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Don’t give HMRC more than you have to – penalties, behaviours and their impact on HMRC’s assessing time limits

A client comes to you with news that they have omitted to return income for some past tax years saying…“Help me, you’re my only hope!” 

What do you do? Do you tot up all the income for those years, calculate the tax and then plug it into the relevant HMRC digital disclosure platform, add on the interest, then look at the penalties blurb and think “yeah careless, it’s that”…job done?

Stop!! At that point it is highly likely that you could have included years that HMRC has no right to assess. Additionally you have likely failed to properly consider the behaviours that lead to the inaccuracy in the returns filed, which means you are potentially overstating the penalty as a consequence.

No client is going to thank you for giving HMRC too much tax and an excessive penalty. Similarly no client is going to thank you for HMRC rejecting a disclosure which has understated the position, especially after the client has paid what you told them to and is expecting HMRC acceptance.

Where returns have been made but unfortunately income omitted, the client should be in an inaccuracy situation. Where no returns have ever been made, then we are in a failure position.

Inaccuracy position

Where a client has filed returns annually, but omitted income for whatever reason therefore understating the tax position and making those returns inaccurate – the time limits for HMRC to assess the lost tax arising from an inaccuracy are:

  1. Normal time limits (NTL) 4 years from the next year-end (so currently 2016/17 tax year) based on reasonable behaviour
  2. Extended time limits (ETL) 6 years for careless behaviour (back to 2014/15)
  3. Further ETL 20 years for deliberate behaviour

Failure position

Where no returns have been submitted, then we have a failure to notify (FTN) situation. Unless the client has a reasonable excuse for not declaring the income previously, a FTN will mean we go back up to 20 years from the next tax year-end. The penalties for FTN are also generally higher than for omissions or inaccuracies from filed returns.

The timing of any disclosure is also important.  If you are at or near a 5 April tax year end, then it is highly likely that the oldest year will drop out before HMRC review the position, so consider the timing of such disclosures in late March or early April.

Disclosing years outside of HMRC scope

If you settle those years outside of HMRC’s assessing grab, you are effectively doing so under Voluntary Restitution or VR principles. HMRC has no power under TMA1970 to recover those years based on the behaviour of the client, so effectively HMRC are appealing to the client’s innate philanthropic nature saying  “would you like to pay the tax even though no longer legally due?”.

If you offer years HMRC are not entitled to by mistake, then you are in the hands of the officer reviewing the disclosure and finding that mistake, rejecting the disclosure and offering VR or a refund of those paid up, but out of date years.

Behaviours and penalties – impact on time limits

The HMRC digital disclosure service usually allows you to self-assess the penalty position and gives options to tick, based on the considered client behaviour giving rise to the inaccuracy.

I have seen instances of incorrect or questionable choices being made here, where I have concerns whether the behaviour was careless at all. It is therefore vitally important to establish precisely why the income was omitted.

If there is a reasonable excuse, for example the client was unaware of their entitlement to the income at the time, then HMRC should only be going back four years from the next year end. Additionally, it is likely that the penalties could be £nil.

If we are approaching HMRC without any earlier nudge letter from them, then chances are our disclosure is unprompted. This also makes quite a difference to the quantum of the penalty.  Potentially the starting point could be 0%.

With inaccuracy penalties only (not FTN penalties), there is also the potential to suspend careless inaccuracy penalties. This is something HMRC offer, in fact they are duty bound to do so in almost every instance. If we can agree suspension conditions then all the penalties effectively go away, as long as the client upholds those suspension conditions for the agreed period.

Disclosures require careful handling. If foreign income or offshore gains have been omitted, then the need for careful handling is magnified, as the starting point for penalties are at least 100% of the tax arising under the draconian Requirement to Correct (RTC) regime. The draft legislation in recovering overstated Coronavirus Job Retention Scheme funds is similarly as draconian.

How we can help

Our investigations team can help. Penalty consideration and establishing behaviours are issues we deal with every day. We embrace the opportunity to engage with HMRC enquiry officers to secure the best deal available in the client’s circumstances.

We are here to help, we can save you time and save the client making an excessive disclosure. This can save the client from settling too many tax years and paying higher penalties than the guidance permits. Conversely it can also prevent a rejected undercooked disclosure.

The cost vs benefits of engaging with us are stacked in favour of your client, so please get in touch with Chris Watts and Dave Wase of the Tax Advisory Investigations Team before you submit that disclosure report.

FEATURING: Dave Wase
Dave joined PKF Francis Clark in October 2018 after a 27 year career working for HMRC. Working as part of the tax advisory investigations team,… read more
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