HMRC tax disclosures explained – your guide to staying compliant

Let’s face it, tax obligations can be daunting. Whether you are self employed, own your own business or rent out a few properties, it’s easy to get lost in the process.

We are only human. Sometimes mistakes can happen, or our personal life takes priority over leaving your tax responsibilities by the wayside. This, however, could leave you with undeclared income and a constant worry that HMRC may come knocking, making everything even more stressful.

Fortunately, HMRC allows opportunities to rectify any mistakes through something called a voluntary disclosure.  Liam Coulter, Tax Director at Wilson Nesbitt explains all you need to know about your options and what it means for you as a taxpayer. 

What Is a voluntary disclosure to HMRC?

To put it simply, a HMRC voluntary disclosure is a way for businesses and individuals to come forward and report undeclared income or errors so they can bring their tax position up to date.  This needs to be done before HMRC gets in touch with you. If they contact you first, this can result in increased penalties.

Voluntary disclosures are typically made through the Digital Disclosure Service (DDS) which is an online platform designed to make the disclosure process as easy as possible. Using the DDS, you can contact HMRC to explain to them what is wrong , pay any additional tax owed (including interest!) and any penalties if you have them. 

How HMRC detects undeclared income

With every year that passes, HMRC gains access to more and more data – including information from Companies House, the Land Registry, the Benefits Agency, UK banks, eBay, and even offshore banks, thanks to the Common Reporting Standard (CRS).

In short, it’s becoming increasingly difficult to hide from your responsibilities. HMRC even has a specially trained team that collates and analyses all the data to identify possible errors and omissions on tax returns.

For example, if you’ve sold a second property, HMRC can quickly obtain this information from the Land Registry and check whether you’ve submitted a tax return to declare rental income or report any potential capital gain on the sale.

What we are saying is, act promptly and responsibly before you get caught off guard by a call from the tax office.

When can HMRC launch a tax investigation?

HMRC has the legal right to inspect your books and records at any time. Under Self Assessment legislation, they can investigate taxpayers entirely at random.

They don’t need to provide a reason for launching an investigation – there doesn’t even need to be any suspicion. Sometimes, it’s simply the luck of the draw.

A full investigation is likely to involve HMRC reviewing all of your financial affairs. However, instead of a full enquiry, they may choose to carry out an aspect enquiry, which focuses on one or more specific areas of the return.

This could include, for example, undeclared rental income, discrepancies in reported income, or unusually high expenses.

If you are subject to a full investigation, you can expect the process to last around 19 months. Professional fees for dealing with an HMRC investigation often exceed £5,000.

 What happens if HMRC contacts you first?

If HMRC successfully finds something wrong with your tax affairs, they can charge penalties of up to 100% of the tax that has been lost – rising to as much as 300% for offshore matters.

In either case, this is likely to be significantly more than the penalties you would face if you had made a voluntary disclosure.

And the worst-case scenario? HMRC can push for a criminal prosecution if they deem the case serious enough.

What taxes can you disclose through the Digital Disclosure Service? 

Businesses and individuals can use the DDS to make a voluntary disclosure about: 

• Corporation Tax 
• Income Tax 
• National Insurance Contributions 
• Capital Gains Tax 

Step-by-Step: Making a voluntary disclosure to HMRC

HMRC accepts many disclosures online, but you should always seek specialist advice on which scheme is most suitable for your circumstances before contacting them.

As part of the disclosure, you are required to self-assess your own exposure to tax, interest, and penalties.

The process involves:

• Notifying HMRC that you wish to make a voluntary disclosure
  
• Receiving a Unique Disclosure Reference Number (DRN) and Payment Reference Number (PRN) from HMRC
  
• Explaining what went wrong and why omissions or mistakes were made
  
• Calculating the unpaid tax, interest, and penalties
  
• Submitting the disclosure and making payment within 90 days allowing HMRC to review the voluntary disclosure which they will either accept or make a request for further information until the disclosure is agreed and finalised
  
• Reaching a formal agreement with HMRC

How many years of tax can HMRC look back on?

How many years tax you need to pay depends on why each mistake occurred – HMRC generally has 4, 6 and 20 year time limits  to assess tax depending on what caused the mistake. For disclosures relating to offshore matters, you may need to go back as far as 12 years. 

Common Disclosure Mistakes to Avoid

Registering for the correct disclosure scheme

It’s important to register for the most appropriate facility based on the nature and extent of the mistakes being corrected. Using the wrong scheme can complicate or invalidate the disclosure.

Missing deadlines

All disclosure processes involve strict deadlines. Missing them – without a valid reason – can prompt HMRC to take matters into their own hands by opening extensive compliance checks. 

These checks may involve requests for information and documents and can take years to resolve. Missed deadlines also reduce the likelihood of achieving maximum penalty reductions, ultimately increasing the total amount payable.

Not disclosing everything

The disclosure must be complete. If any non-compliance is omitted – including tax arising from subsequent decisions linked to the original error – the submission will be considered incomplete. This increases the risk of HMRC asking detailed follow-up questions and potentially investigating your entire tax history to determine the full extent of the issue.

Why acting early matters

Voluntary disclosures are an important way to correct mistakes, bring your tax affairs up to date, and give you peace of mind.

Care and experience are essential when selecting the most appropriate disclosure method, avoiding potential pitfalls, and reaching a mutually acceptable agreement with HMRC.

Our experienced tax team at Wilson Nesbitt is here to help ease the stress of making a disclosure. We’ll guide you through every stage of the process, right up until an agreement is reached with HMRC.

If you need our help, enquire today by calling us on 0800 840 9293.