Chartered Institute of Taxation: CIOT warns draft tax error correction rules could create uncertainty for taxpayers
The Chartered Institute of Taxation (CIOT) has warned that draft legislation designed to strengthen the rules for correcting tax errors could create uncertainty for taxpayers unless stronger safeguards are built into the regime.
In its response to HMRC’s consultation on draft legislation to modernise the correction of errors, the CIOT has supported the objective of encouraging taxpayers to put mistakes right promptly. However, it said aspects of the legislation may not work as intended and could unintentionally leave some deliberate errors outside the scope of the new duty to correct.
The draft legislation would introduce a new legal obligation on taxpayers to take reasonable steps to correct inaccuracies in tax returns and other documents provided to HMRC once they become aware of them. It would also give HMRC a new power to issue Customer Correction Notices (CCNs), requiring taxpayers to review their tax affairs and either correct the identified inaccuracy or explain why no correction is needed.
However, the CIOT is concerned that the legislation does not clearly explain when a taxpayer would be deemed to have become aware of an error or what degree of certainty is required before the duty to correct arises.
Ellen Milner, director of public policy at the Chartered Institute of Taxation, said: “We support HMRC’s objective of encouraging taxpayers to correct mistakes promptly. However, taxpayers need greater certainty about when the new duty to correct arises and what actions they are expected to take. Awareness of a potential issue should not necessarily amount to knowledge that an error has been made, especially in cases where there is genuine technical uncertainty.
“As currently drafted, the proposals could have significant consequences. A taxpayer who has taken reasonable care could potentially face deliberate behaviour penalties and a 20-year assessment time limit if they fail to correct an error that HMRC believes should have been disclosed.
“The new obligations must therefore be proportionate and include appropriate safeguards and clear guidance to work without undermining taxpayer trust and confidence. There should be easements for taxpayers who reasonably consider that they have no duty to correct because, for example, they believe that HMRC are out of time to assess”.
The Institute also argues that HMRC needs to clarify what constitutes taking “reasonable steps” to correct an error, including the process for notifying and correcting errors, and the timescales involved. It has also raised concerns that CCNs could impose a disproportionate amount of time and costs on taxpayers if not used carefully.
In addition, the CIOT says the commencement provisions should make clear whether the new duty could apply to historic errors which are still within HMRC’s assessment time limits and how the rules will interact with existing compliance checks.
Ellen Milner added: “Taxpayers and advisers will need adequate notice and comprehensive guidance before the rules are introduced.
“Further consideration should also be given to how the proposed duty to correct will interact with existing tax regulatory legislation, particularly where the consequences of a failure to correct may extend beyond the taxpayer to their professional adviser.
“The government should ensure that advisers are not exposed to disproportionate regulatory consequences where the original error arose despite reasonable care being taken”.