In their business activities most people want to do the right thing. So, they pay the correct tax owed and at the appropriate time. But no-one is perfect and sometimes things go wrong. Voluntary disclosure can help you to reduce or even eliminate the penalties.
What could go wrong?
You might forget to submit a tax return or send HM Revenue and Customs (HMRC) the wrong information. What happens if, sometime later, you realise your returns are wrong?
Should you just ignore it, or do you notify HMRC of your mistake? This is called voluntary disclosure and it’s an important decision because it could have a significant bearing on your final tax liability.
In any given year HMRC carries out more than 100,000 compliance checks to ensure people pay the correct amount of tax. Even if you have done everything right, or believe that you have, HMRC may decide to review your records.
Often our tax specialists hear the words ‘it won’t happen to me’ or ‘I have never met anyone who has been subject to an HMRC investigation’. If HMRC did check your tax records and something was amiss, how would you react? Are you likely to broadcast the fact that you failed to pay the correct taxes and had been caught out? The answer, typically, is a resounding no!
HMRC fully understands that errors can arise, and for a variety of reasons. That’s why there is a facility for all taxpayers to notify HMRC about errors under a voluntary disclosure.
Whilst you will have the extra tax to pay, the main benefit of making a voluntary disclosure relates to the penalties HMRC could levy on the potential tax it has lost. What’s more, if HMRC comes calling checks can be time consuming. They can also be a distraction to your everyday business and interfere in private your life. Making a voluntary disclosure can help to bring matters to a swift conclusion.
If you fail to submit a tax return you could incur late return penalties. These would be in addition to tax geared penalties on the duties which were due to HMRC.
Tax geared penalties relate to behaviour. What HMRC wants to know is, how did the error come about? Did you take reasonable care or were you careless? Was it a deliberate mistake and if it was an intentional error, did you try to conceal it?
HMRC treats a voluntary disclosure as being ‘unprompted’ both for penalty purposes and when considering your behaviour. This is a real plus and could significantly affect what kind of penalty you face.
If, for example, HMRC accepts that you took reasonable care, the voluntary disclosure would have no bearing on the penalty charge, as no penalty would be due. On the other hand, if your behaviour is deemed careless or worse, the voluntary disclosure can have a major mitigating impact.
A careless error discovered by HMRC could lead to a potential penalty of 15% to 30% of the tax owed depending on your co-operation. Where an unprompted disclosure is made, with full co-operation, the penalty can be reduced to nil.
For taxpayers who deliberately do something wrong the penalty reduction is potentially even greater. Generally, the penalty for this kind of behaviour could be as high as 70% of the tax owed. With an unprompted disclosure and full co-operation it could be reduced to as little as 20%.
Some tax systems, for example The Construction Industry Scheme, as well as VAT assessments dependent on certain circumstances can operate under different penalty regimes. In all cases there are considerable benefits in making a voluntary disclosure rather than waiting for HMRC’s letter to drop on the door mat.
In disclosing an error, you will have full details of why it occurred readily at hand. It’s therefore more likely that HMRC will accept your explanation for the mistake rather than prolonging matters by requesting further clarification. Your unprompted action may also limit the additional interest payable on what you may owe.
Few people would choose to publicly declare that they have been subject to a tax investigation. Yet, the facts could easily become known. Three criteria must be met. HMRC has to establish that behaviour has reached the minimum standard of deliberate, the potential tax lost exceeds £25,000 and a failure to fully co-operate with the investigation. If it can prove this, HMRC will publicly declare the investigation under the ‘current list of deliberate tax defaulters’.
By making a voluntary disclosure you are fully co-operating with HMRC so this would never happen to you.
In the event of a tax error, for whatever reason, voluntary disclosure is very much worthwhile.
Further details and how to go about it are available at: https://www.gov.uk/government/publications/hmrc-your-guide-to-making-a-disclosure
If you are worried about your tax situation and want advice, contact our specialist team on 01785 243276.
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