21st December 2021Making Disclosures to HMRC

HMRC believes that taxpayers want to pay the right amount of tax and wants to help those taxpayers that are not paying the correct amount to put that right. HMRC will encourage you to come forward with a disclosure and admit to any irregularities, rather than the opposite which would be that HMRC uncover potential irregularities themselves and approach you!

Why make a disclosure?

As professional advisers it is our job to make sure that we provide accurate advice and prepare returns correctly, but this can only ever be based on receiving the right information in the first place. The onus, to ensure that self-assessment returns are correct lies with the taxpayer (our clients). Mistakes can happen so as soon as it becomes apparent that a mistake has been made or an omission has arisen, , you should be considering making a disclosure to HMRC.  It is not so much a question of whether or not to make a disclosure, but how.

Why voluntary disclosures are easier to manage

It is better to come forward on a voluntary basis with a disclosure – the alternative is HMRC becoming aware of the matter and this significantly shifts the tactics e.g. HMRC may be sceptical with other parts of a return and/or earlier years if this is relevant. It should be, easier to manage an irregularity through the process of a voluntary disclosure as opposed to being caught out and having to deal with a situation on the back foot. Apart from anything else, a voluntary disclosure will result in lower penalties or at the very least, should put you in a position where an argument for nil or lower penalties is more easily capable of being accepted. Plus, its usually cheaper fee wise, to manage a voluntary disclosure rather than a full enquiry.

The alternative carries too much risk and we have obligations and responsibilities with our regulatory bodies, professional bodies and of course HMRC.  If you are in the position of having to consider making a disclosure, the best course of action is to agree this with your client and make it on their behalf to regularise your clients affairs.

How to make a disclosure

In terms of disclosure facilities, we currently have HMRC’s digital disclosure service (DDS).  The DDS is simple and straightforward which is very useful, if your disclosure is simple and straightforward.

If your disclosure specifically relates to rental income then HMRC’s let property campaign which has been around for some years now, is still available and can be used. The let property campaign disclosure facility is merely a derivative of the DDS.

The Let Property Campaign is an opportunity for landlords owing tax through letting out residential property, either in the UK or abroad, to regularise their tax affairs in a simple way. It is open to all residential property landlords (individuals only) with undisclosed taxes and includes:

  • those that have multiple properties
  • landlords with single rentals
  • specialist landlords with student or workforce rentals
  • holiday lettings
  • renting out a room in your main home for more than the Rent a Room Scheme threshold

If your disclosure relates to “offshore matters” e.g. undeclared foreign bank account income, then the Worldwide Disclosure Facility (WDF) should be used. As with the let property campaign, the WDF is another derivative of the DDS. You should however note that there are additional risks when using the WDF, such as whether or not the much higher ‘Failure to Correct’ penalties might apply as well as the enhanced assessment time limits for non-deliberate offshore non-compliance.

The WDF was opened in 2016 and should be used where a disclosure is required and is in respect of a UK tax liability relating wholly or partly to an offshore matter.

An offshore matter includes unpaid or omitted tax relating to:

  • income arising from a source outside the UK
  • assets held outside the UK
  • activities carried on wholly or mainly outside the UK
  • anything that has the effect of being income, assets or activities held outside the UK

It also includes funds connected to unpaid or omitted UK tax that you have transferred to a jurisdiction outside the UK or are owned in a territory outside the UK. As an example, a client receives UK rental income which is undeclared to HMRC, but pays it directly into an overseas bank account. The undeclared rental income, although it is UK sourced, will be deemed to be an offshore matter and therefore will need to be disclosed using the WDF.

The DDS & let property facility can be used to disclose IT, CGT, CT & NIC. If you have IHT to disclose (and the WDF which can be used to disclose IHT is not an option for you) then there is no separate facility for this and you will need to contact the HMRC Trusts and Estates Risk team in Nottingham.

You can make a disclosure for all tax years up to and including 2019 to 2020 i.e. all but the tax year most recently closed. If HMRC issued your client a tax return for that year or any year from 2017 to 2018 onwards that’s still outstanding, these must still be completed and do not therefore include these tax years on the disclosure form, if indeed this is still required.

The number of years that need to be disclosed depends on the type of behaviour involved.

Agree this with your client beforehand as the behaviour will need to be self-assessed for the purposes of the disclosure. You cannot rely on HMRC to tell you what type of behaviour gave rise to the error or mistake. In the case of non-offshore related disclosures, you must decide whether the error arose:

  • despite your client taking reasonable care or having a reasonable excuse (4 years)
  • because your client was careless (6 years)
  • because it was something your client deliberately omitted (20 years)

The behaviour not only determines how far back HMRC can assess, but also the penalties they can charge. It is key to assess penalties on a reasonable basis and within reason, to your clients benefit. In my view, particularly where you consider that your client has taken reasonable care or that a reasonable excuse exists, set out your justification and explanation in support of this in a separate letter that you can submit at the same time as the disclosure.

It’s worth noting that the let property campaign and the WDF is that none of these disclosure facilities carry any form of indemnity from prosecution. In other words, HMRC could in theory, take a voluntary disclosure and proceed on a criminal route with a view to prosecution.

HMRC’s general policy regarding voluntary disclosures is to consider a prosecution route in exceptional cases and only where a full and complete disclosure is not made.

Managing potential risks

The majority of disclosures arise as a result of mistakes made, oversights, wrong information, misinterpreting information, forgetfulness, or not being aware of the rules. But at what stage might you need to consider needing protection against prosecution in potentially more serious cases?  First, consider and establish the nature of the mistake or omission that requires disclosure.  Anything that is likely to be considered as deliberate, or fraudulent, by HMRC should be considered as a potential risk. In these circumstances, consideration should then be given to the immunity protection under HMRC’s Contractual Disclosure Facility (CDF).

The CDF is only suitable for clients who need to admit deliberate behaviour which HMRC refer to as tax fraud. By filling in the contractual disclosure form CDF1, which can be completed online, you can ask HMRC to consider your client for a CDF contract.

The CDF process involves a contract between your client and HMRC. This means that both your client and HMRC agree to stick to the terms and conditions of the contract, which are;

  • On HMRC’s part, they agree not to criminally investigate your client.
  • On your clients part they will admit their deliberate conduct has resulted in a tax loss, make an outline of the disclosure within 60 days of being offered the contract, give additional details if appropriate in the form of a report, following the 60 day period – including a statement that you have made a complete and accurate disclosure.

A successful CDF disclosure will result in lower penalties; a minimum 20% for an unprompted disclosure as opposed to a minimum 35% if prompted – assuming maximum credit for conduct is given throughout the course of the CDF process for giving, telling, helping etc.  Beware though the potential for ‘naming and shaming’ if anything other than maximum abatement is given.

Consider what is best for the client

The key question when considering a voluntary request for the CDF is what is the best outcome for the client?  Far better for a client to hold their hands up and pay a penalty, but with the immunity from prosecution than risk having HMRC make their own minds up and in a worst-case scenario, start a criminal investigation.  If the disclosure involves deliberate behaviour the CDF route is the only disclosure route if the client wants to avoid any risk of prosecution.

For marginal cases, there is always a balance when considering and requesting a voluntary CDF which is  the value to the client of the prosecution immunity. There are additional costs and risks, not just the minimum tax geared penalty of 20%, involved when requesting CDF as opposed to making a disclosure under the DDS.

To summarise;

  • Make a disclosure if a mistake has been made or an omission is realised. It is not a question of if, more a question of how best to.
  • The nature of the mistake or omission will determine the best disclosure route to follow.
  • The behaviour will need to be self-assessed and remember that this impacts not only the assessable period open to HMRC but also the penalty position.
  • Make a full and complete disclosure – there is no such thing as a partial disclosure.
  • The payment position should be considered and if necessary, a payment plan entered into with HMRC.
  • Going forwards, try to ensure that the correct compliance position is followed.

HMRC very much welcome and encourage voluntary disclosures and the vast majority are accepted as submitted or without too much hassle or further questioning. The chances of having a voluntary disclosure accepted on this basis increase if you take steps to ensure the disclosure is correct and complete and the behaviours are assessed on a reasonable basis.

To discuss your specific circumstances, please get in touch with our tax experts.

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