Disclosures to HMRC

Posted: 25/09/2023

A voluntary disclosure is a way of coming forward to HMRC to declare an amount of unpaid UK tax. This might be necessary because the taxpayer is out of time to amend the relevant tax return they have filed, or because no return has been filed at all. 

Disclosures can be made for income tax, capital gains tax, inheritance tax and corporation tax (as well as other taxes).

Errors or omissions in reporting can arise for all sorts of reasons. There are different ways of approaching HMRC but using the formal disclosure route is one way to settle matters proactively.

The taxpayer must be willing to make a complete and accurate disclosure of their tax affairs and fully co-operate with HMRC by supplying any further information that it requests. This is because, if a disclosure is incomplete or inaccurate, or the taxpayer does not co-operate, HMRC may seek to apply a higher penalty than it would have if they had co-operated. HMRC may also open a civil or criminal investigation and/or publish the taxpayer’s details on its website. 

The advantages for the taxpayer in coming forward include:

• the opportunity to settle past liabilities without being under the pressures of an open enquiry. Naturally if HMRC approaches the taxpayer first, and launches an enquiry, the taxpayer will be on the back foot;
• different penalties apply depending on whether a disclosure is prompted or unprompted. For this reason, it is best to come forward first and be proactive;
• the ability to plan for the future. A line can be drawn under the past and the agreement with HMRC on whatever technical points arise under the disclosure is a foundation for the future; and
• reputation management.

In the context of purely UK matters, a disclosure can be made using HMRC’s digital disclosure service. HMRC launches what it calls ‘campaigns’ from time to time, such as the ‘Let Property Campaign’ for landlords of residential property. These disclosure campaigns are targeted at certain categories of taxpayer and if you are within the scope of one of these, there will be additional considerations. If an ‘offshore matter’ needs to be disclosed, the Worldwide Disclosure Facility (WDF) would be used, but the process will be broadly the same.

Process

The process involves registering for the facility as a first step. There is a deadline of 90 days to make the disclosure, calculate the tax, interest and penalties, and pay the amount due. An extension to 180 days can be agreed under the WDF if the matter is particularly complex. 

HMRC takes a particular stance in relation to offshore matters as it is naturally harder for it to address unpaid tax related to overseas matters. 

There have been several, specific overseas disclosure opportunities in the last 12 years or so that were made available on beneficial terms. These were targeted at taxpayers with undeclared interests in particular overseas jurisdictions. There was the Liechtenstein Disclosure Facility (LDF), for example, and the British Crown dependency disclosure facilities, which ended in 2015. The terms of these could be very favourable to taxpayers with penalties of as little as 10%. These territory-specific opportunities were replaced with the WDF in September 2016 and this remains open. This is the route that would now be used to disclose offshore matters, including for non-UK resident taxpayers. 

An offshore issue includes unpaid or omitted tax relating to:

• income arising from a source in a territory outside the UK;
• assets situated or held in a territory outside the UK;
• activities carried on wholly or mainly in a territory outside the UK; and
• anything having effect as if it were income, assets or activities of a kind described above.

By their very nature, offshore disclosures can be complex. In-depth reviews are often needed in preparation, and bespoke disclosure statements may be drawn up to add to the information provided in the digital form. The disclosure might include matters of interpretation of the law which need to be argued in favour of the taxpayer. HMRC may raise questions and seek to widen the scope of the disclosure. It is therefore very important to have the right specialist advice for the issues at stake, and to make the process as smooth as possible. 

Interest and penalties

There is a statutory rate of interest applied to unpaid tax. It is possible to argue for a reduction of this in certain, limited cases.

The application of penalties can be complicated. In overview, the rate of penalty will depend on the behaviour of the taxpayer that led to the error (whether it was careless, or deliberate for example), whether the disclosure was prompted by HMRC or unprompted, and, if it is an offshore matter, also on the jurisdiction involved. 

If reasonable care has been taken, there may be no penalty at all, but the maximum penalty is 100% of the tax due, or 200% of the tax due for an offshore matter. Penalties are particularly severe for anyone who failed to correct non-compliance for tax year 2015/2016 and earlier years under the requirement to correct rules. Care needs to be taken in the presentation of any disclosure if penalties are a concern. 

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