It has long been the case that if somebody finds a mistake in an old tax return they can make a voluntary disclosure to HMRC and pay the tax, safe in the knowledge that, provided that the error was no more than careless and they cooperate fully in bringing matters up to date, they will not face a penalty.
This approach has always worked well. By allowing people to make penalty-free disclosures in this way, HMRC encourages good compliance and, of course, saves time and money by not having to investigate matters itself.
But it seems that this well-tested approach is changing. HMRC, following an update of its internal instructions, revised its penalty factsheets just before Christmas. They now contain the following words:
‘When calculating penalties for inaccuracies we’ll take into account how long it’s taken for you to tell us about the inaccuracy. If you’ve taken a significant period (normally 3 years) to correct or disclose the inaccuracy we’ll normally restrict the amount of reduction given for disclosure. We’ll restrict the penalty range by 10 percentage points above the minimum to reflect the time taken before working out the reductions for telling, helping and giving.’
This appears to mean that some wholly voluntary disclosures will in future attract a 10 per cent penalty. We say ‘appears’ because it is not entirely clear what the meaning of those words actually is. They might mean that if you know about an error but sit on it for three years before telling HMRC you would face a penalty. But they could mean that if the error occurred more than three years ago, even if you have only just discovered it, you will face a penalty when you bring it to HMRC’s attention.
We can see some merit in HMRC’s approach if the first interpretation is correct, but if the latter applies we are concerned that it could be counterproductive. It might well have the effect of encouraging individuals not to make a disclosure and hope that they can remain beneath the radar.
It is quite right that people who deliberately get their tax returns wrong should face penalties. But we are not convinced that HMRC’s latest approach is wise and wonder whether or not a tribunal would support this new policy if a ‘careless’ case ever went to appeal. That is for the future. But in our view there is an urgent need for HMRC to clarify exactly what its policy now is, to confirm its legal basis, and to explain why it believes this overturning of such a long-standing principle is necessary.