A Possible HMRC Attack on Misstated Profits

The revelation that Tesco had overstated profits by £250m will, no doubt, have consequences for the group’s share price and for some of its senior staff.

The general consensus is that the issue was recognition and interpretation of accounting rules regarding discounts and incentives from suppliers. I can’t help but notice that quoted plc’s appear to have accounting issues which lead to overstated profits whilst private companies appear to be subject to HMRC enquiries into the extent that accounting interpretations could understate profits.  Usually this would be most relevant to aspects of judgement in accounts; for example provisions.

Let us say that a company acknowledges that an accounting interpretation has understated past profits. You would expect the next accounts to correct the matter, perhaps by prior year adjustment if the extent of the error is fundamental.  This would lead to the correct tax being paid.

UK corporation tax is paid on accounts which comply with UK GAAP or, if accounts don’t comply with UK GAAP, the numbers which should have been reported had they agreed with UK GAAP. I can’t help but feel that HMRC could run an argument that materially understated profits represent previously reported profits which don’t comply with UK GAAP.  The tax computation of the errant period (and not the correcting period) should therefore be revised.  This may lead to interest on late payment of tax, companies falling into quarterly instalments who would otherwise not do so and penalties.  It is not an argument that I have seen HMRC actively run.  With tax deficits to recover and government debt to repay it may be an agreement that HMRC may closely pursue more frequently.