Insights

Making a mistake on your tax return can create significant problems if it’s not addressed properly. In the eyes of HMRC, every taxpayer has a responsibility to submit an accurate and timely tax return and pay the correct amount of tax. This means keeping up to date with changing legislation, or working with a tax advisor who can ensure your affairs are always correct, is essential. Making mistakes can result in HMRC enquiries and lengthy investigations. The best way to correct mistakes when it comes to tax payments, is to make a voluntary disclosure. This is a formal process for declaring tax underpayments to HMRC and will ensure that any penalties incurred are minimised.

HMRC provides a range of ways to make a voluntary disclosure and frequently runs campaigns aimed at specific taxpayers, e.g. doctors, taxpayers with offshore accounts, e-commerce traders. HMRC have also been using nudge letters in recent months, to encourage taxpayers they suspect could have a tax shortfall to check their tax returns and correct any mistakes. Owners of second homes were one of the groups targeted recently. In January, HMRC also issued nudge letters to businesses suspected of ‘electronic sales suppression’, which involves using software to deliberately suppress revenue levels and to reduce the level of profits to be declared.

Why make a voluntary disclosure?

HMRC has greater powers than ever today to identify and target people who might have underpaid tax. Software programs like HMRC Connect are used to extract and monitor data from different sources – banks, rental agents, e-commerce platforms, credit card companies and social media networks – to model a taxpayer’s financial status and lifestyle. Any apparent mismatch is flagged and the person may receive a nudge letter. 

If you do have an error to correct the penalties are considerably lower if you make an unprompted disclosure.  If you wait for HMRC to contact you then any disclosure made is deemed to be prompted and the penalties are more severe.

Different types of disclosure facilities

There are several options for taxpayers and each one has different criteria and benefits. 

Contractual Disclosure Facility – this is for disclosures of deliberate non‑compliance, involving tax return errors and failures to notify for any type of tax. Making full disclosures through this facility will protect a taxpayer from criminal investigation and prosecution.

Digital Disclosure Service – this is an online portal for taxpayers where their tax underpayment or mistake was not made deliberately. It is available for the following types of disclosure: 

• Worldwide Disclosure Facility – for disclosing offshore income, gains or profits on which additional UK tax is due;
• Digital Disclosure Facility – for disclosing onshore liabilities of income tax, capital gains tax, inheritance tax, corporation tax, NICs and ATED (Annual Tax on Enveloped Dwellings);
• Let Property Campaign – for landlords to disclose tax non‑compliance for let residential property, either in the UK or overseas.

Taxpayers who use the Digital Disclosure Service should understand that this does not offer protection from criminal investigation, but it does limit the penalties that can be imposed.  Once HMRC acknowledges an intention to disclose, the taxpayer has 90 days to submit their disclosure, offer letter and repay their outstanding tax.

Making a disclosure is a complex process and there are many implications if any deadlines that have been agreed with HMRC are missed.  Being late to respond without a good reason or notifying HMRC in advance could increase the financial penalties imposed or mean more extensive compliance checks are made. 

It is very important to follow the right procedure when making a voluntary disclosure. If you suspect you might have made a mistake on your tax return or have paid the wrong amount of tax and would like advice about approaching HMRC, please contact partners@rjp.co.uk.