Tax Administration and Ethics

Self-assessment is the UK system by which individuals and companies calculate and report their own tax liability, rather than HMRC calculating it.

Who must file a self-assessment tax return (SATR)?

• Self-employed individuals / sole traders (any trading income)
• Partners in partnerships
• Company directors (usually, unless only PAYE income)
• Individuals with untaxed income (rents, foreign income, capital gains exceeding AEA)
• High earners (income over £100,000 — check if needed to register)
• Individuals with complex tax affairs

Registration:

• Must notify HMRC of chargeability by 5 October following the end of the tax year
• Failure to notify: penalty based on potential lost revenue (tax due on the unreported income)

Filing dates:

Payment dates:

Payments on account (POAs):

• Each POA = 50% of the previous year's INCOME TAX + Class 4 NIC liability
• Do NOT include: CGT, student loan repayments, Class 2 NIC
• POAs NOT required if:
  • Previous year's liability (after tax deducted at source) was < £1,000, OR
  • More than 80% of the liability was collected at source (e.g., via PAYE)
• Taxpayer can reduce POAs if expecting lower liability — but if reduced incorrectly, interest and possibly penalties

Worked example: Alice's 2023/24 income tax + Class 4 NIC = £10,000. She's self-employed.

• 1st POA: 31 January 2024 = £5,000
• 2nd POA: 31 July 2024 = £5,000
• After year-end 5 April 2024, calculate actual 2023/24 liability.
• Balancing payment (31 January 2025) = actual liability − £10,000 POAs paid. If actual is £11,500: balance £1,500. Also triggers new POAs for 2024/25: £5,750 each.

Keep records for:

• Self-employed: 5 years from 31 January after tax year
• Other taxpayers: 1 year from 31 January after tax year

Corporation tax self-assessment (CTSA):

Notification of chargeability:

• Within 3 months of the start of the first accounting period
• Failure to notify: penalty based on unpaid tax

Filing deadlines:

• CT600 return: 12 months after the end of the accounting period
• Filing online via MTD-compatible software; accounts and computation in XBRL format
• Late-filing penalties: £100 if up to 3 months late (£500 if 3rd consecutive time); £200 if more than 3 months late (£1,000 if 3rd consecutive); further escalation after 6/12 months

Payment dates (recap):

Records: Must be kept for 6 years from the end of the accounting period.

HMRC enquiry (compliance check):

• HMRC can open an enquiry into a return to check its accuracy
• Enquiry window: 12 months from the date the return is FILED (or if late-filed, from the actual filing)
• Once the enquiry window closes, HMRC cannot open a new enquiry UNLESS using discovery

During an enquiry:

• HMRC requests documents, information, or meetings
• Taxpayer required to respond within specified periods
• HMRC can issue "information notices" — legally binding requests
• Enquiries may be "full" (broad examination) or "aspect" (focused on specific areas)
• Taxpayer entitled to close the enquiry via application to FIRST-TIER TRIBUNAL if HMRC delays

Closing the enquiry:

• "Closure notice" — HMRC states conclusions
• If amendments to tax liability: appeal available within 30 days
• Appeals go to First-tier Tribunal, then Upper Tribunal, Court of Appeal, Supreme Court

Discovery assessments:

• HMRC can raise a discovery assessment AFTER the enquiry window has closed if they "discover" tax has been underassessed
• Conditions (one of):
  • Taxpayer was CARELESS or DELIBERATE in their return
  • HMRC could not reasonably have been expected to know about the issue from the information provided

Discovery time limits:

Example: 2020/21 return filed 31 January 2022.

• Enquiry window closed: 31 January 2023
• Ordinary discovery assessment: until 5 April 2025
• Careless: until 5 April 2027
• Deliberate: until 5 April 2041

The UK has a harmonised penalties regime across most taxes. Penalties depend on the TYPE OF FAILURE and the TAXPAYER'S BEHAVIOUR.

1. Failure to notify chargeability:

• Penalty = % of Potential Lost Revenue (PLR) — the tax HMRC would have collected had notification been made
• Behaviour-dependent:
  • Non-deliberate (but not "reasonable excuse"): 30% max
  • Deliberate (not concealed): 70% max
  • Deliberate and concealed: 100% max
• Reduced for DISCLOSURE (unprompted disclosure gives greater reduction)
• "Reasonable excuse" defence — genuine events like serious illness can reduce penalty to nil

2. Late filing penalties — Income Tax Self Assessment:

3. Late payment penalties — Income Tax:

• 30 days after due date: 5% of unpaid tax
• 6 months after due date: further 5%
• 12 months after due date: further 5%
• Interest accrues from due date regardless

VAT penalties (different regime, effective January 2023):

• Late filing: POINTS-BASED system. Each late return = 1 point. Threshold (4 points for quarterly filers, 5 monthly, 2 annual) → £200 penalty per subsequent late return.
• Late payment: Days 1-15 none (grace); Days 16-30 2%; Days 31+ 4% per annum (daily rate).

4. Penalties for inaccurate returns:

Applies to all main taxes (income tax, CT, VAT, CGT, IHT). Penalty = % of Potential Lost Revenue (PLR).

Disclosure framework:

• Unprompted disclosure (before HMRC contacts) → maximum reduction
• Prompted disclosure (after HMRC contacts) → smaller reduction
• Quality of disclosure: Telling, Helping, Access (THA) — each aspect contributes to reduction

Worked example — inaccuracy penalty:

Bob submitted a tax return claiming excess trading expenses (genuine misunderstanding of the rules — careless). HMRC identified the error, recovering £8,000 of tax. Bob cooperated fully and provided all requested documents promptly.

• PLR: £8,000
• Behaviour: careless (mistake without reasonable care)
• Maximum penalty: 30% × £8,000 = £2,400
• Disclosure was PROMPTED (HMRC contacted first) — minimum for careless with prompted: 15%
• Quality of cooperation: excellent (full T, H, A) — reduce to minimum
• Actual penalty: 15% × £8,000 = £1,200

Suspension of penalties: For CARELESS errors only, HMRC can suspend the penalty for up to 2 years if specific conditions are set (e.g., implement review procedures). If conditions are met, penalty is cancelled.

Reasonable care: Taking reasonable care = no penalty. Examples: seeking advice, following HMRC guidance, ensuring systems for record-keeping. Judged by what a reasonable person in the taxpayer's position would do.

The distinction — avoidance vs evasion:

Aggressive tax avoidance:

• Exploits loopholes or unintended effects of legislation
• Often involves artificial transactions designed solely to obtain a tax advantage
• Increasingly challenged by:
  • GAAR (statutory)
  • Ramsay principle (judicial)
  • DOTAS (disclosure)
  • HMRC litigation strategy

General Anti-Abuse Rule (GAAR):

• Introduced in 2013 to counter ABUSIVE tax arrangements
• "Double reasonableness test": arrangements ABUSIVE if they "cannot reasonably be regarded as a reasonable course of action"
• If GAAR applies: counteracts the tax advantage; may trigger 60% penalty
• Independent GAAR advisory panel reviews cases before HMRC can invoke GAAR — provides safeguard
• Covers: income tax, CT, CGT, IHT, SDLT, NIC, diverted profits tax
• Different from TARGETED anti-avoidance rules (TAARs) in specific parts of tax legislation

Ramsay principle (judicial doctrine):

• Originated in W.T. Ramsay v IRC [1981] — HoL decision
• Courts should look at the REAL economic substance of transactions, not just isolated steps
• A series of transactions constructed for a tax purpose may be taxed as a composite whole — ignoring inserted artificial steps
• Still applied by courts today in tax cases

Halifax principle (VAT):

• Derived from Halifax plc v HMCE [2006] — ECJ decision
• VAT-specific principle: transactions whose essential aim is a tax advantage can be recharacterised or disallowed
• Prevents abusive VAT planning

DOTAS (Disclosure of Tax Avoidance Schemes):

• Requires promoters (and in some cases users) of tax avoidance schemes to DISCLOSE them to HMRC
• HMRC gives the scheme a reference number (SRN)
• Users must include SRN on their tax return
• Applies where:
  • Arrangement gives a tax advantage
  • The tax advantage is a MAIN benefit
  • Specific "hallmarks" exist (e.g., premium fees dependent on success, standardised tax products, confidentiality)
• Penalties for non-disclosure: up to £600/day for promoters; up to £5,000 for users

POTAS (Promoters of Tax Avoidance Schemes):

• Regime targeting promoters with poor compliance history
• HMRC can issue "conduct notices" requiring improvements; "monitoring notices" naming and shaming; hefty penalties for breach

Enablers legislation:

• Targets persons who ENABLE or facilitate tax avoidance (not just the taxpayer using the scheme)
• Penalties for "enablers" of defeated avoidance schemes
• Expands accountability to advisers, promoters, intermediaries

Professional Conduct in Relation to Taxation (PCRT):

Joint code published by UK professional accountancy bodies (ICAEW, ACCA, CIOT, etc.). Sets STANDARDS for tax work by members. Mandatory for members acting in tax.

PCRT structure:

• Fundamental principles (same 5 as ICAEW Code of Ethics): integrity, objectivity, professional competence and due care, confidentiality, professional behaviour
• Five standards for tax planning (added in 2017 — see below)
• Specific guidance on: engagement letters, irregular tax position, dealings with HMRC, conflicts, etc.

Five fundamental principles applied to tax work:

PCRT Five Standards for Tax Planning (2017 onwards):

Standard 4 is crucial — it draws a line: Members CAN help clients with legitimate tax planning (using reliefs as intended, choosing between alternative treatments, timing transactions beneficially). Members CANNOT help clients with:

• "Schemes" exploiting unintended loopholes
• Highly artificial arrangements with no commercial purpose
• Arrangements designed to produce a result Parliament never intended

Threats and safeguards framework:

Safeguards:

• Regulatory safeguards (professional body rules)
• Engagement-level safeguards (different team member review; separate engagement partner)
• Firm-level safeguards (ethics training; whistleblowing policy; conflict checks)
• Ultimately: DECLINE the engagement if threats cannot be reduced to acceptable level

Money Laundering Regulations 2017 (MLR) and Proceeds of Crime Act 2002 (POCA):

Apply to ACCOUNTANTS (and other professionals) providing services including tax advice.

MLR 2017 requirements:

• Firm-level:
  • Appoint a Money Laundering Reporting Officer (MLRO) and Money Laundering Compliance Officer (MLCO)
  • Risk assessment of firm-wide exposure
  • Written policies, controls, and procedures
  • Training for all staff
  • Record-keeping (5 years from end of customer relationship)
• Client-level (Customer Due Diligence — CDD):
  • IDENTIFY and VERIFY the identity of all clients (and beneficial owners where applicable)
  • UNDERSTAND the nature and purpose of the business relationship
  • ONGOING monitoring — review transactions and keep CDD up to date
  • SIMPLIFIED DUE DILIGENCE for low-risk clients (e.g., listed companies, public authorities)
  • ENHANCED DUE DILIGENCE for high-risk clients (e.g., politically exposed persons — PEPs; high-risk third countries)

POCA 2002 — reporting obligations:

• If a regulated professional (including tax adviser) KNOWS or SUSPECTS or has REASONABLE GROUNDS to suspect money laundering, they MUST submit a Suspicious Activity Report (SAR) to the National Crime Agency (NCA)
• Tax EVASION constitutes money laundering — the proceeds are "criminal property"
• Failure to report: criminal offence (up to 5 years' imprisonment)

Tipping off:

• Criminal offence to tell the client (or any third party) that a SAR has been made or is about to be made
• Cannot tell the client you are reporting them or HMRC
• But: you can ask HMRC about what a hypothetical SAR might need to include

Consent regime:

• If the adviser wants to continue acting for a client after submitting a SAR, they may need NCA consent to avoid "mere assistance" offence
• NCA has 7 working days (notice period) plus 31 calendar days (moratorium) to decide

What to do if client admits tax evasion:

1. DO NOT tip off the client
2. Encourage the client to DISCLOSE to HMRC (minimises their penalties; may receive lower sentence)
3. If the client refuses: SUBMIT a SAR to NCA
4. Consider WITHDRAWING from the engagement (professional behaviour principle; continuing would facilitate further tax evasion)
5. Do NOT: complete the return knowing it's wrong; provide false information; sign off on deliberate errors

Conflicts of interest:

• Professional duty to AVOID, or fully disclose and manage, conflicts
• Types of conflicts:
  • Same firm advising both sides of a transaction (e.g., buyer and seller)
  • Advising opposing parties in a dispute
  • Personal financial interest in a client's transaction
  • Family/personal relationships with client staff

Response to conflicts:

1. IDENTIFY the conflict using firm-wide conflict-check systems
2. ASSESS whether it can be managed or if it makes continued engagement impossible
3. IMPLEMENT SAFEGUARDS (separate teams, "Chinese walls", independent reviews)
4. DISCLOSE to affected clients and obtain INFORMED CONSENT
5. If consent not given or safeguards inadequate: DECLINE or WITHDRAW from engagement

Conflicting client interests:

• Advising a husband and wife on tax affairs who subsequently divorce (or conflict in planning advice)
• Two partners in a business with differing interests
• Client and employee of the client (both seeking tax advice on the same employment relationship)

In each case: identify, disclose, separate teams if feasible, obtain consent.

HMRC powers:

• Information notices: Under Schedule 36 FA 2008, HMRC can require taxpayers (and third parties — including agents) to provide information and documents. Penalties for non-compliance.
• Powers of entry and inspection: HMRC can inspect business premises (with notice generally; without notice in some cases)
• Assessment powers: Raise assessments, close enquiries, issue discovery assessments within time limits
• Collection powers: Direct recovery from bank accounts; garnishee orders; distraint on goods

Tax agent responsibilities:

• Register with HMRC as a tax agent (Agent Services Account for certain services)
• Ensure accuracy of returns to the best of their knowledge
• Advise client where errors are identified — persuade client to correct
• Maintain appropriate professional standards (PCRT)
• Subject to the STANDARD FOR AGENTS published by HMRC

Agent liability:

• Agents themselves can be penalised for their role in deliberate tax errors by clients (dishonest agent penalty up to £50,000)
• Agents can be named publicly for deliberately dishonest conduct
• Criminal sanctions possible for conspiracy or facilitation of tax evasion

What if client won't correct an error identified by agent?

1. Advise client of the requirement to correct — explain risks (interest, penalties, criminal)
2. Put the advice IN WRITING
3. Give client reasonable time to act
4. If client still refuses: CEASE to act (the agent cannot sign off on knowingly incorrect returns)
5. Consider SAR to NCA if there's dishonesty (especially deliberate evasion)
6. Written notification of ceasing to act to the client; to HMRC (where applicable — professional clearance)

Takeover/handover of client relationships:

• "Professional clearance": new agent contacts prior agent for any professional reasons to decline the engagement
• Prior agent should respond promptly — not withhold information unless obliged to do so
• ICAEW requires disclosure of any known reasons to decline, subject to confidentiality considerations

Handling HMRC correspondence:

• Agent must RESPOND promptly to legitimate HMRC requests on behalf of clients
• Confidentiality: maintain CLIENT confidence, but HMRC has statutory powers that override client confidentiality
• Privilege: solicitors have Legal Professional Privilege (LPP); accountants generally do NOT for tax advice — meaning accountants' advice may be demanded by HMRC (though HMRC guidance limits this)