Wednesday, March 25, 2009



The new system of penalties that applies from 1 April 2009 differentiates between prompted and unprompted disclosure. An unprompted disclosure attracts half of the maximum penalty of a prompted one. This is to encourage taxpayers to notify HMRC promptly if they make a mistake. A disclosure is “unprompted” if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the error.

The legislation does not specify how to make an unprompted disclosure. That may sound odd. Surely you only need to write a letter to HMRC. Yes, of course! But which bit of HMRC? Ten years ago I knew who was dealing with a client’s tax affairs. Nowadays I rarely do. Responsibility is split between different offices for different aspects of his affairs and one aspect can be dealt with by several different people in the same office.

Surely, you will be thinking, HMRC is HMRC. If you send the letter to the wrong person it will be forwarded to the right one. Well that is what I thought until I read the decision of the VAT and Duties tribunal in Richard Sadler trading as Warnfield Group.

Mr Sadler made an error on his VAT return. When his accountant came to do Mr Sadler’s accounts he picked up the error and advised Mr Sadler to notify it to HMRC. Mr Sadler did so. Such an error can be notified in one of two ways. You can simply write a letter to HMRC or you can fill in HMRC form 642. Mr Sadler took the latter option. He filled in the form and sent it to HMRC with his next VAT return.

Oh no, said HMRC. The legislation enables us to make regulations (an awful lot of the time actually, much more of the VAT law has been made by HMRC than by parliament) and we provided in the VAT Regulations 1995 that a person must correct an error “in such manner and within such time as the Commissioners [of HMRC] may require”. We say on the form 652, “You can use this form to disclose directly to your local VAT office (not VAT Central Unit) the details of any errors”. Mr Sadler disobeyed us! Admittedly he sent it to us but, as far as we are concerned, sending it to us at our VAT Central Unit instead of to us at his local VAT office is not notification of the error at all. Mr Sadler is not entitled to make the ridiculous assumption that we are here to help taxpayers and, like other organisations, will redirect a form to the correct place in our internal post. Parliament has not required us to be reasonable so we won’t be. (I expect that they did not use those precise words but that seems to be the gist of the reason why they pursued Mr Sadler before the VAT and Duties tribunal for a penalty of £11,044 that would not have had to be paid had he sent the form 652 to his local VAT office).

I doubt that many people actually know where their local VAT office is. They deal only with the VAT Central Unit. The address of the local office is on your VAT certificate, but HMRC seem always to be closing down or amalgamating offices, so even if you can find your VAT certificate (which they sent you when you registered for VAT, perhaps 35 years ago) the address on it may not be right.

I also wonder what would have happened if Mr Sadler had not filled in the form but simply written a letter to HMRC. I suspect they would have said that the VAT Regulations flag up “in such manner as … as the Commissioners may require” and that it was incumbent on Mr Sadler to read the Regulations and find out what they required.

I never fail to be puzzled at how often HMRC seem to say that they are anxious to have a good relationship with taxpayers and to help taxpayers to get things right and yet when it comes to the crunch, they seem gleefully to pounce on mistakes made by people like Mr Sadler and insist on strictly enforcing the rules that they have created.



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