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Penalties for inaccuracies – Prompted and unprompted disclosure by Rebecca Benneyworth

23rd Feb 2009
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This week I have been taking a look at the penalty reduction rules which replace the old concept of mitigation.

The old penalty system in relation to direct tax generally prescribes a penalty of up to 100% of the tax lost, which is then mitigated for size, gravity, disclosure and co-operation. This process ends when the new regime commences (although note that the commencement is return driven, so there will still be penalties around under the old rules for some time to come yet). The new regime provides for a strict penalty tariff based on the behaviour which led to the inaccuracy.

However, the amount of the penalty can be significantly reduced when the inaccuracy is disclosed. There is a substantial discount for unprompted disclosure, bringing the minimum penalties down to :

  • For a careless error, 0% rather than 30%
  • For a deliberate inaccuracy, 20% rather than 70%, and
  • For a deliberate inaccuracy with concealment, 30% rather than 100%.

Where a disclosure is prompted rather than unprompted, the discount is not as generous, with the minimum penalty being half of the full tariff.

The law defines an unprompted disclosure as one “made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy or under-assessment”. A disclosure which is not unprompted is prompted. (Finance Act 2007, Sch 24 para 9(2)).

When can we depend on a disclosure being unprompted when explaining to a client the penalty outcome in relation to an inaccuracy? Can the old system of making your disclosures at the commencement of a VAT visit still work?

HMRC’s Compliance Handbook Manual has some help for us on the subject at CH 82420. The general comments indicate that HMRC want to encourage unprompted disclosures (hence the substantial discount prescribed by the system). The guidance goes on to indicate that a disclosure will be treated as unprompted even if at the time it is made the full extent of the disclosure is not known, as long as the full details are provided within a reasonable time. However, officers are warned that all of the facts need to be considered before deciding if a disclosure is prompted or unprompted. "Compliance officers should apply a common sense approach in deciding whether or not a disclosure is unprompted and avoid making hasty judgements." This is good to hear, but what else has the guidance got to help us (and indeed the officer called upon to make the judgement)?

The more detailed guidance indicates that the objective test is not what the person believed but what the facts and circumstances gave him reason to believe. For example, a national campaign highlighting an area of the trading community on which HMRC will be concentrating would not stop a disclosure from being unprompted. “However a disclosure would be prompted if a person made the disclosure after

  • we had contacted them to tell them we wished to make a compliance check of their return, or
  • we had arranged to visit their premises to undertake a compliance check of their records.

It will be exceptional for a disclosure to be unprompted if a compliance check is in progress. It will be unprompted only if the disclosure is about something the compliance officer has not discovered or is not about to discover.”

Three examples at CH82422 are quite illuminating :

Example 1
Jemima returned a capital gain which is the subject of a compliance check. There is no intention to expand the scope of the compliance check during the review. She discloses that she has not declared her car benefit. This is an unprompted disclosure.

Example 2
During a VAT assurance visit considering the credibility of Alphonse’s sales records, he discloses that his sales have also been understated for income tax. This would be related to the subject under review and so is a prompted disclosure.

Example 3
During an Employer Compliance review the employer makes a disclosure that the basis of the transfer pricing calculation for Corporation Tax is wrong. This is unrelated to the subject under review and so there is an unprompted disclosure.

So it is clear, that the process adopted by some advisers, particularly with regard to VAT visits, of screening the records pre-visit and making voluntary disclosures at the start of the visit to eliminate any risk of penalty, while effective under the current regime, will only count as prompted disclosure in future, and will therefore attract a more modest discount.

We as advisers would do well to remember that if we discover an inaccuracy, the quicker the client makes a disclosure the more likely he is to benefit from the substantial discounts for unprompted disclosure.


Replies (4)

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By User deleted
26th Feb 2009 15:13

What white space
For those of us using 3rd party software to complete a return, we have the ability to make notes in a white space, but have you seen a paper return sent to all those unrepresented tax payers - the white space has gone!!

On another point, when completing a clients 2008 SA, I noticed an error in share information for an earlier sale in 2003 and advised the client that we would need to disclose the error, and have file notes on the discussions. Days before I wrote to HMRC, they enquired into the CGT (property transaction) in the 2007 return. I await with interest if they try and argue their enquiry prompted our disclosure!!

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By mikewhit
25th Feb 2009 18:31

"Langham Veltema on steroids" - I presume the steroids will reduce the inflammation ...

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
23rd Feb 2009 22:33

Interesting question
Clint. I won't answer directly, but just add some more detail. The guidance on reasonable care when there is uncertainty indicates that when a taxpayer is unsure about something he should seek clarification, but if he remains unsure then he should disclose the uncertainty on the return. (CH 81120) If he does this, he has satisfied the reasonable care test. By extension I think this also applies when an agent is acting.

I think this (the uncertainty issue) goes more to the Langham Veltema guidance than the issue of discloure described above. Disclosure here supposes that the taxpayer has now discovered an inaccuracy on a return which was not apparent when the return was submitted - otherwise of course the inaccuracy is not a mistake but a deliberate understatement!

Will the new legislation affect my own disclosure policy? You bet! At the moment it feels a bit like Langham Veltema on steriods! I am extremely conscious about the additional penalty implications of disclosing uncertainty - in addition to the normal discovery issues.

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By AnonymousUser
23rd Feb 2009 15:59

How will the new penalty regime affect your "white space" policy
I think that it will be interesting to see whether SP1/06, that was issued in response to Langham v Veltema, gets amended in any way in light of the changing penalty regime, and if not, how (if at all) it should affect the behaviour of taxpayers and advisors in determining the level of disclosure in the original tax returns as filed.

SP1/06 is at pains to point out that it provides no protection to taxpayers who disclose estimates "fraudulently or negligently". Fraud aside, it is clear that disclosure is not an automatic defence against neglect. However, perhaps it would at least drop you squarely into the "unprompted" camp?

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