Audit file issues – Accelerated Payment Notices

Background

A number of limited companies have been subject to APNs where HMRC has questioned the legitimacy of tax schemes in which the company has had some involvement.

An APN is a requirement to pay an amount on account of tax or National Insurance Contributions (NICs). HMRC issues APNs to taxpayers involved in avoidance schemes disclosed under the Disclosure of Tax Avoidance Schemes (DOTAS) rules, or counter-acted under the General Anti Abuse Rule. APNs have been used effectively as a means of generating cash flow for HMRC in tax avoidance cases where it would otherwise have had to wait until the end of the assessment and appeals process to secure the tax, penalties and interest owed.

Ethical considerations

If you are acting for the client in connection with the underlying scheme which is subject to the APN, then you may have a problem. The FRC Ethical Standard is fairly explicit on the subject of tax advocacy. A firm must provide tax services to an entity it audits where this would involve acting as an advocate for the entity in the resolution of an issue.

This knowledge of the firm’s non-audit services may not be in the possession of audit staff and emphasises the importance of the involvement of the Responsible Individual (RI) in the planning process. It is often apparent on audit files that the consideration of the auditor’s appointment and, in particular, ethical issues are undertaken at a level which is too junior with audit staff making assumptions on matters that the RI would need to be consulted on.

How has the matter been treated in the accounts?

Often the payment is regarded as recoverable and simply treated as a miscellaneous debtor - the key audit assertion requiring verification will be recoverability. As with any other debtor, the auditor must document evidence to support this assertion. This may not be easy as there will undoubtedly be a degree of uncertainty in many of these cases along with a resolute attitude amongst the directors that they will ‘fight to the death’ with HMRC over it. Whilst feelings may run strong, the likelihood of winning the argument may not be quite as strong. HMRC claim a significant level of success in connection with these matters in respect of the tax claimed ultimately being payable.

Summary

The presence of APNs should prompt the auditor to consider the treatment adopted in the accounts and whether it is appropriate. Where there are payments made under APNs which have been treated as recoverable and included in the accounts on this basis the appropriate level of professional scepticism must be evidenced. This means that the likelihood of recovering the tax must be assessed and backed up by evidence on which the auditor has exercised professional judgment in arriving at a conclusion.

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