Making a voluntary disclosure to HMRC
HMRC periodically run campaigns or disclosure opportunities for taxpayers who might have underdeclared their tax liabilities and thereby encourage such people to make disclosures sooner so as to reduce interest and penalties and not undergo a formal investigation. During the last few years these campaigns have been targeted at business sectors such as doctors, solicitors and plumbers and at types of investment income such as offshore assets and let property.
For those who don’t qualify for a current HMRC campaign, these people can still use the Digital Disclosure Service (DDS) to tell the Revenue that they have not declared the right amount of tax for one or more of the following taxes:
- Income Tax
- Capital Gains Tax
- NIC
- Corporation Tax
The DDS provides both individuals and companies with the chance to bring their tax affairs up to date in a simple and straightforward manner. For example, a business that hasn’t declared all of its income or a business that’s trading and hasn’t been registered with HMRC for one or more taxes. This wouldn’t happen with a limited company however, as HMRC sends a newly formed company a form CT41G (Corporation Tax – Information for New Companies) within a few days of the company registering with Companies House.
How to make a voluntary disclosure
To make a disclosure it is necessary to:
- tell HMRC that you want to make a disclosure (notify)
- tell HMRC about all income, gains, tax and duties not previously divulged (disclose)
- make a formal offer
- pay the tax
- help HMRC as much as you can if they ask for further information
The problem won’t go away
Regardless of the reason for a person’s tax affairs being wrong, ignoring the fact won’t make it go away but only compound the problem as penalties could be up to 100% of the tax arrears or up to 200% for offshore related income. In serious cases, HMRC may even consider starting a criminal investigation.
Individuals and companies can notify by completing the DDS form. HMRC will then write to them to advise of their unique Disclosure Reference Number (DRN) and Payment Reference Number (PRN).
Disclosure
Once a person has received their DRN they can proceed to make their disclosure but this must be done within 90 days of the date that HMRC acknowledge the notification. A disclosure can be made about any of the following:
- your own or your company’s tax affairs if you’re a director or company secretary
- a trust or estate
- a Limited Liability Partnership (LLP)
An agent may also make a disclosure on behalf of their client.
Where a person’s records are incomplete then they should estimate the undisclosed income and gains and use this to make the disclosure. HMRC may ask for an explanation as to how the estimates have been calculated, so it is important to keep the calculations for reference.
For the period of disclosure it will be necessary to refer to bank statements but where these are not available and copies cannot be obtained, then a person should work out their income by using more recent statements as a guide to their income and expenditure.
Income received in the current tax year shouldn’t be included in any disclosure as HMRC will expect that person to register for Self Assessment and complete a tax return.
When making a voluntary disclosure, a person will know why they haven’t told HMRC about their income before or not paid the right amount of tax, so it will be necessary to decide whether the error was made:
- despite taking reasonable care
- because they were careless
- because it was something they did deliberately
The behaviour will then determine how much a person will pay.
All income and gains must be included in the disclosure which may include:
- investment income received gross, e.g interest
- taxed income liable at higher rates
- net income from land or property
If a person’s only undeclared income is from residential letting, then they should use the Let Property Campaign.
HMRC expects to accept most disclosures. Once the Revenue have carried out checks to their satisfaction, they will accept the disclosure as quickly as possible.
Unsurprisingly, HMRC won’t accept disclosures that are found to be largely wrong or incomplete when they check them, nor disclosures where HMRC have already started an enquiry or disclosures where it is suspected that monies are the proceeds of serious organised crime.
Other liabilities
Whilst other taxes can’t be specifically made on the disclosure form, there is a box that can be ticked in the ‘Other potential liability’ section of the form. This will enable the relevant HMRC department to be alerted to resolving the relevant issues.
The offer
Part of the disclosure is an offer to pay outstanding liabilities. The offer, together with HMRC’s acceptance letter creates a legally binding contract between the taxpayer and HMRC.
Paying the tax
The PRN has to be used when making payment of all tax owing. Any unpaid tax will cause HMRC to take steps to recover the money, so where a person cannot meet their liabilities in full it is important that they tell HMRC as soon as possible and enter into a time-to-pay-arrangement.
Self Assessment
Where individuals or companies realise they have underdeclared income and therefore their tax liability and are able to amend their Self Assessment tax returns, then they should do so. Returns can be amended 12 months from the due filing date.
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