Time to confess? Making a voluntary disclosure

With more sophisticated databases, computer systems and sharing of information, it is becoming ever more difficult for taxpayers to keep things concealed from HMRC.

If a taxpayer knows they have something to disclose to HMRC, we advise them to make a voluntary disclosure sooner rather than later.

Non-compliance or not disclosing your financial affairs can result in some very tough penalties, so it is always much better to be upfront and frank about your matters or risk getting caught out.

What is a voluntary disclosure?

A voluntary disclosure is when you proactively contact HMRC if you think your tax affairs are wrong or that you’ve not paid the correct amount of tax.

Telling HMRC about the issue yourself, rather than waiting for them to contact you is a much better approach.

Penalties for voluntary disclosure

Penalty rates for voluntary disclosures are much lower than those for prompted disclosures (a disclosure after HMRC has contacted you about something they think is incorrect).

Fines can range from 0% up to 300% of the underpaid tax, depending on the taxpayer’s behaviour and the reason for non-compliance.

In serious cases of undisclosed tax or income, HMRC may also consider starting a criminal investigation.

How do you make a voluntary disclosure?

There are various ways in which disclosures can be made to HMRC and choosing the right one for your circumstances is important.

HMRC is currently running a specific Let Property campaign for disclosures of undeclared rental income, but other disclosures can be made via the Contractual Disclosure Facility (CDF) or the Digital Disclosure Service (DDS).

If the disclosure involves income, assets of gains outside of the UK, then you would need to use the Worldwide Disclosure Facility (WDF).

Closing the tax gap

For the 2020/21 tax year, HMRC published data showing that the tax gap is estimated to be £32 billion, which is 5.1% of total theoretical tax liabilities. The tax gap is the difference between the tax which the government should in theory collect, and the amount that HMRC has actually collected.

The biggest share of the total tax gap is for income tax, National Insurance, and Capital Gains Tax (CGT). In 2020/21 this amounted £12.7 billion. This is closely followed by VAT at £9 billion.

Reviewing the tax gap allows HMRC to understand how non-compliance occurs and how it can address the causes. Over recent years, HMRC has started to use a wide range of computer systems to help process and analyse huge volumes of data to try and reduce the tax gap.

Connect

The main computer system used by HMRC is called ‘Connect’ and this has been in use since 2010. Over 90% of tax enquiries are now triggered by information and analysis generated by Connect.

Connect can obtain data from many databases to analyse and cross check with information supplied to HMRC by taxpayers.

This includes information from third parties such as banks and pension providers, and access to Government agencies such as Land Registry, Companies House etc.

Getting the right advice

While you can make a disclosure direct to HMRC yourself, using an experienced adviser to guide you through the process is recommended. Working out the amount of tax due, how many years of tax must be paid, and what the penalties may be is not straightforward.

If you would like to discuss making a voluntary disclosure to HMRC then please do get in touch. We have a wealth of experience in making voluntary disclosures to HMRC and liaising with them over penalties to try and mitigate these as far as possible.

We are also happy to assist with disclosures where you have been contacted by HMRC and need a helping hand to guide you through responding to them.

While making the first move towards bringing your tax affairs up to date can be daunting, making that confession is certain to provide some relief and peace of mind going forward.