Chapter 23 PCRT: Dealing with errors Flashcards
23.2 Introduction
The term error is intended to include aa errors and mistakes whether they were made by a client, the member, HMRC or any other party involved and whether made innocently or deliberately. Unless a client is already aware of the possible error, they should be informed as soon as the member identifies them. A member should advise clients how to make a repayment claim is needed and advise the client of time limits to make a claim. Sometimes HMRC may make an error leading to the client incorrectly paying tax, there may be fee costs as a result of correcting mistakes. A member should consider in some circumstances, clients or agents may be able to claim for additional professional costs incurred and compensation from HMRC.
When dealing with errors a member should give the client appropriate advice, persuade the client to behave correctly, not to assist a client in a plan to commit any criminal offence or to conceal an offence, if appropriate discuss the client’s situation with a colleague. Once aware of an error, a member must bear in mind the legislation on money laundering.
When a member makes the error, they should consider notifying their professional indemnity insurers. A member should consider specialist legal advice if they have concerns about their own position. The Criminal Finances Act 2017 has created new criminal offences of failure to prevent facilitation of tax evasion.
23.3 Establishing the Facts
A member is not required to make enquiries to identify errors which are unrelated to the work they have been engaged to perform. If they become aware of errors, they should follow the guidance even if the error does not relate to their work. A member should discuss this with the client. Where the client provides an explanation for the apparent error to the satisfaction of the member, they are free to continue acting for the client.
When the client fails to explain the error to the satisfaction of the member, where appropriate they should cease to act, if they conclude it is appropriate to continue acting for the client, they should monitor the position carefully. In serious cases of errors, a member should seek specialist help, in some situations they may wish to seek, or advise the client, to seek a second opinion. A member should document the discussions they have with a client, specialist and HMRC, document the client’s explanations and their conclusions and reasons for reaching that conclusion.
As a general principle all errors should be corrected. In the opinion of professional bodies it is reasonable to take no steps to advice HMRC of isolated errors where the tax effect is no more than the minimal (up to £200), as these would probably cost HMRC and the client more to process than they are worth to the Exchequer.
23.5 Specific authorisation from the client to disclose an error
A member must ensure they have authority to disclose an error with HMRC. This could be specifically agreed with the client or a general authority contained in a letter of engagement. A member must have the client’s authority to agree a negotiated figure following a disclosure of the facts and circumstances. A member cannot agree a figure that they know to contain an error. A member does not need their client’s authority to return an excessive overpayment, but they should notify their client that they have done so.
23.6 Asking the client for authority to disclose
The member should ask the client’s permission to notify HMRC of the error and a member should encourage the client to make a timely disclosure. The member should advise the client of their obligations under tax legislation and refer as relevant to interest, surcharges and penalties for errors. It is the client’s decision to follow the advice.
Where it appears the client is reluctant to authorise disclosure of the error to HMRC, the member should explain to the client, the consequences of non-disclosure, the benefit of making a voluntary disclosure especially regarding reduced penalties and the wide ranging powers to obtain information from taxpayers, their agents and third parties available to HMRC. This will also include the member explaining that they will:
• Be required to put their advice that disclosure is required in writing
• Be obliged to cease to act and in some circumstances to disassociate themselves from any work done, should disclosure not be made. The client should be aware that HMRC could open enquiries which could lead to the discovery of the non-disclosure
• Comply with their professional obligations relating to the appointment of a new adviser
When the client remains reluctant to authorise disclosure of the error to HMRC, the member should raise the issue at a higher level within the client organisation.
It is essential to advise the client in writing, setting out the facts by the member, confirming to the client the member’s advice to disclose and the consequences of non-disclosure. If the client delays making a full disclosure, the member should consider if it should be treated as a refusal to disclose.
23.6 Asking the client for authority to disclose (2)
If the client still refuses to make an appropriate disclosure to HMRC, the member must cease to act, if relevant inform HMRC of their withdrawal (but not state the reason due to confidentiality) and should:
• Consider withdrawing reports signed by the member
• Consider whether a money laundering report should be made to the firm’s MLRO/NCA
• Consider carefully their response to any professional enquiry letter (professional clearance letter)
Where a member ceases to act they should inform the client of this in writing. If HMRC were to realise a member continued to act when aware of undisclosed errors, it would damage the members relationship with HMRC, in some circumstances HMRC may consider a member to be knowingly or carelessly involved in the commission of an offence or be engaged in dishonest conduct.
Where a member undertakes work to verify audit accounts which carry a report signed by the member and the reports are found to be misleading, the same principles of confidentiality apply. A member can inform HMRC if the engagement letter allows them to do so. If they do not have permission they should write to the client and ask for permission to withdraw their report, if the client rejects this they should see specialist advice.
Having ceased to act, a member may be approached by a new adviser for information relevant to the decision to accept the appointment or not. The member must get the authority from the client to respond. The member should only discuss matters freely with the prospective adviser if the client gives them authority. If the client does not give authority, the member should inform the prospective adviser of this fact.
23.15 Other related matters
Self-assessment – when the error relates to this, the client should amend any self-assessment affected by the error if they are within the time limit to do so. When the time limit has passed the client should provide HMRC with sufficient and accurate information to explain the error. If HMRC fails to act, a member is under no obligation to draw HMRC’s failure to their attention nor to take further action. A member should ensure their client is aware of the potential for interest and penalties.
Tribunals – a member is not under a duty to monitor all returns and tax cases for many years after the returns have been filed to identify this rare event. If the member is aware of a situation however, they should determine if the interpretation in the court or tribunal is applicable to the client’s return. the member should ascertain whether the cases is to be appealed and may await the outcome of the appeal.
Where the client’s return is under enquiry it remains open and can be amended in a normal manner. Subject to further appeal, a decision of a court is regarded as determining how the law is applied, a member will need to have regard to whether the facts of the case can be distinguished from the client’s circumstances. The client should notify HMRC of the possible deficiency in their return unless:
• The basis upon the self-assessment was sufficiently clear in the original return
• There is continuity of treatment of the item from previous returns
• The item was treated in accordance with prevailing practice
The member should consider HMRC’s powers to make a discovery assessment where the tax is out of normal time for assessment (generally four years). For tax avoidance schemes HMRC may assert that longer time limits apply. Members should be careful not to accept an allegation by HMRC of negligent, careless or fraudulent conduct by the client without seeking specialist advice. If a client refuses to authorise disclosure to HMRC the member should treat this situation in the same way as any other error.
