Even though VAT laws are harmonised within the EU to some extent, the local regimes regulating VAT filing corrections, non-filing disclosures or optional voluntary disclosures can be very different from country to country.
In this article, we explain key problems and solutions in relation to Germany as an example of a country with a particularly complex VAT correction and disclosure regime, followed by an overview of the disclosure concepts established in Spain, Italy, Poland and the UK, and a short summary for France.
Germany
VAT corrections and disclosures in Germany regularly require individual disclosure plans. Taxpayers often underestimate the complexity and the risks involved in ill-considered disclosure processes.
1) VAT correction obligations: Under German tax law, taxpayers can be legally obligated to correct VAT filing errors (that led to VAT underpayments or input VAT over-recovery). The obligation rests with the management (i.e., the legal representatives of the company).
Correction is mandatory under German law once the relevant senior person positively realises that the past filing was incorrect (or may very well have been incorrect — grey area) and resulted or could result in an underpayment of VAT or over-recovery of input VAT. The failure to correct the VAT filing would amount to a criminal offence in itself if done intentionally (whereby conditional intent suffices) or to an administrative offence if due to gross negligence and could trigger criminal/administrative sanctions of various kinds.
Correction without undue delay: The corrections must be submitted "without undue delay" (grey area often argued to allow just 14 days after having learned about the mistake and after having it approved by advisers). If taxpayers do not yet have all information available for a correction, but they do have knowledge of the filing mistake, they can typically be already legally obligated to announce (and not yet correct) the issue to the tax office.
It is important to realise that intentional violation or gross negligence of this information obligation would again amount to a tax offence. The correction obligation even applies where the incorrect tax filing itself was done intentionally or due to gross negligence. However, as a consequence of the general right to remain silent, the tax authorities accept the same timeframe as being without undue delay as would be reasonably required to prepare and file a voluntary disclosure (see below).
Pre-audit filing periods: Recently, there is a new law regulating VAT correction obligations following VAT audit findings, in case "similar" supplies have been made in pre-audit filing periods.
Non-filing: Similar consideration can occur in case no VAT filing had been submitted at all in the past.
2) Voluntary disclosures, on the other hand, are as an instrument of defence optional and have to be submitted by individual personnel/management who may require personal protection against sanctioning of gross negligence or intentional tax offences in the past (essentially perpetrating, aiding or abetting incorrect VAT filing with underpayments). A disclosure essentially requires that the person agree with submitting the VAT corrections to rectify all known filing mistakes in relation to which an individual may be accused before the correction is filed.
An individual assessment is required on whether voluntary disclosures are needed and opportune and whether the protective effect that can be achieved under the individual circumstances outweighs the risks and cost associated with the disclosure process.
Key concerns: There are regularly multiple layers of complexity to a VAT correction and disclosure process in Germany. Below are a few examples:
- There are varying levels of difficulty for a disclosure, depending on the VAT amounts at stake, the number of years concerned and the likely protection required (accusations of gross negligence or knowledge/intent).
- It must be decided whether it is possible and more appropriate to submit a disclosure in a 'discreet', i.e., more anonymous, way, which reduces risks of proceedings being initiated but provides less protection in case they do get initiated. The alternative would be a more 'open' disclosure that is more easily detectable as disclosure and expresses or indicates the persons submitting the disclosure (this triggers greater risks that the authorities initiate proceedings, but it would provide greater protection in case the authorities can establish actual gross negligence or intent). Tax officials are generally obliged to involve the department for criminal or administrative offences if they identify that a correction letter also serves as a voluntary disclosure. While a valid voluntary disclosure should ultimately provide protection for the relevant individuals, the initiation of criminal investigations can still be a stressful experience.
- Certain disclosures can trigger high individual disclosure penalties (up to 20% on the VAT amount per individual offender).
- Certain time periods might be barred from the disclosure effect (e.g., in case of pending audits).
- Disclosures can protect against personal charges, but not against penalty interest (6% per annum), and more important, not against — often significant — company fines.
- Disclosures regularly require accompanying letters providing accurate information about the supplies and VAT numbers, while not necessarily including language indicating gross negligence, intent or even undue delays of filing corrections.
- Dilemma — timely announcement versus valid disclosure: A voluntary disclosure can be meant to protect against sanctioning in case of any accusations of VAT underpayments in the past or intentional delay or omission of VAT corrections. If the allegation includes intentional behaviour (not only gross negligence), the disclosure can be valid only under the condition that all known tax offences are disclosed at once (at least as a basic rule). Often, taxpayers find themselves in the unfortunate situation that they must correct the past VAT filing without undue delay (correction obligation) while they do not yet have all numbers and facts investigated to actually submit a valid voluntary disclosure.
Once the filing mistake is announced to the tax authorities (information/correction obligation), the disclosure (for intent) might be legally barred from having any protective effect for past tax offences (e.g., once the issue has been detected by the tax authorities as a consequence of the announcement). This is one of many reasons why taxpayers need to carefully reflect on the chances and risks of their disclosure strategy.
VAT filing going forward: Once having become aware of past filing mistakes, taxpayers must carefully consider how to continue with their VAT filing going forward, i.e., if the same kind of supplies are still being rendered. Information letters to the tax office (embedded in the disclosure strategy outline above) describing the process going forward may be a solution in case VAT filing errors cannot be fixed immediately.
In summary, there is no standard disclosure process in Germany. Save for rare simple standard situations, taxpayers are regularly required to carefully reflect on disclosure plans to achieve optimal protection and without involuntarily incriminating themselves or exposing themselves to unnecessary proceedings.
Other Jurisdictions
Italy
As in Germany, VAT corrections and disclosures in Italy can be complex and are often underestimated by taxpayers. For this reason, it is advisable to analyse the case and plan the necessary steps in advance.
Self-regularisation in Italy ("ravvedimento operoso") is not mandatory by law, but it is an option given to taxpayers to regularise their tax position. The rules provided for by Art. 13 of the Legislative Decree No. 472/1997 enable the taxpayers to rectify their omissions or irregularities by filing the missed/wrong tax fulfilments and paying the relevant tax (if any).
In more detail, as a return for the spontaneous payment of the tax due and of the statutory interest accrued on those sums, the taxpayer is entitled to a bonus effect consisting in the reduction of the penalty that would otherwise be imposed in full by the tax authorities. This reduction is based on the time elapsed between the tax violation and the subsequent regularisation: depending on the infringement, the reduction can be 1/15, 1/10, 1/9, 1/8, 1/7, 1/6 or 1/5 of the minimum penalty.
Self-regularisation is considered completed with the simultaneous payment of the VAT that has been omitted or underpaid, the reduced relevant penalty and the interests on arrears, calculated at the legal annual rate from the day on which payment should have been made until the day on which the balance is actually paid. In case of omitted payment of VAT, it would be necessary to verify why and when the violation has occurred, to understand whether the annual VAT return must also be corrected and, if this is the case, to pay the relevant reduced penalty for unfaithful VAT return.
We highlight that in Italy that the self-regularisation process does not prevent the tax authorities from performing their check or continuing a tax audit activity (if it has already started). However, voluntary disclosure can be thoroughly valuable because of the positive implications also from a criminal perspective. Indeed, depending on the case, self-regularisation can constitute a cause of non-punishability or a mitigating circumstance for any tax offences committed.
United Kingdom
There is a plethora of tax disclosure regimes within the UK, including reporting certain tax avoidance schemes, publishing a tax strategy and, of course, disclosing any errors made in tax filings.
We are often asked about penalties associated with tax errors and the new disclosure regime relating to uncertain tax treatment. We seek to deal with these two issues in this note.
Errors and risk of penalties
In relation to errors made in VAT returns, most UK large taxpayers have some experience of HM Revenue & Customs (HMRC) considering whether to issue penalties. Penalties are due where an error was "careless" or "deliberate" (errors on VAT returns will not lead to a penalty if the taxpayer exercised reasonable care).
Penalty mitigation
It is very common for large businesses to make errors on VAT returns. It is important to consider whether the taxpayer took reasonable care despite having made the error. Even if the error may have been caused by careless behaviour, it is important to get ahead of this and disclose the error to HMRC, for the following reasons:
1. The level of penalty will depend on whether the error was "prompted" or "unprompted" (with reduced penalties for unprompted disclosures).
2. The extent to which the taxpayer cooperates with HMRC will influence the extent that the penalty can be reduced.
A taxpayer ought to receive a reduction to a penalty if it does the following: communicates with HMRC (by sharing everything relevant to HMRC promptly1); helps HMRC to quantify the assessments (and providing any other reasonable assistance required by HMRC2); and gives HMRC access to records (and sharing relevant documentation and information as requested by HMRC3).
Finally, even where there is a careless penalty due, it can be easy to forget that HMRC have the power to "suspend" penalties. The timeframe for suspension is up to two years, but we normally see the timeframe set at three to 12 months for VAT-related errors. If, at the end of the suspension period, the taxpayer has not breached any of the suspension conditions, the penalty will not be due. If the suspension conditions were breached, the penalty would become payable.
New UK disclosure regime
We now turn to a less familiar disclosure obligation. Last year, the UK added a new disclosure regime: large business must disclose any "uncertain tax treatments" contained within their tax returns. We share some insights on this new disclosure regime below. We explain the basics and then reflect on some practical points that have arisen in the past year.
Background
The UK had identified a "legal interpretation tax gap", which is defined as losses "where the customer's and HMRC's interpretation of the law and how it applies to the facts in a particular case result in a different tax outcome, and there is no avoidance". The "legal interpretation tax gap" refers to a taxpayer taking a different view from HMRC on the interpretation of legislation, case law or tax authority guidelines on the application of legislation or case law. In 2019, the government indicated that the "legal interpretation tax gap" was costing HMRC some GBP 6.2 billion, with the majority of the legal interpretation tax gap attributable to large businesses.
Accordingly, the government passed a new law (Finance Act 2022) to require large businesses to notify HMRC if they have adopted an "uncertain tax treatment". This is designed to make sure that HMRC are aware of situations where a large business has adopted a tax position that HMRC disagree with. The new rules took effect in relation to any relevant tax filing required to be made on or after 1 April 2022.
What is covered by the new regime?
Where it concerns a "large business" in relation to an "in-scope tax" with a relevant tax advantage, HMRC must be notified.
- Generally, a "large business" is defined as a business that has turnover above GBP 200 million a year and/or has a balance sheet total over GBP 2 billion.
- The scope of the measure was reduced from the original proposals with only corporation tax, income tax (including PAYE) and VAT in scope.
- A relevant tax advantage is where it is reasonable to conclude that, by bringing the uncertain amount into account, the taxpayer would obtain a tax advantage (widely defined) compared to the tax treatment based on an expected amount (for example, based on HMRC's published position) and the aggregate value of any such related tax advantages is more than GBP 5 million.
If the above applies, a notification trigger will be either of the following:
- The accounts contain a provision to reflect the probability that a different tax treatment will be applied. This aims to capture those instances where a taxpayer has recognised it is more likely than not that the filing position will not be sustained.
- The taxpayer's treatment has diverged from HMRC's known position. HMRC's position will be known where it is apparent from guidance, statements or other material from HMRC, or from dealings with HMRC.
Taxpayers will need to notify where they have adopted an uncertain tax treatment, but only if a disclosure has not already been made. If, for example, the transaction has been disclosed under the Disclosure of Tax Avoidance Schemes rules, then a subsequent uncertain tax treatment disclosure is not required.
The penalty for failing to disclose an uncertain tax treatment is GBP 5,000 for a first failure, GBP 25,000 for a second failure and GBP 50,000 for a third failure (all within a three-year period). There is a reasonable excuse defence and right to appeal any levying of a penalty.
Practical issues that have arisen
(1) Which accounts are relevant?
The first criterion that requires notification to HMRC of uncertain tax treatment is if a provision has been recognised in the accounts of the company or partnership, in accordance with generally accepted accounting practice (GAAP) (i.e., UK GAAP and IFRS), to reflect the probability that a different tax treatment may be applied to the transaction.
The challenge for multinationals is that the consolidated group accounts may be the main point of reference for the business, but those accounts may be subject to different financial reporting standards. However, it is the UK GAAP rules that apply to the UK subsidiary or branch that is the relevant reference point: it is the provision in the UK accounts that will trigger the requirement to notify HMRC of any uncertain tax treatment.
(2) When has a taxpayer notified HMRC?
It is not always entirely clear when a disclosure has already been made that a notification is not required under the uncertain tax treatment regime. The mere fact that a business has applied for a clearance in relation to a situation will not necessarily exempt it from the need to make a formal notification, particularly if HMRC disagree with the suggested tax treatment.
For most large businesses, the disclosure is likely to be made as part of the regular communications with the HMRC Customer Compliance Manager (CCM). However, for those communications to be a valid notification, the taxpayer ought to be satisfied that all, or substantially all, of the information that would have been included in the notification if it had been required to be given to the CCM.
The practical point is to make sure an accurate record of the communications with the CCM is made (ideally with the CCM agreeing the minutes of the communication), and for the discussion to cover the points required to be notified, including the following: tax regime; notification trigger(s) under which disclosure is being made; description of the transaction/tax issue type; explanation of uncertainty including reference to any relevant statute, case law and HMRC guidance to which the uncertainty relates; and indication of the amount of tax advantage relating to the uncertainty.
(3) What about historic tax uncertainties?
A business may have decided on a course of action many years ago. But if the historic tax uncertainty is reflected in a VAT return covered by the regime, then notification obligations will arise.
(4) What is the link between the uncertain tax treatment notification and penalties for an error?
Where HMRC are notified about an uncertain tax treatment, they may choose to assess the taxpayer. The taxpayer will then be free to appeal any assessment. If it turns out that the taxpayer made an error, the question is whether a taxpayer can argue that it had taken reasonable care.
It is open for a taxpayer to prepare their returns based on HMRC's view but make a claim based on its view — and litigate any disagreement. In these circumstances, a penalty would not normally be relevant.
However, the uncertain tax treatment notification is relevant where a taxpayer prepares its returns based on its view. HMRC may argue it was not reasonable for the taxpayer to file contrary to HMRC's view.
This is a difficult area because the taxpayer must demonstrate that it took a reasonably arguable position to protect against a risk of a penalty if it turns out that an error had been made by the taxpayer.
It is worth remembering that HMRC are not always correct. Therefore, a notification trigger of HMRC's guidance may not necessarily mean the taxpayer has failed to adopt a reasonably arguable position. However, if the notification trigger is an accounting provision, this is likely to be because of the taxpayer's advisers advising that the taxpayer would likely lose the issue if it were to be litigated. In that situation, a taxpayer will need to carefully consider whether it has a reasonably arguable position to protect against the risk of penalties.
Spain
Under Spanish law, taxpayers can voluntarily regularise potential errors in VAT returns. Otherwise, if those errors are not corrected and are raised during a tax audit or limited verification procedure, relevant penalties could be imposed. In general terms, during a tax audit, undue payments of taxes (including VAT) are sanctioned with a general penalty that varies between 50% and 150% of the underpaid tax, plus delay interest (currently 4.0625%). In those scenarios — that is, during a tax audit — a criminal offence procedure could be opened if the unpaid tax debt exceeds EUR 120,000.
Additionally, in cases of not self-assessing the VAT (that is, in the case of intra-EU acquisitions or if the reverse charge rule applies) — when there is no VAT underpayment — the general penalty amounts to 10% of the VAT not reported in the VAT return. In those cases (and this is becoming more common, unfortunately), the Spanish tax authorities request the output VAT (through an assessment) and then allow the company to proceed with the deduction of the input VAT. Recently, the Spanish supreme court issued a judgment stating that the mentioned penalty of 10% is not in line with the proportionality principle. This penalty is still in the Spanish VAT Act, and the Spanish tax authorities would probably still try to apply it. Still, with this judgment, we are very optimistic about winning potential cases in which the tax authorities apply the mentioned penalty.
However, to avoid those penalties, taxpayers have the opportunity to voluntarily disclose the situation that led to VAT underpayments or over-recovered input VAT — just in case the Spanish tax authorities have not opened a tax procedure in respect of the same period/tax.
From a VAT perspective, there are two kinds of voluntary disclosure procedures or, that is, two methods to disclose the situation voluntarily (as we will explain below, choosing either of these methods will depend on the concrete circumstances of the case).
(i) General method — filing complementary VAT returns. This method involves submitting an "additional" or "complementary" VAT return for each of the periods in which VAT underpayments exist. Through those VAT returns, the taxpayer will declare and pay the "extra" VAT amount that was underpaid.
Filing these kinds of returns may result in the imposition of surcharges and delay interests. The applicable surcharges depend on the time that has elapsed since the deadline for submitting the original VAT return and the date on which the mentioned complementary VAT return is submitted. Those surcharges are 1% plus 1% per complete month of delay. If the delay in submitting the complementary return is longer than 12 months, a surcharge of 15% applies. In those cases, delay interest also applies from the first year of delay.
A general reduction of 25% of the total amount of surcharges imposed could apply if the tax debt and the corresponding surcharges are paid within the voluntary period.
It is worth noting that a special regime could apply in the case of submitting complementary returns derived from the interpretation applied in a previous tax audit. Spanish law specifically states that those surcharges would not apply if the taxpayer voluntarily discloses the same facts but in a different period than the ones directly regularised by the tax authorities (if some concrete conditions are met, such as the requirement that this regularisation be carried out within six months since the previous tax audit). Those situations (disclosure procedures derived from the criteria applied by the tax authorities during a tax audit) have led to multiple resolutions from the Spanish tax court, Spanish national court and Spanish supreme court in which those bodies have rejected the application of surcharges in those situations (especially if no penalties were imposed during the tax audit).
(ii) Reasonable interpretation of the law — include the corresponding input/output VAT in the next VAT return to be filed
In cases of "errors derived from the interpretation of the law" (that is, cases in which the taxpayer could not have known about the errors made in the VAT return), the corresponding VAT could be disclosed in the next VAT return to be submitted after the mentioned error was "discovered". This situation would not result in the imposition of surcharges and delay interest, as the VAT Act allows the VAT payment to be made within the voluntary period of payment of the next VAT return to be submitted. In our view, these criteria could directly apply in cases of disclosure procedure derived from the criteria applied by the tax authorities during a tax audit where no penalties were imposed.
"Reasonable interpretation of the law" should be analysed on a case-by-case basis, as it is not a concept that could apply to all cases (for instance, it could apply to certain VAT issues that are controversial and where the criteria from the tax authorities are not clear).
These two procedures generally apply when dealing with VAT disclosure procedures. However, the circumstances of each case should be analysed in detail to decide the course of action and the specific potential consequences. The above-mentioned procedures are subject to more "tailor-made" approaches as the personal handling of the procedure is key (i.e., getting in contact with the particular officer in charge, submitting explanatory letters). In general, the main objective is to reach a clear plan following the above and manage it properly.
Poland
Basic disclosure regime and penalties
Fiscal penal offences that are envisaged in the Polish Fiscal Penal Code may be, in simple terms, divided into two categories: those that consist in reporting incorrect data in the Polish VAT returns (so-called Standard Audit Files) or EC Sale Lists, and those that consist in other non-compliance (e.g., wrongly issuing VAT invoices, keeping tax records unreliably, not providing the tax authorities with certain additional data required by law).
Fiscal penal offences may be subject to heavy fines in Poland (even millions of Euros) and — in the most severe situations — even imprisonment.
There are two separate regimes of voluntarily disclosures in Poland:
- First, if a taxpayer only needs to correct the wrong data reported in its Standard Audit File or EC Sale List (but no other fiscal penal offence has been committed in connection with this), a taxpayer simply files a correction of Standard Audit File or EC Sale List.
In this situation, there is no need to file any additional voluntary disclosure.
The fiscal penal liability should be effectively waived if: (a) the correction of Standard Audit File/EC Sale List is filed effectively by a taxpayer (meaning, from the tax law point of view a taxpayer is allowed to file a correction of Standard Audit File, for example, no tax proceeding is being carried out) and (b) no fiscal penal proceedings have been initiated by the tax authorities before filing the corrections and (c) a taxpayer pays the outstanding tax together with default interest.
- Second, if a taxpayer committed tax offences other than wrong reporting in the Standard Audit File and EC Sales Lists (e.g., a taxpayer issued VAT invoices incorrectly, did not maintain appropriate records), persons responsible for handling financial, in particular tax, matters of a taxpayer must file a letter called "voluntary disclosure letter" ("czynny zal"). Fiscal penal liability of these persons may be effectively waived only if this letter is filed. There are certain conditions that must be met for a voluntary disclosure letter to be effective. In particular, the taxpayer must pay the underpaid tax together with default interest within the timeframe specified by the authorities. The voluntary disclosure letter cannot be filed when the tax authorities already have knowledge of the tax offence or have already started activities aimed at revealing the fiscal offence.
What to generally consider
For a voluntary disclosure letter to provide protection to all persons who were responsible for handling the financial, in particular tax, matters of a taxpayer, it must be signed by all involved persons. In practice this involves board members, tax managers, the chief accountant, financial directors, tax advisers and other persons who have decision-making powers in a company. It is always advisable to scrupulously prepare the list of persons who should sign the voluntary disclosure letter.
France
There are various disclosure procedures that can be used before and during a tax audit. The main effect is to reduce the level of applicable late payment interest (currently 2.4% per annum) from 50% to 30%. These reductions do not apply where the taxpayer is acting in bad faith. However, the likelihood of being considered to be acting as such is generally mitigated by the implementation of a disclosure procedure. Disclosing mistakes may also facilitate the negotiation of a payment plan.
1 HMRC Compliance Manual at CH82444
2 HMRC Compliance Manual at CH82450
3 HMRC Compliance Manual at CH82460
