It has long been the case that people finding mistakes in old tax returns can make a voluntary disclosure to HMRC.
It meant they could pay any outstanding tax, safe in the knowledge that, provided the error was not more than careless and they cooperate fully to bring matters up to date, they would not face a penalty.
According to tax consultant Andrew Hubbard and head of tax investigations Mike Down at audit, tax and consultancy services firm RSM, “this approach has always worked well”.
“By allowing people to make penalty-free disclosures in this way, HMRC encourages good compliance and, of course, saves times and money by not having to investigate matters themselves.
“It seems this well-tested approach is changing,” they warned.
Penalty range
The update in question centres on the introduction of a three-year timeframe and subsequent penalty for disclosures made after that time.
The HMRC penalty factsheets now state: “When calculating penalties for inaccuracies we’ll take into account how long it’s taken for you to tell us about the inaccuracy. If you’ve taken a significant period (normally three years) to correct or disclose the inaccuracy we’ll normally restrict the amount of reduction given for disclosure.
“We’ll restrict the penalty range by 10 percentage points above the minimum to reflect the time take before working out the reductions for telling, helping and giving.”
Hubbard and Down say: “This appears to mean that some wholly voluntary disclosures will, in future, attract a 10% penalty.
“We say ‘appears’ because it is not entirely clear what the meaning of those words actually is. They might mean that if you know about an error but sit on it for three years before telling HMRC, you would face a penalty.
“But they could mean that if the error occurred more than three years ago, even if you have only discovered it, you will face a penalty when you bring it to HMRC’s attention.”
Counterproductive move?
While the duo admit that there is some merit to the taxman’s approach, they are concerned it would be counterproductive.
“It might well have the effect of encouraging individuals not to make a disclosure and hope that they can remain beneath the radar,” Hubbard and Downs say.
“It is quite right that people who deliberately get their tax returns wrong should face penalties. But we are not convinced that HMRC’s latest approach is wise and wonder whether or not a tribunal would support this new policy if a ‘careless’ case ever went to appeal.
“That is for the future. But, in our view, there is an urgent need for HMRC to clarify exactly what their policy now is, to confirm its legal basis, and to explain why they believe this overturning of such a long-standing principle is necessary.”
Moral compass
Old Mutual Wealth financial planning specialist Rachael Griffin does not think the change will act as a deterrent.
“If someone makes an innocent mistake which means they have not paid the tax due to HMRC, then they have an obligation to correct it.
“HMRC’s move to encourage people to take more care to ensure they get their tax affairs in order sooner rather than later is unlikely to deter innocent people from coming forwards, as their moral compass will likely ensure they do the right thing,” she told International Adviser.
