What is HMRC voluntary disclosure and should you do it?

When it comes to handling your finances, honesty is the best policy. Whether you're self-employed or run a business, managing your taxes can be stressful and occasionally mistakes do happen unintentionally. No matter how long you've been declaring your income there's always a possibility that errors can occur but did you know that there's an opportunity to rectify your mistakes?

The idea of doing the wrong thing in your tax return may be worrying, but as long as you declare your unpaid tax to HMRC (also known as voluntary disclosure) you should remain penalty-free.

Want to keep your finances in check? Here's all you need to know about voluntary disclosure and what it means for you as a taxpayer.

What is voluntary disclosure?

When you submit your income information to HMRC, this should be completely transparent. HMRC believes that its customers want to pay the correct amount of tax, however, in some cases, errors will occur resulting in companies and individuals paying less than they actually owe.

Voluntary disclosure provides those who are not paying the correct amount of tax an opportunity to rectify their declaration and bring their payments up to date. The DDS (digital disclosure service) allows individuals and companies to rectify any discrepancies with their Income Tax, Capital Gains Tax, Corporation Tax or National Insurance contributions. Any additional tax owed will then need to be calculated and paid within 90 days.

What is covered under voluntary disclosure?

The DDS can be used by individuals and companies who have a disclosure to make about:

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

For example, if you are a business that hasn't declared all of its income, you're a prime candidate for voluntary disclosure to HMRC.

When is voluntary disclosure required?

HMRC requires financial information from individuals and organisations to ensure that the correct tax is being paid in line with current legislation. If an error has been made that has resulted in the incorrect amount of tax being paid, this must be disclosed via voluntary disclosure.

Why is voluntary disclosure important?

If you know you made a mistake with your taxes or deliberately changed important information, the worst thing you can do is put your head in the sand. More often than not, HMRC will see the discrepancies later down the line as their access to third-party sources continues to improve and this could result in serious penalties for you and your business.

On the other hand, HMRC deal with voluntary cases in a more lenient fashion than when they are discovered through other means. When you are investigated for tax evasion, depending on the range in seriousness, penalties and even prosecution are two of the main consequences of getting caught whereas this can all be avoided through voluntary disclosure. 

Top reasons for voluntary disclosure include:

  • You may receive criminal prosecution and heavy fines if you are caught.
  • You will have more business protection.
  • It doesn't matter why your tax information is wrong, it will work out better to come clean.
  • Tax evasion will not create the right impression of your business.

The most serious cases of tax evasion could be considered suitable for a criminal prosecution, but even if the taxpayer is investigated under civil powers, the penalties levied can be as much as 100% of any tax lost.

How do you make a disclosure and when should you seek expert advice?

So, you want to make a voluntary disclosure? As soon as you know that tax is owed or you have concerns around unpaid taxes you must get in contact with HMRC.

The process is fairly straightforward, to make a disclosure you should:

  • Notify HMRC that you want to make a disclosure.
  • Provide all information regarding income and tax duties that were not reported.
  • Make a formal offer and reach an agreement with HMRC.
  • Pay what you owe.

Alternatively, for those who deliberately failed to pay the correct tax in the past, a Contractual Disclosure Facility (CDF) form, also called Code of Practice 9, could be the best option. Making a full disclosure through the CDF will protect you from criminal investigations. Doing so may also help you avoid having your details published on the government's website for a year. However, in cases where there is suspicion that tax avoidance has been committed intentionally and no CDF has been supplied, HMRC may decide to escalate matters.

If you need help managing your taxes, Keith Graham Chartered Accountants guide you through the voluntary disclosure process. We will look through your accounts and provide up-to-date and accurate information for HMRC. Get in touch with us today for more information.