VOLUNTARY DISCLOSURE OF ERRORS ON INDIRECT TAX RETURNS

Transcription

1 VOLUNTARY DISCLOSURE OF ERRORS ON INDIRECT TAX RETURNS A submission made on 29 October 2007 by the Tax Faculty of the Institute of Chartered Accountants in England and Wales in response to a consultation paper issued on 1 August 2007 by HM Revenue & Customs CONTENTS Paragraph Introduction 1-2 Key point summary 3-9 Comments Annex Who we are Ten Tenets for a Better Tax System A B ICAEW Tax Faculty, Chartered Accountants Hall, PO Box 433, Moorgate Place, London EC2P 2BJ T +44 (0) F +44 (0) E tdtf@icaew.com 1 of 6

2 VOLUNTARY DISCLOSURE OF ERRORS ON INDIRECT TAX RETURNS INTRODUCTION 1. We are pleased to respond to the consultation paper issued by HM Revenue & Customs on 1 August 2007 regarding voluntary disclosure of errors on indirect tax returns, which can be found at nfpb=true&_pagelabel=pagelibrary_consultationdocuments&propertytype=docum ent&columns=1&id=hmce_prod1_ Details about the Tax Faculty and the Institute of Chartered Accountants in England and Wales are set out in Annex A and our Ten Tenets for a Better Tax System which we use as a benchmark is in Annex B. KEY POINT SUMMARY 3. Many businesses regard the voluntary disclosure requirements as an unnecessary burden, the main benefit being the opportunity to avoid a possible penalty. We are concerned that the new penalty regime will remove this benefit, making voluntary disclosure less attractive than it has been in the past. The solution to this would be to exclude voluntary disclosures from potential penalties under the new penalty regime. An inferior alternative could be to issue any penalties imposed against voluntary disclosures as suspended penalties, thereby making penalties for all voluntary disclosures avoidable, subject to specified conditions. 4. Whatever method is finally adopted, we recommend that a de minimis limit be set for individual errors, below which an individual error would not be taken into account when determining if the new limit had been exceeded. We suggest that an appropriate de minimis limit, below which an individual error could be ignored, might be 1,000 or 1% of the total VAT/indirect tax throughput for the return period in question, whichever is the greater. 5. It would be necessary to define an individual error for the purposes of paragraph 4 above. In many cases this would be obvious, but where a similar error had been made persistently, such as the incorrect VAT liability regularly being applied to the sale of a particular product, then the total amount of VAT misdeclared in relation to all occurrences of that error should be used to determine if the de minimis limit had been breached. 6. A very simple voluntary disclosure regime based on individual errors could be established by setting a de minimis limit for individual errors, with no other conditions. In this case, all individual errors over, say 10,000, would need to be voluntarily disclosed. All individual errors under this limit could be adjusted on the next return submitted after the error was discovered, without any further reporting requirements. A variation of this regime could be to adjust the 10,000 threshold according to a percentage of the tax throughput. 2 of 6

3 7. For ultimate simplicity, we would welcome a return to the system where errors of any size could be adjusted on the next return submitted immediately following the discovery of an error. However, the requirement to complete a separate box on the return to identify such adjustments would eliminate most of the simplification benefits gained. If a separate box would be required in such circumstances, then we suggest that raising the thresholds would be a better option. 8. If voluntary disclosure thresholds are to remain, then we recommend that a higher threshold be introduced for the compulsory correction of errors, below which it would be possible to adjust the following return. We suggest that an appropriate threshold would be 10,000 or 10% of the tax throughput for the period in question, whichever is the greater. These thresholds should not include individual errors falling below the de minimis limits described at paragraphs 4 and 5 above, but should relate to the total value of relevant errors rather than the net amount. We recognise that HMRC may wish to impose an upper ceiling of, say 1,000,000, above which all errors should be voluntarily disclosed. 9. Whatever method is introduced, the facility to make a voluntary disclosure for any amount should remain. This would be particularly useful for small businesses wishing to claim an early refund of previously overpaid indirect taxes. COMMENTS 10. HM Revenue & Customs are seeking views on possible changes to the voluntary disclosure arrangements for indirect taxes. Their consultation paper suggests alternative options that are being considered. Whilst considering these options, we have also taken the opportunity to provide suggestions as to how the burden of voluntary disclosure could be reduced still further. 11. HMRC needs to determine its objectives for the voluntary disclosure regime. An indicator of the objective of reducing burdens on businesses would be to see a reduction in the number of voluntary disclosures being made. This could also significantly reduce the burden on HMRC of processing the voluntary disclosures received. Is the key motive for HMRC to be made aware of significant errors and associated system weaknesses or is it a revenue raising exercise? 12. For larger businesses, especially those with several self accounting branches, one of the main burdens created by the existing system of voluntary disclosure is the effective requirement to keep a centralised record to determine if the 2,000 voluntary disclosure limit has been exceeded. 13. There are instances under the present voluntary disclosure arrangements where large errors can fall outside the requirement. We believe that HMRC should be made aware of large errors, whether compensating or otherwise, and so recommend that future thresholds relate to the total amount rather than the net amount of errors discovered in a period. This would also remove the temptation when discovering an error, to wait and see if a compensating error arose. 14. A criticism of the existing regime is that where a refund claim of any size is made to HMRC from a small or medium sized business, it is common practice to visit the trader to discuss the claim before making repayment. Where such a claim is 3 of 6

4 submitted by a qualified accountant on behalf of a client, we believe that HMRC should give some credence to this when considering if it is necessary to make a visit. 15. Specific comments on the four options included in chapter 2 of the consultation document are set out at paragraphs 16 to 21 below. 16. Option 1. An increase in the current financial limit of 2,000 would be most welcome. However, although this measure would reduce the number of disclosures being made, it would not, in isolation, significantly reduce the burden of having to maintain a schedule to determine if the new increased limit had been breached. 17. Option 2. Using different financial limits for different sizes of businesses has its attraction, but any such measure should be calculated on a common basis, such as percentage. Failure to do this would create difficulties for businesses near a threshold, for example to determine whether a business fell within the rules for a small or medium sized business. 18. A percentage basis with upper and lower limits would be a viable option. For example, voluntary disclosures could be required in respect of errors discovered that were greater than 10,000 and 10% of tax throughput, subject to a requirement that all errors of over 1,000,000 must be disclosed. 19. Option 3. We would welcome a return to the system where errors of any size could be adjusted on the next return submitted immediately following discovery of an error. However, the requirement to complete a separate box on the return to identify such adjustments would eliminate most of the simplification benefits gained. 20. Option 4. A generic model for dealing with error or mistake claims across all indirect and direct tax regimes would be welcome if an acceptable generic model could be devised. However, it would be essential for any such model to include a de minimis limit that was sufficiently large if the objective to reduce the burden on businesses was to be achieved. To remover the limit completely, thereby effectively reducing the de minimis limit to zero, would place an unacceptable additional burden on business and HMRC. 21. However, the opportunity to correct errors on returns ending within, say, one year of the return on which the original error had been made would be welcome, if this could be done without having to maintain a separate record of adjustments. 4 of 6

5 ANNEX A WHO WE ARE 1. The Institute of Chartered Accountants in England & Wales is a professional body representing some 128,000 members. The Institute operates under a Royal Charter with an obligation to act in the public interest. It is regulated by the Department of Trade and Industry through the Accountancy Foundation. Its primary objectives are to educate and train Chartered Accountants, to maintain high standards for professional conduct among members, to provide services to its members and students, and to advance the theory and practice of accountancy (which includes taxation). 2. The Tax Faculty is the centre for excellence and an authoritative voice for the Institute on taxation matters. It is responsible for tax representations on behalf of the Institute as a whole and it also provides services to more than 11,000 Faculty members who pay an additional subscription. 3. Further information is available on the ICAEW website, and on the ICAEW Tax Faculty website at or telephone +44 (0) of 6

6 ANNEX B THE TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 - see 6 of 6