We have written extensively about the disclosure process and the various campaigns and facilities by which HMRC encourage taxpayers to pay previously undeclared tax on income and/or gains. It’s hardly surprising that owing to a near two-year hiatus where HMRC officers have been seconded, we are beginning to see an increase in the number of people wanting to disclose – be it because they have received a letter form HMRC or because they want to voluntarily come forward.
A significant number of the people contacting us are concerned that HMRC will prosecute and the temptation for many is to bury their head in the sand and hope that HMRC will not find out. Given the raft of information at HMRC’s disposal it’s usually only a matter of time before there’s the proverbial knock on the door. Where a taxpayer has paid too little tax, we would always encourage them to rectify their tax affairs by making a disclosure, this is not simply because it’s the right thing to do, but also because making a disclosure, whether prompted or unprompted, reduces the level of penalties which HMRC can apply.
It is also advisable to make the disclosure sooner rather than later to reduce the risk that HMRC will issue a letter (if they’ve not done so already) and the disclosure becomes ‘prompted’.
Whilst every disclosure is unique in its characteristics, each generally follow the same initial process:
- Review primary documentation (bank statements, invoices, receipts)
- Identify whether there has been an underpayment of tax (compare accounts and/or self-assessment tax returns to the primary records)
- Notify HMRC that a disclosure is required as soon as possible after the error has been identified
- HMRC will issue a case reference and payment reference within 30 days, if possible a payment on account should be made to prevent further interest charges arising
- Calculate the underpayment of tax (all other forms of income arising in that year will be required as well as an accurate determination of the previously undeclared income) and interest
- Make the disclosure to within HMRC including, where relevant, details of the reasons for the underpayment and extenuating circumstances
- Enter negotiations with HMRC regarding the appropriate level of penalty
- Once the total liability has been agreed, the taxpayer will need to sign a ‘letter of offer’ to HMRC who will normally accept the offer provided it matches the agreed liabilities. Before the offer can be accepted tax must either be paid in full or a payment plan arranged
The total timescale for the above can be anywhere between three months to three years depending on the complexity of the case and the level of negotiation with HMRC on either points of law / tax treatment or penalties. For simple disclosures which deal with only one source of undeclared income it’s likely to take three months.
The period to which the disclosure relates will depend on the number of years in which the error arises and the behaviour that lead to the error. Where the error was brought about by deliberate behaviour, HMRC can look back over twenty years. Whether a behaviour is deliberate will depend on the unique facts of each case and whether the taxpayer had extenuating circumstances which affected their ability to ensure their tax affairs were correct.
Where the error has occurred for more than three years HMRC have been known to argue that the behaviour was deliberate.
Penalties – where there has been a loss of tax brought about by careless or deliberate behaviour, HMRC will charge a penalty. The penalty rate will depend on the behaviour, whether the disclosure was prompted or unprompted, and the quality of the disclosure. Where the tax has arisen from overseas income the penalties can be as high as 200%. Where the behaviour was careless, the penalty can be stood over if the taxpayer meets certain conditions ensuring the behaviour leading to the error isn’t repeated.
Name and shame – where a taxpayer has repeatedly evaded tax, their liabilities span significant number of years, or in specific circumstances relating to the type of tax HMRC can publish the taxpayers details
Imprisonment – in most cases, where a taxpayer makes a disclosure to HMRC and pays the tax, interest, and penalties due, HMRC will not prosecute. Litigation is time consuming and expensive (for the taxpayer and the Revenue) and quite frankly they’d rather have the money than go through the court process.
Edge are disclosure specialists, having worked on complex fraud cases in relation to UK and foreign source income. If you’d like to speak to an advisor about how we can help, please do not hesitate to contact us.