HMRC warns that tax deductions for data protection penalties are invalid

According to HMRC, some tax agents have been advising their corporate clients that they can claim corporation tax refunds or reductions if they set aside funds as a precaution against payment of future fines or civil claims for breaching the GDPR. These set-aside amounts are claimed to reduce the company's taxable profits through the recognition of a provision and a corresponding expense. The agents may advise the company that there is a high risk of being penalised in some way for non-compliance with the GDPR and suggest a corresponding monetary amount to be set aside. They may even advise the company to amend a previous tax return by including this amount retrospectively and claim a refund.

Some agents also try to link the GDPR claims to research and development (R&D) tax credits, in order to falsely inflate the size of the R&D credit. 'Businesses should be alert to this approach as it could lead to an error on which tax, interest, and penalties may be due, even if the R&D element is correct', HMRC says.

HMRC notes that such set-aside provisions are contrary to generally accepted accounting practice (GAAP) and says it will challenge them. It says it will 'tackle tax agents who encourage or facilitate customers making false claims for expenses, rebates, or tax credits', by issuing penalties, suspending the agents’ ability to make claims on behalf of clients or by refusing to deal with an agent.

However, it also observes that the agents responsible sometimes disappear before HMRC makes any enquiries about the information submitted. It is also unclear whether agents can be penalised for suggesting a deduction that does not meet HMRC's interpretation of GAAP.

Sources

• HMRC