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Correcting errors on previous returns

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5th Oct 2009
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Found an error? Is a penalty likely? This article explains which penaty regime will apply to mistakes you find, and how to put them right.

It is not uncommon that when preparing a tax return the agent discovers errors that have been made on a previous return. This may be the previous self assessment return, or errors made on VAT returns submitted by clients during the year.

Some of the mistakes you will be correcting this year will be subject to the new penalty regime, and some will not, so it may be useful to set out the approach you need to take when correcting mistakes. The advice that follows assumes that the mistake has resulted in an underpayment of tax rather than an overpayment - as penalties cannot apply unless the inaccuracy results in an underpayment or potential underpayment of tax.

Returns affected by new penalties

Return affected by new penalties are as follows :

  • Form P35 for 2008/09
  • VAT returns for years, months or quarters ending 31 March 2009 and later periods
  • Income tax self assessment returns for 2008/09 (2009 returns), and
  • Corporation tax returns for periods starting on or after 1 April 2008.

Correcting returns prior to new regime

For VAT returns prior to the new regime, any errors can be corrected either by putting the entries on the next available return, or by completing form VAT 652. The limit for correcting an error on the return is cumulative net errors of up to £10,000, unless the business has supplies on the next return of more than £1 million, in which case the limit is the lower of 1% of the box 6 entry and £50,000. No default interest is charged on errors put right on a return, but will otherwise be charged on those corrected by form VAT 652. No penalty can be charged under the VAT serious misdeclaration penalty if the error has been corrected.

For income and corporation tax returns which are amended subsequently, technically a penalty of up to 100% of the tax underpaid can be levied, but this penalty would be subject to mitigation for size, gravity, disclosure and co-operation. It is quite unlikely that such a correction would be penalised in the current climate, as the new regime encourages voluntary correction of errors.

Correcting returns affected by the new rules

When correcting an error on a return which is subject to the new penalty regime, the agent will have to consider whether any penalties can potentially apply to the error when it arose. An inaccuracy which arises despite reasonable care is not subject to a penalty at all, so if you consider that the reason for the error was not a lack of care, it is sufficient to correct the error and take no further steps.

However, if on considering the reason for the inaccuracy carefully, you believe that it arose through a lack of reasonable care by your client (including a failure to keep adequate records) then you will need to formally disclose the error to ensure that exposure to a penalty is minimised. Disclosure is defined in Finance Act 2007 Sch 24 para 9 as :

(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying the inaccuracy or under-assessment, and
(c) allowing HMRC access to records for the purpose of ensuring that the inaccuracy or under-assessment is fully corrected.

When correcting an error either by putting it right on the next VAT return, or by filing an amended self assessment return you will need to ensure that (a) and (b) above are adequately covered to benefit from the maximum discount which reduces a careless penalty from 30% to 0%. HMRC indicates that (c) only applies if the officer requests access to check, and thus need not be considered in the initial disclosure.

When the amount of the error has been identified – as will be usual in making the correction, it is only necessary for the amendment to make clear that an error has been corrected, and that this resulted from an inaccuracy on the return. However, the Compliance Handbook identifies that the maximum reduction for disclosure is available depending on the timing, nature and extent of the disclosure. From CH82440, we find that “Telling” includes

  • admitting the document was inaccurate or that there was an under-assessment
  • disclosing the inaccuracy in full
  • explaining how and why the inaccuracy arose.

What is important is the timing, nature and extent of the telling of the disclosure (para 9(3)), which the guidance explains as follows :

  • “The timing is only relevant to the period over which the disclosure is made, and not how long since the inaccuracy arose before the disclosure. When the person tells you about an inaccuracy in their return they must tell you all the facts at that time. If they do not, they may not receive the full reduction.
  • The nature covers why the document was inaccurate. The person needs to show a positive approach to telling what has happened not just reacting to questions.
  • The extent is whether everything is disclosed. If there is only a partial disclosure then a full reduction will not be due.”

Steps to take

When correcting an error on a self assessment return that is affected by the new penalty regime, you can make a disclosure in the white space (or accompanying letter or attachments for corporation tax) when the inaccuracy was careless. Your disclosure will need to cover all of the aspects outlined above to explain what happened. If you are satisfied that the mistake arose despite reasonable care, it is a good idea to document that conclusion and the evidence you considered to refer back to in the event of a subsequent enquiry.

For VAT it is best to correct errors on the next return if possible to eliminate the default interest charge, but to send a letter of disclosure in the case of careless errors.

Some suitable wordings for disclosure notes or letters are attached for you to download – these cover only disclosure of careless inaccuracies.
 

Replies (3)

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Chris Caspell CTA TEP
By ccaspell
21st Oct 2009 13:50

Amendments to Self Assessment Tax Returns

Am I right in thinking that, if the mistake is found within 12 months following the 31st January after the tax year then an amendment can still be made to the Tax Return? If so, is this without penalty?

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By User deleted
27th Oct 2009 10:23

"it depends"

I think that if the error is considered careless then a penalty can still apply if the tax increases.  The tax due should have been paid by 31st January, you amend return in say July, there is a late payment of tax and possible penalty.

I hope that these kinds of things will end up in a nil penalty.  Let's say you amend a return but make no separate disclosure, if HMRC come along 6 months later and say it is a careless mistake do we expect a nil penalty?  It's unprompted, the tax underpaid paid and interest charged.  Surely there will not be a penalty in these cases, unless it is a deliberate error and in those cases if deliberate surely someone will not then decide to amend the return anyway!

 

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By kristiana
31st Oct 2011 18:47

Suitable wording for disclosure notes

Does anybody know where to find this? The article mentions them in the last sentence but I am unable to locate where to download them from.

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