PCRT helpsheet: Dealing with irregularities

This helpsheet provides further guidance on the application of the Fundamental Principles and Standards when dealing with irregularities that arise in tax. This includes establishing the facts, whether client authorisation is needed to disclose an irregularity and actions to take where a client refuses to disclose.

Introduction

Establishing the facts 

Is the irregularity trivial?

Is specific authorisation by client required to disclose an irregularity?

Stage 1: Asking the client for authority to disclose

Stage 2: Advising the client of the consequences of failure to disclose

Stage 3: Advising the client in writing of the consequences of failure to disclose

Actions where the client refuses to disclose

Ceasing to act

Informing HMRC

Withdrawing reports signed by the member

Reporting to MLRO/NCA

Professional enquiry (also known as professional clearance)

Other related matters 

     Self-assessment

     Decisions of Tribunals or Courts

          What corrective action is required?


Introduction

For the purposes of this Chapter, the term ‘irregularity’ is intended to include all errors whether the error is made by the client, the member, HMRC or any other party involved in a client’s tax affairs.

In the course of a member’s relationship with the client, the member may become aware of possible irregularities in the client’s tax affairs. Unless already aware of the possible irregularities in question, the client should be informed as soon as the member has knowledge of them.

Where the irregularity has resulted in the client paying too much tax the member should advise the client about making a repayment claim and have regard to any relevant time limits. With the exception of this paragraph and the final paragraph in the section titled ‘Is specific authorisation by the client required to disclose an irregularity’ the rest of the information on this helpsheet deals solely with situations where sums may be due to HMRC.

On occasions it may be apparent that an error made by HMRC has meant that the client has not paid tax actually due or he has been incorrectly repaid tax. Correcting such mistakes may cause expense to a member and thereby to their clients. A member should bear in mind that, in some circumstances, clients or agents may be able to claim for additional professional costs incurred and compensation from HMRC. See HMRC’s complaints factsheet.

A member must act correctly from the outset. A member should keep sufficient appropriate records of discussions and advice and when dealing with irregularities the member should:

  • Give the client appropriate advice;
  • If necessary, so long as he continues to act for the client, seek to persuade the client to behave correctly;
  • Take care not to appear to be assisting a client to plan or commit any criminal offence or to conceal any offence which has been committed; and
  • In appropriate situations, or where in doubt, discuss the client’s situation with a colleague or an independent third party (having due regard to client confidentiality).

Once aware of a possible irregularity, a member must bear in mind the legislation on money laundering and the obligations and duties which this places upon them (see ATT CCAB guidance and CIOT CCAB guidance).

A member should also consider whether the irregularity could give rise to a circumstance requiring notification to their professional indemnity insurers.

In any situation where a member has concerns about their own position, they should take specialist legal advice. This might arise, for example, where a client appears to have used the member to assist in the commission of a criminal offence in such a way that doubt could arise as to whether the member had acted honestly and in good faith.

The flowchart below summarises the recommended steps a member should take where a possible irregularity arises. It must be read in conjunction with the guidance and commentary that follow it.

Establishing the facts

Although a member is not under a duty to make enquiries to identify irregularities which are unrelated to the work in respect of which they have been engaged, if they do become aware of any irregularity in a client’s tax affairs they should follow this guidance, whether in relation to a matter on which they have acted or not.

A member who suspects that an irregularity may have occurred should discuss this with the client to remove or confirm the suspicion. they should take into account the fact that they may not be aware of all the facts and circumstances and may not, therefore, be able to reach a conclusion.

If the irregularity concerns the accounts but is not material from an accounting perspective in general no adjustment is needed and no further action is required.

Where the client provides an explanation for the apparent irregularity to the satisfaction of the member, the member is free to continue to act for that client. Where the client fails to explain the apparent irregularity to the satisfaction of the member, the member should consider whether it is appropriate to continue to act. Where the member concludes that it is appropriate to continue to act they should monitor the position carefully. Should it later become apparent that there is an irregularity despite the client’s previous assurances to the contrary the member should follow the advice in the flowchart above. In cases where a member ceases to act, they below (see sections: Ceasing to Act; Informing HMRC; Withdrawing reports signed by the member; Reporting to MLRO/NCA).

If a member is in doubt as to whether there is an irregularity the member should consider seeking specialist advice. Likewise correcting more serious errors can require specialist help where again assistance may be required. In some situations, the client may wish to seek or the member should recommend a second opinion.

Whether the member decides to continue to act for the client or not, the member should protect their position and record their compliance with this guidance by documenting:

  • The discussions they have had with their client, any colleague, specialist and/or HMRC;
  • The client’s explanations; and
  • Their conclusion and the reasons for reaching that conclusion.

It may be appropriate to confirm the facts in writing with the client.

Is the irregularity trivial?

As a general principle all known irregularities should be corrected (save for non-material adjustments as described above). In the opinion of the professional bodies it is reasonable for a member to take no steps to advise HMRC of isolated errors where the tax effect is no more than minimal, say up to £200, as these will probably cost HMRC and the client more to process than they are worth to the Exchequer.

Is specific authorisation by client required to disclose an irregularity?

A member must ensure that he has authority to disclose an error to HMRC. This could be specific authority agreed with the client or a general authority contained in a letter of engagement. If in any doubt or if the amount of tax involved is material the member should confirm the position with the client.

If the client withdraws the member’s authority to correct the error, the member should follow the guidance below (see sections: Actions where the client refuses to disclose; Ceasing to act; Informing HMRC; Withdrawing reports signed by the member; Reporting to MLRO/NCA and Professional enquiry).

A member must have the client’s authority to agree a negotiated figure following disclosure of the facts and circumstances. A member cannot agree a figure that they know to contain an error.

In all cases where HMRC has sent an over-repayment to the member they must return it to HMRC as soon as practicable. A member does not require their client’s authority to return an excessive repayment but, as a matter of course, they should notify their client that they have done so.

Stage 1: Asking the client for authority to disclose

Subject to the circumstances set out above (see section: Is specific authorisation by client required to disclose an irregularity?) the client should be asked to authorise the member to notify HMRC of the error. A member should encourage the client to make a timely disclosure. The member should advise the client of their obligations under the relevant tax legislation and refer, as relevant, to interest, surcharges, penalties and the rules concerning the delayed correction of innocent errors.

Whether the client follows the member’s advice is, ultimately, the client’s decision. If, however, the client decides not to act in accordance with the member’s advice as to their obligations, the member should take the further steps detailed below (see sections: Stage 2; Stage 3; Actions where the client refuses to disclose; Ceasing to act; Informing HMRC; Withdrawing reports signed by the member; Reporting to MLRO/NCA and Professional enquiry).

Stage 2: Advising the client of the consequences of failure to disclose

Where it appears that the client is reluctant to authorise disclosure of the irregularity to HMRC, the member should explain to the client:

  • The potential consequences of non-disclosure;
  • The benefit of making a voluntary disclosure especially as regards 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 themself from any work done, should disclosure not be made. The client should be left in no doubt that adverse inferences could be made and that this step could result in HMRC commencing enquiries which might lead to the discovery of the non-disclosure; and
  • Comply with their professional obligations relating to the appointment of a new adviser, as it is the duty of professional advisers before accepting professional work to communicate with the person who previously acted in connection with that work.

Where the client is an organisation and the client contact still remains reluctant to authorise disclosure of the irregularity to HMRC, the member should raise the issue at a higher level within the client organisation. If, having followed this approach, the client continues to be reluctant to authorise disclosure to HMRC, the member should follow the guidance set out below (see sections: Stage 3; Actions where the client refuses to disclose; Ceasing to act; Informing HMRC; Withdrawing reports signed by the member; Reporting to MLRO/NCA and Professional enquiry).

Stage 3: Advising the client in writing of the consequences of failure to disclose

Where the client remains unwilling to make a full disclosure to HMRC the member should ensure that their conduct and advice are such as to prevent their own probity being called into question. It is essential therefore to advise the client in writing, setting out the facts as understood by the member, confirming to the client the member’s advice to disclose and the consequences of non-disclosure.

If, after being advised in writing, the client prevaricates about making a full disclosure, the member must consider at which point the prevarication should be treated as a refusal to disclose.

Actions where the client refuses to disclose

If, despite being fully advised of the consequences, the client still refuses to make an appropriate disclosure to HMRC, the member must:

  • Cease to act;
  • If relevant, inform HMRC of their withdrawal;
  • Consider withdrawing reports signed by the member;
  • Consider whether a money laundering report should be made to the firm’s MLRO/NCA; and
  • Consider carefully their response to any professional enquiry letter (also known as professional clearance letter).

These obligations are set out in more detail below.

Ceasing to act

Where the member must cease to act in relation to the client’s tax affairs they should inform the client in writing accordingly.

If HMRC were to realise that the member had continued to act after becoming aware of such undisclosed errors, the member’s relationship with HMRC would be prejudiced. HMRC might, in some circumstances, consider the member to be knowingly or carelessly concerned in the commission of an offence or be engaged in dishonest conduct.

The member should consider carefully whether it is appropriate to continue to act in relation to any non- tax matters of the client.

Informing HMRC

Where the member had been dealing with HMRC on the client’s behalf or had been formally appointed as a tax agent, the member should notify HMRC that they have ceased to act for that client. Because of the obligation to maintain client confidentiality a member should not provide HMRC with an explanation as to the reasons for ceasing to act.

Withdrawing reports signed by the member

Where a member has undertaken work to verify or audit accounts or statements which carry a report signed by the member which is subsequently found to be misleading, the same principles of client confidentiality apply. If the engagement letter provides the member with the authority to notify HMRC in such circumstances, they should inform HMRC that they have information indicating that the accounts or statements cannot be relied upon.

If the member does not have their client’s consent to the disclosure, they should write to the client and explicitly ask for permission to withdraw the report; if unsuccessful, they should then obtain specialist legal advice as to what action they should take.

A member should not explain to HMRC the reasons why the returns, accounts, etc. are defective. To do so without the client’s consent is more likely than not to be considered by a court of law as a misuse of confidential information and an unjustified breach of client confidentiality.

Reporting to MLRO/NCA

In deciding whether a report should be made to NCA, the member (or the member’s MLRO) should take into account the various requirements of the legislation and any reporting exemption which might apply. See Chapters 6 and 7 of the CCAB guidance.

Professional enquiry (also known as professional clearance)

Having ceased to act the member may be approached by a prospective adviser for information relevant to the decision of whether to accept the appointment or not.

Before responding to a request for information from a prospective adviser, a member must ensure that they have authority from the former client to disclose all the information needed and reasonably requested by the prospective adviser to enable him to decide whether to accept the work. Only to the extent that they are authorised to do so should the member discuss freely with the prospective adviser all matters of which the prospective adviser should be made aware.

If the client refuses permission to the member to discuss all or part of their affairs, the member should inform the prospective adviser of this fact. It is then up to the prospective adviser to make enquiries from the client as to the reasons for such a refusal.

Other related matters

Self-assessment

Where the error relates to a self-assessment return the client must amend any self-assessment affected by the error providing they are within time to do so. Where the time limit for amending a self-assessment has passed the client should provide HMRC with sufficient and accurate information to explain the error. If HMRC fails, or is unable, to take any necessary action, for example to issue a discovery assessment, a member is under no legal obligation to draw HMRC’s failure to their attention, nor to take any further action. Where it is relevant a member should ensure that the client is aware of the potential for interest and/or penalties.

Decisions of Tribunals or Courts

It is possible that after a client has made a self-assessment return a later (perhaps years later) unrelated decision of the Tribunal or Court may cast doubt on whether the self-assessment return was made on the correct basis.

A member is not under a duty to monitor all returns and all tax cases for many years after the returns have been filed to identify this rare event. However, if the member is aware of such a situation they should determine whether the interpretation in the court or tribunal case is applicable to the client’s return. The member may wish to consider seeking specialist advice if in doubt. The member should also ascertain whether the case is to be appealed and may await the outcome of any appeal. Where there is a final decision which is applicable to the client’s return(s), the member should refer to the guidance below to determine what action may be required.

What corrective action is required?

Whether a client needs to correct an irregularity when a later court or tribunal decision casts doubt on a past return is a complex question and one that presents practical difficulties.

Where the client’s return is under enquiry, it remains open and can be amended in the normal manner.

The following broad principles should be applied where the client’s return is not under enquiry:

Subject to whether there is any further appeal, a decision of a Court is regarded as determining how the law should always be applied. A member will however need to have regard to whether the facts of the relevant case can be distinguished from the client’s circumstances.

Unless the basis upon which the self-assessment was made was sufficiently clear in the original return, or there is continuity of treatment of the item from previous returns, or the item was treated in accordance with ‘prevailing practice’ the client should notify HMRC of the possible deficiency in his return.

The member should have regard to HMRC’s powers to make a discovery assessment where the tax is out of normal time for assessment (generally four years).

In cases involving marketed tax avoidance schemes HMRC may assert that longer time limits apply for example where there was no disclosure at all or a DOTAS SRN was not put on the return. Members should be careful not to accept an allegation by HMRC of negligent/ careless or fraudulent/ deliberate conduct by the client or the member without seeking specialist advice first.

If a client in this situation refuses to authorise disclosure to HMRC then unless the member has expert knowledge in this area they should recommend that a second opinion be sought and otherwise treat this situation in the same way as any other irregularity.