The United European Gastroenterology Federation had made some errors in its tax return and disclosed these to HMRC as soon as it discovered them, unprompted by HMRC. Errors arise in even the most careful taxpayer’s records, and how to handle them is an important issue for all taxpayers and their advisers. A conscientious taxpayer might hope to persuade HMRC that the penalty for the error should be the minimum permitted: 0%.
However, in the case of United European Gastroenterology Federation v Revenue and Customs Commissioners ( UKFTT 292 (TC), published on 17 May 2013), HMRC had already requested a meeting to inspect the taxpayer’s tax records before the taxpayer disclosed its error to HMRC and HMRC took the view that the taxpayer’s disclosure of its errors had been prompted by the request for a VAT visit. This distinction is important. Although the minimum penalty for an unprompted disclosure is 0%, this minimum is increased to 15% for disclosures which qualify as “prompted”. HMRC duly imposed the minimum 15% penalty (£104,973) for a prompted disclosure.
The taxpayer argued that its error had not been prompted by HMRC’s request to inspect its tax records – the error had been discovered by the taxpayer in the course of compiling its Financial Statements. The Tribunal agreed that the taxpayer would have disclosed the error “irrespective of whether or not HMRC had made contact … to arrange the visit” and that the “disclosure was not prompted by anything done by HMRC, as it would have been made in any event”.
This is all very reasonable and one might at this point expect the taxpayer to win its argument, with the penalty being reduced to nil. However, the law does not define unprompted disclosures in such terms. The Tribunal referred to Paragraph 9(2)(a), Schedule 24, Finance Act 2007, which states that “disclosure is unprompted if 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”.
It was clear to the Tribunal that the very fact HMRC had contacted the taxpayer to enquire into its tax records provided the taxpayer with reason to believe HMRC were about to discover the error. In this sense, the disclosure qualified as “prompted” and the minimum penalty permitted by law is 15%. In fact, the Tribunal “emphasise[d] that this is the case … even though we fully accept the [taxpayer’s] evidence that the disclosure would have been made even if no HMRC visit had been arranged.”
This case does clarify a particular issue relating to VAT errors: taxpayers cannot expect to avoid a penalty by disclosing an error between the date HMRC requests a VAT visit and the date that visit takes place. However, the implications of this decision extend beyond that. It seems the very act of HMRC contacting a taxpayer to enquire into its tax records (for direct and indirect taxes) could increase the minimum penalty for subsequent error disclosures from 0% to 15%, even for errors which would have been disclosed independently of HMRC’s contact.
Taxpayers should therefore consider disclosing their errors to HMRC as early as possible, even if only in outline before the calculations are complete. Not only could swift disclosures reduce the penalties imposed by HMRC, but the sooner disclosure is made the less chance there is of HMRC co-incidentally contacting the taxpayer for a routine enquiry before the disclosure is finalised. However specialist advice should always be sought before acting, because in some cases the way the ‘unprompted’ disclosure is made could be extremely important.
For further information this decision and VAT in general please contact the TaxDesk on 0845 4900 509 and ask for Kevin Hall. For information in relation to penalties and HMRC enquiries generally, ask for John Hood.