Calculating the tax you owe and paying the authorities the right amount, year-in, year-out, can be challenging without the help of an accountant. When you get it wrong—submitting a digital tax return with errors for example—it is important that you get ahead of any potential penalties by making an HMRC voluntary disclosure as soon as possible.
Failure to pay the right amount of tax can be a deliberate or an honest mistake. The latter is especially true for complex tax cases often encountered by individuals with multiple taxable streams—including capital gains, inheritance and income—as well as business owners in charge of paying corporation tax and making employee contributions like National Insurance.
Whilst HMRC is proficient at identifying errors in tax payments through its connections to banks, Companies House, and tax returns, it can sometimes take years before the authorities come knocking at your door. Making an HMRC voluntary disclosure is your key to resolving tax issues before HMRC takes out a more serious, potentially criminal, case against you.
What is an HMRC voluntary disclosure?
HMRC expects taxpayers in the UK to be completely transparent about the amount of money they earn, where it comes from, and what tax they owe to HMRC from their various income streams. The authority trusts that taxpayers will file carefully-compiled, honest tax returns each year and pay the correct amount of tax owed.
Voluntary disclosures are for people who discover, realise, or wish to admit that they have, in fact, not paid the correct amount of tax and/or not made lawful declarations about starting a business, inheriting money, or the like. HMRC disclosures provide the opportunity to right wrongs by disclosing to the UK tax authority any such discrepancies and paying what’s due within 90 days of the declaration.
When should you make HMRC disclosures?
You should make a voluntary disclosure to HMRC as soon as you discover discrepancies or errors which have resulted in you paying the incorrect amount of tax, or if you realise you’ve failed to disclose starting a business, etc.
For example, if you’re a sole trader who submitted a tax return last year and have since realised you forgot to include some of your income on the return, it’s time to make a voluntary disclosure.
Similarly, if you’re the owner of a business like a limited company, and have deliberately misled HMRC as to your company’s turnover, you should make a voluntary disclosure as soon as possible to avoid facing criminal charges.
What do HMRC disclosures cover?
Voluntary disclosures through HMRC cover unpaid or incorrectly paid tax generated by any taxable income streams. This includes:
- Income tax, including income generated by dividends
- Capital Gains tax, such as on sales of inherited property
- Corporation tax
- Starting a business (i.e., generating taxable turnover as a business)
- Inheritance tax
- National Insurance payments
- Other liabilities, for example: Overclaiming on Coronavirus Job Retention Scheme grants
The importance of making a voluntary disclosure to HMRC
We cannot stress enough just how important it is to disclose any purposeful or accidental wrongdoing to HMRC. They might not have spotted the discrepancies yet, but in time they most likely will, and the consequences will be all the more severe as a result. Let’s take a look at the benefits of HMRC disclosures and the risks of not disclosing.
4 key benefits of making a voluntary disclosure
- You protect yourself against possible criminal prosecution
- You reduce the fines associated with failure to pay tax
- You protect your and your business’s reputation as honest and trustworthy
- You reset your tax record, effectively wiping the slate clean
Penalties and risks of failing to disclose
The risks of failing to disclose tax discrepancies and other tax liabilities are wide-ranging. They can include heavy fines, public naming, criminal prosecution and even jail time.
In most cases, filing a voluntary disclosure reduces the penalties associated with the tax you owe—sometimes reducing penalties all the way to 0%, if HMRC deems the initial offence committed despite reasonable care and dealt with promptly.
HMRC’s website outlines the standard penalties issued for most less-serious non-disclosure cases as: “Up to 100% of the tax liability… or 200% for an offshore liability.”
Voluntary disclosure HMRC: How far back does it go?
By this point in our guide to understanding HMRC voluntary disclosures, you may already have decided you need to make one. But how far back into your tax records does the disclosure have to go? And how far back might HMRC penalize you for your mistakes?
The length of time you’ll need to disclose depends on the nature of the offence—whether accidental or not. To determine how far back your voluntary HMRC disclosure should go, you’ll first have to decide why you made the error:
- Did you make the error despite taking reasonable care?
- Did you make the error due to careless reporting?
- Did you make the error deliberately?
- Did you hide the error through offshore dealings?
- Or alternatively, have you failed to notify HMRC about inheriting money or assets, or about starting a business?
Failure to notify HMRC of starting a business
Individuals who start a business have until 5 October in their company’s second tax year to tell HMRC that they started the business. Failure to do so requires a voluntary disclosure and payment of owed taxes up to a maximum of 20 years.
Unpaid inheritance tax
Failure to submit and pay an inheritance tax return also triggers the need for a voluntary disclosure going back to a maximum of 20 years.
Unpaid tax despite reasonable care
If you believe that you took care to ensure your tax return was correct and your bookkeeping accurate, but you still failed to pay enough tax, then you should prepare to disclose and pay HMRC what you owe up to a maximum of 4 years.
Unpaid tax through carelessness
You may also have failed to pay enough tax simply because, when submitting your tax return(s), you were not paying enough attention, or were careless with your accounting. If this is the case, you must pay what you owe HMRC up to a maximum of 6 years.
Unpaid tax through deliberate misleading
Deliberately misleading HMRC regarding your taxes is a much more serious offence—there are plenty of perfectly legitimate ways to pay less tax in the UK, but this is not it. Thankfully, the penalties for deliberate misleading can still be mitigated by submitting a voluntary disclosure. You must pay HMRC what is owed to them for up to the past 20 years.
Unpaid tax involving offshore matters or transfers (concealment)
Similarly, ‘concealing’ your tax records from HMRC by conducting your business or tax affairs ‘offshore’ is another serious offence. HMRC disclosures concerning offshore dealings must go back to a maximum of 12 years.
How to make an HMRC voluntary disclosure
Having learned what HMRC disclosures are, why they’re important, what they cover and when you should make one, it’s time to close our article with guidance on how to make an HMRC voluntary disclosure.
HMRC makes the process of disclosure fairly straightforward through its online Digital Disclosure Service (DDS), which can also be used to make voluntary disclosures concerning income, capital gains, corporation or inheritance tax, as well as National Insurance contributions.
For disclosures concerning income or gains made overseas—i.e., for offshore-related voluntary disclosures—you can use HMRC’s worldwide disclosure service instead. It is equally important to note that if you deliberately withheld tax payment from HMRC, you should use the Contractual Disclosure Facility (CDF) instead of the DDS.
To make an HMRC voluntary disclosure, follow the steps below:
- Notify: Tell HMRC that you want to make a disclosure via one of the relevant disclosure services outlined above.
- Disclose: Provide HMRC with all relevant and transparent information to do with your income over the years (length outlined above) and the taxes you believe you owe (including interest).
- Agree: The next step is for you to come to an agreement with HMRC by first making a formal repayment offer and then discussing and amending your offer with HMRC until the authority is satisfied.
- Pay: Last but most certainly not least, the final step on your voluntary disclosure journey is to pay HMRC what you owe (as agreed in step 3) within 90 days. Interest and other penalties may be applied to all late payments.
Conclusion: Seeking professional guidance when making an HMRC voluntary disclosure
Knowing that you need to make an HMRC voluntary disclosure means that you’ve already made a tax mistake once. It’s important not to do so again.
But trawling through old bookkeeping records and tax returns, identifying where you’ve made mistakes and why, calculating what you owe HMRC including interest, and filing a transparent, compliant disclosure form… Well, it all takes a lot of work.
Not all individuals nor businesses have the resources and know-how to ensure they stay tax-compliant all of the time. Many may even feel worried that their voluntary disclosures will contain further errors, thus compounding the risks and penalties associated with their failure to pay or disclose certain taxes.
If you feel like this scenario describes you, fret not. Professional help is just around the corner. Browse UWM Accountants’ specialised tax services to ensure that both the future of your HMRC disclosures and your tax reporting are as compliant and profitable as possible.
Get in touch with the friendly, local UWM accountancy team, today.
