Whilst checking whether or not 5 year averaging was beneficial for a client, we have come across an error in the 2016 self-assessment return – basically that particular years 2 year averaging was incorrect and has resulted in £3.5k in tax being underpaid.
I’m in no doubt that many will argue that the moral/ethical thing to do is to advise HMRC of the error and pay the tax owed.
However, what is the taxpayer actually obliged to do by law?
I was reading the Sanderson V HMRC  UKUT 0623 case with interest. The judges comments in that case that although a failure to correct an error could have an effect on penalties, there was no statutory provision obliging a taxpayer to correct a return, nor any duty (so far as he was aware) to inform HMRC of past mistakes.
So, if the taxpayer submitted his return, and the taxpayer and agent at the time genuinely believed at the time that the return was correct and complete to the best of their knowledge, then they have done nothing wrong, and there is no statutory obligation to inform HMRC that they later find an error.
This is the case. The person who prepared the return genuinely believed what they calculated was correct, and the taxpayer believed the return prepared by us was correct, and so both us and the taxpayer were justified in submitting a return which we believed to be correct.
It was only as I was looking at the 2018 5 year position that the error was spotted – and we are now out of time to submit an amendment.
I’m aware that if this is later discovered by HMRC then we are exposed to larger penalties, but does anyone know of any statutory obligation on a taxpayer to correct an error – particularly one outside the time limit for amendment?