Tax - Proposed ‘duty to ‘correct’ on tax payers: more clarity needed
HM Revenue & Customs is continuing to tighten up its compliance functions, with a proposed new statutory duty on taxpayers to correct filed inaccuracies when they become aware of them. A failure to do so could result in the error or inaccuracy being considered deliberate.
HMRC is typically quick to contact tax payers who have underpaid tax, or when it seeks to question or investigate transactions to which tax relief and exemptions have been applied. Conversely, it is not unreasonable to expect the diligent tax payer to contact HMRC and report errors or inaccuracies when discovered, even if it means additional tax is payable. This will soon become the tax payers’ obligation.
Existing rules
As the rules stand at present, HMRC will treat an inaccuracy in a tax return as deliberate only if the taxpayer knowingly provides inaccurate information with the intention to mislead HMRC. If an inaccuracy is considered deliberate, HMRC can issue assessments for inaccuracies for the previous 20 years; and penalties could be up to 100% of the tax owed.
On the other hand, assessments may only go back 6 years if an inaccuracy is considered careless. Furthermore, a failure to correct an error in a tax return or document is not, for now, automatically deemed deliberate.
Key headlines
The plans for a statutory duty are set out in draft legislation and a policy paper; and come almost two years after a consultation on improving compliance by tax payers. The key proposals are:
· Taxpayers will be required to correct inaccuracies in tax returns and other documents once they become aware of them.
· HMRC will have power to issue a Customer Correction Notice. This will require taxpayers to correct a perceived error or explain why a correction is not required.
· Where a taxpayer does not take reasonable steps, when they become aware of the inaccuracy, to correct it or notify HMRC, the behaviour will be treated as deliberate -significantly increasing the potential financial penalty.
The objective behind the proposed change is, the government, to establish “clear expectations” of tax payers, but it will place a heavier burden on them.
Importantly, the proposals go beyond the issue of reporting accuracies – it effectively deals with the more serious issue of potential deliberate non-disclosure of errors and its consequences.
Limitation period
While the duty will arise when the taxpayer becomes aware of an inaccuracy, existing statutory time limits for amending tax returns or making assessments will apply. Tax payers will not, therefore, face a lifetime obligation to report inaccuracies when discovered.
There is some time to go before the rules will be implemented, and we would hope that much more clarity will be provided. For example, at what point will a taxpayer be considered to have become aware of an error; and at what point might a taxpayer be considered to have deliberately concealed an error or inaccuracy?
What does this mean?
All tax payers will need to understand the new ‘duty to correct’ inaccuracies and errors when discovered, or disclose them to HMRC. If a Customer Correction Notice is issued, the tax payer will be expected to understand the actions required of them and respond appropriately, or face potential penalties.
The new rules will also place an additional burden on accountants and financial advisers. They will, for example, need to clearly explain the statutory requirements to clients when an error or inaccuracy in a tax return or document is discovered.
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