Know Your Customer meetings and penalties | KPMG | UK

Know Your Customer meetings and penalties for disclosure

Know Your Customer meetings and penalties

Large employers who receive a KYC letter should consider the impact that it might have on any future disclosure of employment tax errors.


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HMRC's Know Your Customer (KYC) programme was launched several years ago as part of the wider risk review procedures for businesses, with the intention of specifically assessing employment tax risk for large employers in the UK. A KYC meeting allows HMRC to understand the environment within which a business engages with its employees, although it may lead to further enquiries where points arise on which further information is required by HMRC. Large employers are likely, by now, to be familiar with the process - but they may not have considered the effect that the receipt of a KYC letter could have on any planned disclosure of employment tax errors. 

Employers are likely to be aware of the underlying principle that penalties may arise where tax due is underreported. There are various factors affecting the level of penalty, including the amount of additional tax due, the nature of the error, and (significantly in this context) whether a taxpayer discloses an error to HMRC voluntarily or whether HMRC discover it themselves.

Where a taxpayer discloses voluntarily, there is a further distinction between a ‘prompted’ and an ‘unprompted’ disclosure. The latter can see penalties reduced to nil, but ‘prompted’ disclosures can only be reduced to a minimum of 15 percent of Potential Lost Revenue (the tax which would have gone unpaid if the error had not been disclosed).

 Determining whether a disclosure is prompted or unprompted is therefore clearly very important. But what about situations where an employer receives notification of a KYC meeting before making a disclosure? Does this represent a precursor to an enquiry, or is this simply a request to meet and discuss the environment within which a business engages with its employees, outside of the regime of enquiries and compliance checks? Recent discussions with HMRC suggest that any voluntary disclosure made after the notification of a KYC meeting will prima facie be considered as having been ‘prompted’ and would attract a minimum penalty of 15 percent.

That said, HMRC have also noted that there may be circumstances where a disclosure was so imminent that they may, on the evidence, be able to treat it as unprompted - however, this would depend entirely on the circumstances. The overall message from HMRC is that employers should get in touch as early as possible to notify them that a disclosure may be made, rather than waiting for all preparatory work to be completed, if they are to consider the disclosure to have been wholly unprompted.

For further information, please visit KPMG Employers’ Club (registration required). 

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Mike Lavan

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