Home > Publications > Selected cases— Parliamentary> Selected Cases and Summaries of Completed Investigations: April 2001 to September 2001 > Case No. C.28/01
Selected Cases and Summaries of Completed Investigations
PCA 6th Report – Session 2001-2002
Chapter 1
Advice about the tax implications of working abroad
Professor C complained that in 1995 the Inland Revenue had misdirected him in a letter replying to his request for advice about the tax implications of his taking paid leave to do research and teaching in the United States of America (USA). The professor said that by using the expression “foreign income deduction”, but providing no explanation of the term (which should have been “foreign earnings deduction”) and by telling him that there were no leaflets on the subject, when leaflet IR58 was available, the Revenue led him to believe that the deduction would be given solely against any foreign income. As a result he returned to the United Kingdom after 11 months, when he could have chosen to extend his stay to just over a year and pay no United Kingdom income tax. The Revenue accepted the Ombudsman’s finding that the Revenue’s failures had caused Professor C financial loss and agreed to make a payment equal to that loss.
Back to top
Full text
5.1 Professor C complained that the Inland Revenue (the Revenue) gave him misleading information, which he relied upon to his detriment.
Background
5.2 The Revenue leaflet IR 58 explains what happens when a person who is resident in the United Kingdom (UK) goes to work abroad. It explains how a person qualifies for foreign earnings deductions and gives a number of examples. The leaflet explains the meaning of “earnings”, and lists 14 examples starting with “salaries”. It contains a paragraph which explains the effects of a stay outside the UK of less than 365 days, and one that is 365 days or more. That paragraph says “If, however, your stay abroad does not cover a complete tax year, you will normally remain resident and ordinarily resident in the UK and so may have to pay UK tax on your earnings for the work you do abroad as well as for work done in the UK. If you are abroad for at least 365 days you may get a foreign earnings deduction of 100% of your earnings for that period. This means that your earnings for that period will be free from UK tax.” IR58 is obtainable on request from a tax office, or a person’s employer may issue it, if they consider it appropriate. Code of Practice 1 “Mistakes by the Inland Revenue” (COP1) sets out the Revenue’s commitments to taxpayers and gives them details of how to complain. It says that if they make a serious error they will pay any reasonable costs the taxpayer incurred as a direct result. They say that the definition of “serious” will depend on the facts of each case and that that could be where a simple or trivial mistake could have serious consequences for the taxpayer.
5.3 Professor C was head of department at the University of P (the university) in 1995. In July the university granted him paid leave of absence for the period 16 September 1996 until 20 June 1997 to undertake work at a university in the United States of America (USA). On 22 October 1995 Professor C asked the Revenue for advice on the tax implications of working abroad. The Revenue replied in a letter of 14 November 1995. Professor C was in the USA between 14 August 1996 and 17 July 1997, as he also took annual leave. On his return to the UK Professor C learned from colleagues that he would have been in a better tax position had he been out of the country for a full year. Professor C complained to the Revenue that he had been misled by the information they had given him in November 1995. The Revenue has maintained that they have no responsibility for any misunderstanding.
Back to top
Edited comments of the Revenue
5.4 In his comments to the Ombudsman the Chairman of the Board of Inland Revenue (the Chairman) said that in 1995 Professor C asked the Revenue’s local office for advice on the tax implications of a period of service overseas, which he was likely to undertake from August 1996. Professor C said that his UK employer would continue to pay his salary and that his stay overseas was likely to be for a little less than a year, although it could be more. Professor C concluded by asking whether there were any leaflets available, which might help him understand the points he had raised. The local office replied on 14 November and explained the position. They said there were no leaflets available.
5.5 The Chairman said that in 1996 Professor C told the local office that he would be in America from 14 August 1996 to 17 July 1997, but when the local office replied they noted the return date as 10 June 1997. The Chairman said that in 1998 Professor C told the local office that in their letter of 14 November 1995 they had told him that if he stayed abroad for 365 days he could be entitled to a 100% deduction on his foreign (his emphasis) earnings for the period. Professor C said he had not pursued the option of staying for a full 365 days after reading the letter but, if the advice had been wrong, then an injustice had occurred.
5.6 The Chairman said that the local office replied to Professor C and said that they did not think they had given him incorrect advice. They enclosed a leaflet IR58, erroneously described as IR 28, which they said confirmed the information given in their letter of 14 November 1995. Professor C met with an inspector from the local office who showed him a number of internal instructions, one of which, he said, confirmed what the Professor had originally been told. Professor C said that the original letter had been totally misleading, and that had he seen the instructions beforehand he would have made sure he remained in the USA for the full 365 days.
5.7 The Chairman concluded by saying that he was sorry that Professor C felt the Revenue had given him misleading advice about foreign earnings deductions. He said that he did not think they had, but they could have handled matters better. He said that the letter of 14 November 1995 seemed quite clear, and that there was a reference to Professor C’s UK salary and, in the same paragraph, an explanation of the need to be abroad for at least 365 days, so a link had been made between the deduction and the UK salary. He said that foreign earnings deductions, and the rules about them, might confuse some people, but the Revenue were always happy to answer any queries which people might have. He said that the reference to a foreign income deduction, rather than a foreign earnings deduction, was unfortunate, but he did not think it could have made any real difference to Professor C’s understanding of the matter. He said he was sorry that the Revenue had told Professor C that there were no leaflets available when Leaflet IR58 explained foreign earnings deductions in some detail. At the same time he said he was pleased that the letter asked Professor C to contact the local office if he had any queries; if Professor C had done so, the local office would have been able to give him a fuller explanation and sort out any misunderstandings he might have had.
Back to top
Investigation
5.8 In investigating Professor C’s complaint, the Ombudsman’s staff considered evidence from him at interview and from his then employer (the university), as well as meeting representatives of the Revenue and reviewing their papers.
Edited comments of Professor C
5.9 Professor C told the Ombudsman’s staff that in 1995 the university had granted him a period of sabbatical leave to undertake advanced study in his field of specialisation. While in the USA, he had spent 95% of his time on research and about 5% teaching. Teaching could be viewed as part of the research as it was exchange of information. He had received an honorarium for some of the seminars and some payment for his teaching. During his sabbatical period, he had produced 11 publications, four of which could only have been written as a result of his research in the USA. On his return he had reported to the university about his work; and also to the Health Authority. He regarded the research as part of his duties of employment with the university.
5.10 Professor C said he had applied for and been granted the period 16 September 1996 to 20 June 1997 as paid sabbatical leave, with a month on either side of that period as annual leave. On his return to the UK on 17 July 1997, he still had some of his annual leave left. There was no contractual guidance or requirement about the length of sabbatical leave that academic staff could take. It was at the discretion of the university but sabbaticals were generally tailored to the need of the academic staff seeking the sabbatical. The start date had been driven by the need to find a date that would enable him, as Head of Department, to see through the inspection of his department’s research programme. Professor C said his return date was more flexible. There was no immediate requirement for him to return to his job as his deputy had covered the work from 1 August 1996 to 31 July 1997. Professor C said his deputy could have extended this cover and that his children were not due back at school until some weeks after their return (i.e. in September 1997).
5.11 Professor C said that he had no specialist knowledge of UK taxation matters. He had never used an accountant, but prepared his own income tax returns relying solely on the Revenue guidance notes. He had not expected to get tax relief on his earnings, but had expected some income tax relief on the expenses associated with the sabbatical visit, and that was why he had written to the Revenue. He had asked for their advice and guidance on the effect his sabbatical might have on his income tax position and asked to see any relevant leaflets. The Revenue’s reply had said there were no leaflets, although he had since obtained a copy of leaflet IR58, which clearly covered his position. Professor C said the leaflet would have been invaluable, but he had taken at face value the Revenue’s statement that there were no relevant leaflets. They were the experts and he had relied on the writer as an authority on her subject.
Back to top
5.12 Professor C said that part of the Revenue’s letter of 4 November 1995 had misled him.
He quoted:
“As your UK salary will continue to be paid whilst you are working in the USA, income tax will continue to be paid under the PAYE legislation in the normal way”.
He said that he felt that clarified the position of a UK taxpayer and that no relief would be available for his UK salary.
5.13 Professor C said the use of the words “foreign income deduction” in the second sentence of that paragraph, when measured against the preceding sentence, misled him into thinking that it had to do with foreign income. That was any payments made from USA sources to him while abroad. He had not seen it as related to his UK income from the university. He had taken the phrase “on your earnings” in that sentence to mean earnings arising and paid overseas and he had not expected to have any. In the event he had received a couple of small honorarium payments. He said “foreign income deduction” was jargon, which the Revenue should have explained. Having seen IR58, it is obvious that he had been mistaken as to the meaning of the expression “foreign income deduction”. He had been unaware of the 365 days deduction for UK earnings and the Revenue letter of 14 November 1995 had seemed to confirm that tax relief would not be available. He had consulted only the Revenue on the matter. He had not sought clarification on the jargon used in the Revenue letter of 14 November, as he had not expected tax relief on his earnings. The author of that letter had written authoritatively on the matter; and he had assumed she was fully aware of her subject. He saw no reason not to rely on her advice, which she had given willingly.
Back to top
Edited comments of the University
5.14 A representative of the university, speaking as Professor C’s then employer, said that the university were unaware of any requirement to issue form IR58 to their employees, and that they did not retain a stock of the leaflet. He said that few of the university staff were aware of the tax implications when planning sabbatical leave, and the average length of such leave was 4-6 months. He confirmed that the period of leave granted to Professor C in 1996/97 could probably have been up to one year in duration, and that a few days over a year would not have caused the university any problem. He said he was unaware of any requirement for Professor C to have returned to the UK by 17 July 1997.
Findings
5.15 The Revenue made several errors in dealing with Professor C: in the letter of 14 November 1995 the Revenue described foreign earnings deduction as foreign income deduction; and, in the same letter, they said they had no leaflets on the subject, when leaflet IR58 was available; in July 1996 the Revenue recorded Professor C’s return date as 10 June 1997 instead of 17 July 1997; in May 1998 he was told that the Revenue were sending leaflet IR28, when they meant IR58. Each of these errors was, in itself, a simple or trivial mistake, but in combination they had serious consequences for Professor C.
5.16 In October 1995 Professor C was still making plans and deciding how long to stay in the USA. He sought advice direct from the Revenue and he said that he intended to be away for a little less than one year but that it could be more. I see that as evidence that in 1995 Professor C was in a position to have taken leave of 365 days or more in 1996.
5.17 I looked for evidence that Professor C had been unable to be out of the country for 365 days or more in 1996/97. In particular I looked at whether he was required to be in the UK between 17 July 1997 (his return date) and 15 August 1997 (the end of the 365 day period). Professor C said in evidence that there was no such requirement (paragraph 5.10). I asked his then employer whether they knew of any bar to Professor C’s absence in that period. The university said they knew of no requirement and that it was probable that the period of leave would have been extended to a year (paragraph 5.14).
5.18 It is clear that Professor C was not prevented by circumstances from being absent from the UK for 365 days or more in 1996/97. He said (paragraph 5.12) that the reason for his return within that period was because in 1995 the Revenue’s letter had misled him into believing there would be no benefit in staying abroad for a full year. I therefore considered whether it was reasonable for Professor C to have understood that letter as he had. The Chairman said that the letter had been clear because there was a reference to Professor C’s UK salary and an explanation of the need to be abroad for at least 365 days in the same paragraph and that that established a link between the deduction and the UK salary (paragraph 5.7). I accept that the meaning of the paragraph may be clear to someone with knowledge of the subject but Professor C had no such knowledge (paragraph 5.11). Professor C said (paragraph 5.12) that the first sentence of that paragraph contained the word “salary” and that he understood that to be his UK salary. As he had expected, he was told he would have to pay tax on that. The second sentence contained the words “foreign income deduction” and “earnings” and he understood that to mean any foreign income, that is earnings in the USA. I see it as reasonable that Professor C, with no knowledge of the subject, should think the use of two sentences within the paragraph, where the first sentence used “salary” and the second used “earnings”, had some significance. The writer had meant the same thing by both terms, and had salary been repeated in the second sentence the meaning would have been clear.
5.19 Professor C had written to the Revenue for advice ten months ahead of his leaving date (14 August 1996), and the letter clearly indicated that his plans were provisional. For that reason, the fact that Professor C thought some of the information in the Revenue’s reply related to a theoretical situation - his having income from work he would undertake in the USA when he had told the Revenue that he did not expect to receive any - does not detract from my conclusion that Professor C’s interpretation of the paragraph was a reasonable one.
5.20 The Chairman suggested that Professor C should have contacted the local office if he had any queries (paragraph 5.7) but, through Revenue error, he was without leaflet IR58 to compare with the local office’s explanation, Professor C had been satisfied that he had been given authoritative advice and that he understood the issues. He therefore had no reason to seek further advice; and I do not see it as a failure on his part that he did not do so.
5.21 The local office intended their letter to be helpful, which I welcome. However, it contained a serious error in telling Professor C that there were no leaflets on the issue when there were. The local office took some trouble to explain the issues to Professor C and to offer him further advice. However, though the paragraph on this issue is similar to one found in leaflet IR58 (paragraph 5.2) it differs in an important way. The paragraph in IR58 concludes, “This means that your earnings for that period will be free from UK tax” which the Revenue omitted from their letter. The leaflet also gives a definition of “earnings” and uses the correct term “foreign earnings deduction”. I consider that the errors in that letter, together with the local office’s failure to send Professor C the leaflet IR58, amounted to maladministration. As a direct result of that maladministration, Professor C had not considered staying in the USA for a full year, and thereby he paid tax that he need not have done. However, had Professor C remained out of the UK for the full 365 days he would have incurred costs for himself and his family. I asked the Chairman if the Revenue would discuss my findings with Professor C to consider making an ex gratia compensation payment to him for the tax he had paid, which he would not have paid had he stayed away from the UK for 365 days, less a reasonable sum for the expenses Professor C and his family would have incurred in staying abroad for the further period (some four weeks). In reply, the Chairman said that the Revenue’s Regional Office would contact Professor C shortly to discuss the question of compensation.
Conclusion
Previous < Contents > Next
Back to top
|
