The recent case of Lifeplus Europe Ltd v HMRC [2026] UKFTT 00797 (TC) is relevant to taxpayers facing Schedule 36 information notices in the context of a Transfer Pricing Dispute. The case shows HMRC’s assertiveness in this area and provides an example of a taxpayer successfully resisting HMRC’s demands. It is a reminder of the limitations of HMRC's Schedule 36 powers:
• HMRC were unable to show that the parent company accounts requested were “reasonably required”;
• It was also found that the documents were not within the taxpayer's “possession or power” to obtain.
Our previous insight article provides an introduction to Schedule 36 in the Transfer Pricing Disputes context and can be found here: Transfer Pricing Disputes & Investigations: HMRC’s Schedule 36 powers and associated penalties | JHAB LLP. As explained in that article, Schedule 36, among other things, allows HMRC to compel production of information or documents that are “reasonably required” to check a taxpayer's tax position. Schedule 36 also includes a penalty regime and specific Transfer Pricing amendments were introduced in 2023.
Background
Lifeplus Europe Limited (“the Appellant”) is a UK subsidiary of a US parent. HMRC opened an enquiry into the Appellant’s tax position, having identified a perceived Transfer Pricing risk for certain Accounting Periods (there had been significant growth in the Appellant’s turnover, yet the net profit margin in its company accounts had reduced significantly). This reduction in profits had coincided with the adoption of a particular Transfer Pricing policy. HMRC issued a Schedule 36 Information Notice to the Appellant, requesting, in respect of several Accounting Periods, all of the US parent company’s group consolidated financial statements (“Item 1”); and all of that parent company’s entity level financial statements (“Item 2”).
Following an HMRC review, the Appellant appealed to the Tribunal. The issues were: (1) Whether the documents requested were “reasonably required” by HMRC to check the Appellant’s tax; and (2) If so, whether the documents were in the “possession or power” of the Appellant. These issues required the Tribunal to consider relevant Transfer Pricing principles applied to cross-border transactions.
The parties’ arguments
HMRC argued that in respect of ‘Item 1’, the consolidated financial statements would: (1) evidence the group’s overall turnover, costs and profit; (2) enable HMRC to assess the proportion of the Appellant’s contribution to group profits/losses; and (3) substantiate the accuracy of the evidence that the Appellant had provided to HMRC during the enquiry.
In respect of ‘Item 2’, HMRC argued that the entity level financial statements would: (1) evidence the figures put forward as part of the Appellant’s proposed adjustment to HMRC’s CUP analysis; (2) assist with verifying whether the parent company, as an entity, was making a loss in 2013; and (3) enable HMRC to compare the Appellant’s turnover and costs/profits with those of the parent company, to support the correctness of the CUP analysis.
In response, the Appellant argued that: (1) The consolidated group accounts and the parent company accounts were not ‘reasonably required’ for the purpose of checking the Appellant’s tax position, because there was no ‘rational connection’ between those accounts and the issue in the enquiry; and (2) in any event, those accounts were not in the Appellant’s ‘possession’ or ‘power’ because the Appellant did not have any enforceable legal right, ‘general consent’, or ‘de facto’ right to access them.
The Tribunal’s Decision
The Tribunal decided in favour of the Appellant. The Tribunal considered that the approach adopted by HMRC during the enquiry, together with the relevant Transfer Pricing methodologies and processes, is the lens through which any ‘rational connection’ between the tax dispute and the documents requested in the Information Notice is to be viewed.
Having considered the information, the Tribunal held that the documents requested in the Information Notice were not ‘reasonably required’. HMRC had, among other things, failed to give an objectively reasonable explanation for why they should be permitted to have the contents of the accounts. OECD Guidelines para 3.22 states that once a one-sided method is chosen with the domestic taxpayer as tested party (as in the instant case), the tax administration "generally has no reason to further ask for financial data of the foreign associated enterprise".
For completeness, regarding ‘possession or power’, the Tribunal was satisfied that the Appellant had made serious attempts to obtain the documents requested—upon receipt of the Information Notice, the Appellant’s representatives asked the parent company’s Chief Financial Officer to obtain the documents, but the parent company declined (stating that the owners of the privately-held company were entitled to their privacy and confidentiality under US law, and citing the sufficiency of the annual transfer pricing studies and the volume of information already provided). Some of the Appellant’s officers were also officers of the parent company, however the Tribunal decided, amongst other things, that the Appellant did not have either a right or power to access the documents without the parent company’s consent and that complying with HMRC’s requests would put the Directors in breach of their statutory duties. As part of its reasoning, the Tribunal considered disclosure case law from the High Court and Court of Appeal and the CPR 31.8 line of authorities, noting that ‘control’ and ‘power’ have the same meaning.
Implications and possible next steps
The end of the decision includes the standard right to apply for permission to appeal, however the Tribunal’s decision cannot in fact be appealed as it is considered ‘final’ (by virtue of Paragraph 32(5) of Schedule 36).
In terms of the wider matter, HMRC may now decide (having failed to obtain the documents sought), to simply issue closure notices amending the relevant tax returns based on the information they currently hold. The Appellant would then be able to appeal, and the burden would be on them to dislodge the amendments.
As the enquiries remain open, there are no time limits for HMRC to close the enquiries and amend the returns, however the Appellant may apply to the Tribunal for a direction that HMRC issue a closure notice unless there are reasonable grounds not to (Paragraph 33, Schedule 18 to Finance Act 1998). In light of HMRC’s delays and failures so far, the Tribunal may be sympathetic to such an application (enquiries have been open since 2016 across ten Accounting Periods and almost 30,000 emails have been provided to HMRC).
HMRC may also need to consider the UK/US treaty dimension, should they seek to impose a Transfer Pricing adjustment. There may also be double-taxation and mutual agreement procedure / corresponding adjustment considerations.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
Schedule 36 Finance Act 2008 contains information and inspection powers, which HMRC regularly use as an investigative tool against taxpayers during tax investigations and before tax disputes have become litigious. It also includes a penalty regime. HMRC may use this tool in Transfer Pricing investigations and disputes.
Schedule 36 has seen several amendments aimed at strengthening HMRC's powers in areas of particular enforcement interest to HMRC. It can therefore be a useful marker of HMRC's current priorities. The targeted Transfer Pricing amendments made to Schedule 36 in 2023 underscore a growing HMRC appetite for investigation and enforcement action in this area. Below is a brief introduction to Schedule 36 in the Transfer Pricing context.
HMRC’s Schedule 36 powers
Part 1 of Schedule 36 enables HMRC to issue information notices compelling a person to provide information or produce documents (provided they are reasonably required for checking a tax position). Part 2 gives HMRC the power to enter a person's business premises and inspect the premises, business assets and business documents (again, where reasonably required for checking that person's tax position). Part 4 contains restrictions on HMRC’s powers. Part 5 covers appeal rights.
Notably, there is no right of appeal against a requirement in an information notice to produce statutory records. The master file and local file under the Transfer Pricing Records Regulations 2023 are considered statutory records. HMRC also have targeted Transfer Pricing Schedule 36 powers which (as per HMRC’s Transfer Pricing Documentation policy paper published 15 March 2023) are part of a wider package designed to “ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines”. Specifically, Schedule 36 was amended by Schedule 5 to Finance (No.2) Act 2023 so that an information notice can specify the prescribed Transfer Pricing records (i.e. the master file and local file), and can be issued outside an enquiry, and so that the "possession or power" requirement is disapplied where documents are in the possession or power of another member of a multinational group.
In the Transfer Pricing context therefore, taxpayers may see HMRC use its Schedule 36 powers with particular confidence, informed heavily by policy. Schedule 5 to Finance (No.2) Act 2023 also inserted paragraph 3C into Schedule 24 Finance Act 2007 (and parallel provisions into Schedule 18 Finance Act 1998 and TMA 1970) so that where the taxpayer has failed to maintain or produce the specified Transfer Pricing records, an inaccuracy is presumed ‘careless’ unless reasonable care is shown—potentially exposing the taxpayer to substantial tax-geared penalties and extended assessment time limits.
The Schedule 36 penalty regime
Part 7 contains the penalty regime for non-compliance. Penalties range from small, fixed amounts (under paragraphs 39 and 40) to potentially unlimited tribunal-imposed penalties (under paragraph 50).
There is a right of appeal to the FTT against both the decision that a penalty is payable under paragraphs 39 or 40 and the amount of the penalty. No liability arises under paragraphs 39 or 40 if the person satisfies HMRC or the FTT that there was a reasonable excuse for failing to comply with the information notice or for obstructing an HMRC officer.
Paragraph 50 contains a tax-related penalty: where a person has become liable to a paragraph 39 penalty, the failure or obstruction continues after that penalty is imposed, and an officer has reason to believe that, as a result, the amount of tax the person has paid or is likely to pay is significantly less than it would otherwise have been, HMRC can apply to the Upper Tribunal (within 12 months of the relevant date) for an additional penalty. In deciding the amount, the Upper Tribunal must have regard to the tax which has not been, or is not likely to be, paid—this can mean a very substantial penalty in high value Transfer Pricing contexts.
Taxpayers should also be aware that paragraphs 53-55 create a criminal offence where a person conceals, destroys or disposes of a document (or arranges for the same) that is the subject of a Tribunal-approved information notice (or where HMRC has informed the person that the document is or is likely to be the subject of such a notice). This can lead to a fine and / or a custodial sentence of up to 2 years.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
HMRC has published a policy paper and draft legislation that proposes a statutory obligation on taxpayers to correct errors in past tax returns. It is proposed that this new legislation should feature in Finance Bill 2026/27 and would come into effect on a day to be appointed. The draft legislation is presently out for consultation until September and so may change.
The same draft legislation also covers a proposed power for HMRC to issue correction notices where it has reason to suspect an error in a document that can be corrected. This note concentrates on the proposed obligation to self-correct.
The genesis of this proposal is the HMRC Tax Administration Framework Review in 2024/25. Responses to that review were published in April 2025 and one of the proposals that the Government said it would take forward was approaches to taxpayer self-correction. This current proposal is presented as part of an approach to modernise and simplify tax administration.
To date the precise legal (as opposed to professional or ethical) obligation to correct the position when a taxpayer discovers a mistake in a tax return already submitted to HMRC may have been unclear. This proposal intends to address that situation.
Under the new proposal, when a person “becomes aware” of an inaccuracy in a return that has led to an underpayment of tax and, at that time, the inaccuracy may be corrected either by the taxpayer themself or HMRC in some way, the taxpayer must either correct the inaccuracy themselves if they are able to do so or inform HMRC of the inaccuracy. Section 118(6) TMA 1970 is amended so that failure to comply with the obligation to correct will lead to the inaccuracy being treated as deliberate on the taxpayer’s part. Such treatment would impact upon HMRC’s assessing powers, the quantum of any penalty for non-compliance and open the possibility of ‘naming and shaming’ in connection with what may previously have been an innocent error.
It should be noted that the draft legislation is not restricted to a particular type of inaccuracy or error. The governing concept is an “inaccuracy in relation to which Condition 1(2) of [Schedule 24 FA 2007] is satisfied”. So, the test proposed is: does the inaccuracy “amount to or lead to (i) an understatement of a liability to tax, (ii) a false or inflated statement of loss or (iii) a false or inflated claim to repayment of tax.” Consequently, a wholly innocent mistake is within scope.
The trigger for the obligation to self-correct is that the taxpayer becomes “aware” of the inaccuracy. The concept of ‘becoming aware’ is not unknown in tax legislation but is a term that has an inherent vagueness of meaning. Actual knowledge is clearly within scope but what about the jurisprudence on ‘blind eye knowledge’? Is a decision not to look at what the taxpayer suspects might be a problem within scope?
There are a number of questions and concerns with this proposed legislation. For example;
• How does this proposal interact with the declaratory nature of judicial decisions? Does a return that was submitted based upon a particular view of the law become inaccurate and liable to correction when a subsequent judicial decision overturns that view of the law? How does the taxpayer deal with conflicting decisions as a case proceeds on appeal? Suppose the initial view of the law was arguably “in accordance with the practice generally prevailing at the time when it was made”?
• Precisely when does the taxpayer “become aware” of the inaccuracy so as to become subject to the obligation to correct? Suppose that the taxpayer is not an individual?
Hopefully these and other questions will be answered by the current consultation on the draft clauses. However, it does seem likely that some provision relating to an obligation to self-correct will appear in next year’s Finance Bill. Taxpayers should be aware of this upcoming new obligation.
Should you wish to discuss this Insight, please contact:
Iain MacWhannell, Partner in our Tax Disputes Team:
imw@jha.com
+44 (0)20 7851 8888
Steve Bousher
*The class of documents potentially within the new obligation is wider than simply tax returns. The class includes all documents of types that fall within paragraph 1(4) of schedule 24 Finance Act 2007. This note refers simply to ‘returns’ as a convenient shorthand.
The recent case of Lifeplus Europe Ltd v HMRC [2026] UKFTT 00797 (TC) is relevant to taxpayers facing Schedule 36 information notices in the context of a Transfer Pricing Dispute. The case shows HMRC’s assertiveness in this area and provides an example of a taxpayer successfully resisting HMRC’s demands. It is a reminder of the limitations of HMRC's Schedule 36 powers:
• HMRC were unable to show that the parent company accounts requested were “reasonably required”;
• It was also found that the documents were not within the taxpayer's “possession or power” to obtain.
Our previous insight article provides an introduction to Schedule 36 in the Transfer Pricing Disputes context and can be found here: Transfer Pricing Disputes & Investigations: HMRC’s Schedule 36 powers and associated penalties | JHAB LLP. As explained in that article, Schedule 36, among other things, allows HMRC to compel production of information or documents that are “reasonably required” to check a taxpayer's tax position. Schedule 36 also includes a penalty regime and specific Transfer Pricing amendments were introduced in 2023.
Background
Lifeplus Europe Limited (“the Appellant”) is a UK subsidiary of a US parent. HMRC opened an enquiry into the Appellant’s tax position, having identified a perceived Transfer Pricing risk for certain Accounting Periods (there had been significant growth in the Appellant’s turnover, yet the net profit margin in its company accounts had reduced significantly). This reduction in profits had coincided with the adoption of a particular Transfer Pricing policy. HMRC issued a Schedule 36 Information Notice to the Appellant, requesting, in respect of several Accounting Periods, all of the US parent company’s group consolidated financial statements (“Item 1”); and all of that parent company’s entity level financial statements (“Item 2”).
Following an HMRC review, the Appellant appealed to the Tribunal. The issues were: (1) Whether the documents requested were “reasonably required” by HMRC to check the Appellant’s tax; and (2) If so, whether the documents were in the “possession or power” of the Appellant. These issues required the Tribunal to consider relevant Transfer Pricing principles applied to cross-border transactions.
The parties’ arguments
HMRC argued that in respect of ‘Item 1’, the consolidated financial statements would: (1) evidence the group’s overall turnover, costs and profit; (2) enable HMRC to assess the proportion of the Appellant’s contribution to group profits/losses; and (3) substantiate the accuracy of the evidence that the Appellant had provided to HMRC during the enquiry.
In respect of ‘Item 2’, HMRC argued that the entity level financial statements would: (1) evidence the figures put forward as part of the Appellant’s proposed adjustment to HMRC’s CUP analysis; (2) assist with verifying whether the parent company, as an entity, was making a loss in 2013; and (3) enable HMRC to compare the Appellant’s turnover and costs/profits with those of the parent company, to support the correctness of the CUP analysis.
In response, the Appellant argued that: (1) The consolidated group accounts and the parent company accounts were not ‘reasonably required’ for the purpose of checking the Appellant’s tax position, because there was no ‘rational connection’ between those accounts and the issue in the enquiry; and (2) in any event, those accounts were not in the Appellant’s ‘possession’ or ‘power’ because the Appellant did not have any enforceable legal right, ‘general consent’, or ‘de facto’ right to access them.
The Tribunal’s Decision
The Tribunal decided in favour of the Appellant. The Tribunal considered that the approach adopted by HMRC during the enquiry, together with the relevant Transfer Pricing methodologies and processes, is the lens through which any ‘rational connection’ between the tax dispute and the documents requested in the Information Notice is to be viewed.
Having considered the information, the Tribunal held that the documents requested in the Information Notice were not ‘reasonably required’. HMRC had, among other things, failed to give an objectively reasonable explanation for why they should be permitted to have the contents of the accounts. OECD Guidelines para 3.22 states that once a one-sided method is chosen with the domestic taxpayer as tested party (as in the instant case), the tax administration "generally has no reason to further ask for financial data of the foreign associated enterprise".
For completeness, regarding ‘possession or power’, the Tribunal was satisfied that the Appellant had made serious attempts to obtain the documents requested—upon receipt of the Information Notice, the Appellant’s representatives asked the parent company’s Chief Financial Officer to obtain the documents, but the parent company declined (stating that the owners of the privately-held company were entitled to their privacy and confidentiality under US law, and citing the sufficiency of the annual transfer pricing studies and the volume of information already provided). Some of the Appellant’s officers were also officers of the parent company, however the Tribunal decided, amongst other things, that the Appellant did not have either a right or power to access the documents without the parent company’s consent and that complying with HMRC’s requests would put the Directors in breach of their statutory duties. As part of its reasoning, the Tribunal considered disclosure case law from the High Court and Court of Appeal and the CPR 31.8 line of authorities, noting that ‘control’ and ‘power’ have the same meaning.
Implications and possible next steps
The end of the decision includes the standard right to apply for permission to appeal, however the Tribunal’s decision cannot in fact be appealed as it is considered ‘final’ (by virtue of Paragraph 32(5) of Schedule 36).
In terms of the wider matter, HMRC may now decide (having failed to obtain the documents sought), to simply issue closure notices amending the relevant tax returns based on the information they currently hold. The Appellant would then be able to appeal, and the burden would be on them to dislodge the amendments.
As the enquiries remain open, there are no time limits for HMRC to close the enquiries and amend the returns, however the Appellant may apply to the Tribunal for a direction that HMRC issue a closure notice unless there are reasonable grounds not to (Paragraph 33, Schedule 18 to Finance Act 1998). In light of HMRC’s delays and failures so far, the Tribunal may be sympathetic to such an application (enquiries have been open since 2016 across ten Accounting Periods and almost 30,000 emails have been provided to HMRC).
HMRC may also need to consider the UK/US treaty dimension, should they seek to impose a Transfer Pricing adjustment. There may also be double-taxation and mutual agreement procedure / corresponding adjustment considerations.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
Schedule 36 Finance Act 2008 contains information and inspection powers, which HMRC regularly use as an investigative tool against taxpayers during tax investigations and before tax disputes have become litigious. It also includes a penalty regime. HMRC may use this tool in Transfer Pricing investigations and disputes.
Schedule 36 has seen several amendments aimed at strengthening HMRC's powers in areas of particular enforcement interest to HMRC. It can therefore be a useful marker of HMRC's current priorities. The targeted Transfer Pricing amendments made to Schedule 36 in 2023 underscore a growing HMRC appetite for investigation and enforcement action in this area. Below is a brief introduction to Schedule 36 in the Transfer Pricing context.
HMRC’s Schedule 36 powers
Part 1 of Schedule 36 enables HMRC to issue information notices compelling a person to provide information or produce documents (provided they are reasonably required for checking a tax position). Part 2 gives HMRC the power to enter a person's business premises and inspect the premises, business assets and business documents (again, where reasonably required for checking that person's tax position). Part 4 contains restrictions on HMRC’s powers. Part 5 covers appeal rights.
Notably, there is no right of appeal against a requirement in an information notice to produce statutory records. The master file and local file under the Transfer Pricing Records Regulations 2023 are considered statutory records. HMRC also have targeted Transfer Pricing Schedule 36 powers which (as per HMRC’s Transfer Pricing Documentation policy paper published 15 March 2023) are part of a wider package designed to “ensure that businesses maintain, and provide upon request, transfer pricing documentation prepared in accordance with OECD Transfer Pricing Guidelines”. Specifically, Schedule 36 was amended by Schedule 5 to Finance (No.2) Act 2023 so that an information notice can specify the prescribed Transfer Pricing records (i.e. the master file and local file), and can be issued outside an enquiry, and so that the "possession or power" requirement is disapplied where documents are in the possession or power of another member of a multinational group.
In the Transfer Pricing context therefore, taxpayers may see HMRC use its Schedule 36 powers with particular confidence, informed heavily by policy. Schedule 5 to Finance (No.2) Act 2023 also inserted paragraph 3C into Schedule 24 Finance Act 2007 (and parallel provisions into Schedule 18 Finance Act 1998 and TMA 1970) so that where the taxpayer has failed to maintain or produce the specified Transfer Pricing records, an inaccuracy is presumed ‘careless’ unless reasonable care is shown—potentially exposing the taxpayer to substantial tax-geared penalties and extended assessment time limits.
The Schedule 36 penalty regime
Part 7 contains the penalty regime for non-compliance. Penalties range from small, fixed amounts (under paragraphs 39 and 40) to potentially unlimited tribunal-imposed penalties (under paragraph 50).
There is a right of appeal to the FTT against both the decision that a penalty is payable under paragraphs 39 or 40 and the amount of the penalty. No liability arises under paragraphs 39 or 40 if the person satisfies HMRC or the FTT that there was a reasonable excuse for failing to comply with the information notice or for obstructing an HMRC officer.
Paragraph 50 contains a tax-related penalty: where a person has become liable to a paragraph 39 penalty, the failure or obstruction continues after that penalty is imposed, and an officer has reason to believe that, as a result, the amount of tax the person has paid or is likely to pay is significantly less than it would otherwise have been, HMRC can apply to the Upper Tribunal (within 12 months of the relevant date) for an additional penalty. In deciding the amount, the Upper Tribunal must have regard to the tax which has not been, or is not likely to be, paid—this can mean a very substantial penalty in high value Transfer Pricing contexts.
Taxpayers should also be aware that paragraphs 53-55 create a criminal offence where a person conceals, destroys or disposes of a document (or arranges for the same) that is the subject of a Tribunal-approved information notice (or where HMRC has informed the person that the document is or is likely to be the subject of such a notice). This can lead to a fine and / or a custodial sentence of up to 2 years.
If you have a dispute with HMRC which involves any of the issues referred to above and would like to discuss how we might be able to assist you, please contact:
- Iain MacWhannell, Partner in our Tax Disputes Team:
https://uk.jha.com/our-people/profile/iain-macwhannell
imw@jha.com
+44 (0)20 7851 8888
- Thomas Hemming, Associate:
https://uk.jha.com/our-people/profile/thomas-hemming
Thomas.Hemming@jha.com
+44 (0)20 7851 8888
HMRC has published a policy paper and draft legislation that proposes a statutory obligation on taxpayers to correct errors in past tax returns. It is proposed that this new legislation should feature in Finance Bill 2026/27 and would come into effect on a day to be appointed. The draft legislation is presently out for consultation until September and so may change.
The same draft legislation also covers a proposed power for HMRC to issue correction notices where it has reason to suspect an error in a document that can be corrected. This note concentrates on the proposed obligation to self-correct.
The genesis of this proposal is the HMRC Tax Administration Framework Review in 2024/25. Responses to that review were published in April 2025 and one of the proposals that the Government said it would take forward was approaches to taxpayer self-correction. This current proposal is presented as part of an approach to modernise and simplify tax administration.
To date the precise legal (as opposed to professional or ethical) obligation to correct the position when a taxpayer discovers a mistake in a tax return already submitted to HMRC may have been unclear. This proposal intends to address that situation.
Under the new proposal, when a person “becomes aware” of an inaccuracy in a return that has led to an underpayment of tax and, at that time, the inaccuracy may be corrected either by the taxpayer themself or HMRC in some way, the taxpayer must either correct the inaccuracy themselves if they are able to do so or inform HMRC of the inaccuracy. Section 118(6) TMA 1970 is amended so that failure to comply with the obligation to correct will lead to the inaccuracy being treated as deliberate on the taxpayer’s part. Such treatment would impact upon HMRC’s assessing powers, the quantum of any penalty for non-compliance and open the possibility of ‘naming and shaming’ in connection with what may previously have been an innocent error.
It should be noted that the draft legislation is not restricted to a particular type of inaccuracy or error. The governing concept is an “inaccuracy in relation to which Condition 1(2) of [Schedule 24 FA 2007] is satisfied”. So, the test proposed is: does the inaccuracy “amount to or lead to (i) an understatement of a liability to tax, (ii) a false or inflated statement of loss or (iii) a false or inflated claim to repayment of tax.” Consequently, a wholly innocent mistake is within scope.
The trigger for the obligation to self-correct is that the taxpayer becomes “aware” of the inaccuracy. The concept of ‘becoming aware’ is not unknown in tax legislation but is a term that has an inherent vagueness of meaning. Actual knowledge is clearly within scope but what about the jurisprudence on ‘blind eye knowledge’? Is a decision not to look at what the taxpayer suspects might be a problem within scope?
There are a number of questions and concerns with this proposed legislation. For example;
• How does this proposal interact with the declaratory nature of judicial decisions? Does a return that was submitted based upon a particular view of the law become inaccurate and liable to correction when a subsequent judicial decision overturns that view of the law? How does the taxpayer deal with conflicting decisions as a case proceeds on appeal? Suppose the initial view of the law was arguably “in accordance with the practice generally prevailing at the time when it was made”?
• Precisely when does the taxpayer “become aware” of the inaccuracy so as to become subject to the obligation to correct? Suppose that the taxpayer is not an individual?
Hopefully these and other questions will be answered by the current consultation on the draft clauses. However, it does seem likely that some provision relating to an obligation to self-correct will appear in next year’s Finance Bill. Taxpayers should be aware of this upcoming new obligation.
Should you wish to discuss this Insight, please contact:
Iain MacWhannell, Partner in our Tax Disputes Team:
imw@jha.com
+44 (0)20 7851 8888
Steve Bousher
*The class of documents potentially within the new obligation is wider than simply tax returns. The class includes all documents of types that fall within paragraph 1(4) of schedule 24 Finance Act 2007. This note refers simply to ‘returns’ as a convenient shorthand.
.jpg)
