Think your tax affairs are settled? Think again.
If you think your tax affairs are settled with HMRC, you may need to think again – a small error from years ago could come back to haunt you, says Fiona Fernie
HMRC have just issued a consultation called Modernising the Correction of Errors which includes a proposal that requires taxpayers who become aware of an inaccuracy in tax returns or other documents they have submitted to correct them.
The issue is how the rules could work in practice and that many taxpayers may not be aware it’s in HMRC’s legislation pipeline.
The correction obligation is linked to statutory time limits for HMRC assessments – generally four years where reasonable care was taken, six years where behaviour was careless and up to 20 years where an error was deliberate. Under the new proposals taxpayers who discover errors while reviewing old documents or returns up to 20 years old will undoubtedly clash with HMRC if they disagree about whether corrections were required.
Under the new proposals taxpayers who discover errors while reviewing old documents or returns up to 20 years old will undoubtedly clash with HMRC if they disagree about whether corrections were required
Just suppose you discover an error five years after filing a return. You feel you took reasonable care when preparing the original submission and conclude that HMRC is out of time to assess for additional tax. You decide that no correction is required and carry on with your life.
The problem is that years later HMRC could conclude that your original error was careless. Under this new legislation, because you didn’t correct the error, HMRC could argue that you failed to comply with your obligations. Under the new proposals, they could treat your failure to correct as deliberate behaviour for assessment time limit and penalty purposes even though your initial error was not deliberate.
HMRC overreach
If you think that sounds stressful, imagine that enough time had passed since the error that you had no obligation to retain records and now have no documentary evidence to explain to HMRC what happened and why.
The proposal does not make it clear how you would prove to HMRC that you had not discovered an error within the reporting time limits, or if you had, how you could demonstrate that it was reasonable that you decided not to report it.
This proposal represents a significant shift from HMRC. It is usually for them to prove careless or deliberate behaviour; the new rules would move that burden onto taxpayers in these circumstances.
HMRC’s objective is sensible, but they have gone about it in the wrong way. This legislation needs clearer safeguards and a finite time limit for making corrections. Otherwise, a measure intended to modernise compliance could undermine it – if by reviewing your old tax affairs and finding a historic error, you risk a dispute with HMRC and a penalty for not reporting it, why do it at all?
Fiona Fernie is a partner at leading audit, tax and business advisory firm, Blick Rothenberg