered the relevant legislation in relation to paying tax on a lump sum pension payment. The relevant legislation in this case is the ‘Income Tax (Earnings and Pensions) Act 2003’ (the Act). Sections 579A to 579D of the Act set out that any pension payment made is taxable as pension income and this should be taxed at the relevant tax rate of income tax in place at the time, and that this amount should be withheld by the pension provider at source.
32. The Act sets out that any income tax due on any pension income covered in the Act should be deducted by the pension provider at the time of the payment, so it will be paid in full in the tax year that the withdrawal is made. It also confirms that the payment should be taxed as income in that year. This means that any payments in one year that are above the higher rate tax threshold will be taxed at the higher rate.
33. Mr N does not dispute this is what the law says and does not dispute that HMRC has followed the relevant tax rules when deducting tax from his pension payment. While this is not in dispute, it is important to examine the Act as we need to consider if there are any exceptional circumstances clauses in the Act that might allow Mr N to spread the tax liability of a lump sum pension payment over more than one year.
34. We can confirm there are no exceptional circumstances clauses in the Act that would allow a person to spread the tax liability of a lump sum payment over more than one tax year. As such there is no mechanism in law that would allow HMRC to accept the proposal Mr N made to it.
35. We have also found no other guidance or legislation that says HMRC should have allowed Mr N to change the way it calculated his income tax liability. As this is the case, we have found no indications that HMRC has done anything wrong in the way it dealt with Mr N’s request to rectify a mistake. As such, we will take no further action.
36. We understand this has been a difficult time for Mr N and that the decision to withdraw his pension income in one year has had very real financial consequences for him. We are sorry to see that this was the case, and he took the action he did not realising at the time the impact this would have. We also know it has been frustrating for Mr N trying to resolve the situation in a satisfactory way. Although we have not been able to take any action in relation to the issues Mr N has complained about, we hope the clear explanation will help Mr N fully understand our decision.