We all make mistakes, and when it comes to taxes, those mistakes can have serious consequences. Whether you’ve accidentally overlooked some income or deliberately avoided paying taxes by underreporting income, overstating deductions, or not filing at all, it’s crucial to address the issue proactively. Ignoring tax issues can lead to penalties, interest, and even legal action by HMRC. It’s important to seek professional advice and take the necessary steps to resolve any tax discrepancies as soon as possible.

Why Make a Voluntary Disclosure?

The simple answer is that it’s always better to come forward voluntarily than to wait for HMRC to discover the discrepancy. By taking the initiative, you can often reduce penalties and avoid more severe consequences, such as criminal prosecution. Moreover, it’s the right thing to do, and it can provide peace of mind knowing that your tax affairs are in order.

The Digital Disclosure Service

The Digital Disclosure Service (DDS) is the main platform used by individuals and companies to report any undisclosed income or gains to HMRC. It is designed to cover a wide spectrum of taxes, including income tax, capital gains tax, inheritance tax, corporation tax, National Insurance contributions, and the Annual Tax on Enveloped Dwellings (ATED). However, it’s important to note that the DDS cannot be utilized to rectify VAT-related errors.

The process of using the Digital Disclosure Service involves several steps:

• Notification: First, you need to inform HMRC of your intention to make a disclosure. You don’t need to provide details of the undeclared income or gains at this stage. After notifying HMRC, you’ll receive a unique Disclosure Reference Number (DRN) and a payment reference number.
• Disclosure: Once you have your DRN, you have 90 days to make your full disclosure. This is where you provide all the details of the undeclared income or gains.
• Calculation: You’ll need to calculate the amount of tax owed, including any interest and penalties. HMRC provides an online calculator to help with this, but it’s often advisable to seek professional advice to ensure accuracy.
• Offer: As part of your disclosure, you’ll need to make an offer to HMRC to settle the outstanding amount.
• Payment: You should make the payment when you submit your disclosure using the payment reference number provided by HMRC.

The number of years your disclosure needs to cover depends on the reason for the error. If it was due to reasonable care, HMRC can go back four years. For careless errors, it’s six years, and for deliberate evasion, HMRC can look back 20 years.

If HMRC is satisfied with your disclosure, they will accept it and send you a letter of acceptance. This, along with your offer letter, forms a binding contract. However, if the disclosure is found to be incorrect or incomplete, or if HMRC has already opened an enquiry into your affairs, they may not accept it.

The Contractual Disclosure Facility

For cases of deliberate tax evasion, HMRC offers the Contractual Disclosure Facility (CDF). This is specifically for admitting tax fraud and should not be used for accidental errors or carelessness. If HMRC suspects you of tax fraud, they may offer you a contract through the CDF.

The CDF provides a structured way to make a full disclosure of tax fraud. It offers certain guarantees, such as immunity from prosecution for the tax offences you disclose, provided you make a full and accurate disclosure.

Specific Campaigns

From time to time, HMRC runs targeted campaigns focused on particular types of undeclared income. These campaigns often offer more favourable terms for those who come forward voluntarily. Information about current campaigns can be found on the Gov.uk website.

For example, specific forms might be required for declaring undisclosed income from certain business activities or for reporting offshore income and gains.

Making Your Disclosure: Key Considerations

Be thorough and honest: It’s crucial to be comprehensive and truthful when making your disclosure. Partial or misleading disclosures can lead to severe consequences.

Seek professional advice: Tax laws are complex, and calculating what you owe can be challenging. A tax professional can help ensure your disclosure is accurate and complete.

Act promptly: Once you realize you need to make a disclosure, don’t delay. The sooner you act, the better the outcome is likely to be.

Prepare for the financial impact: You’ll need to pay the tax owed, plus interest and potential penalties. Consider how you’ll manage this financially.

Understand the implications: A disclosure can affect your tax affairs in the future. Make sure you understand how to stay compliant.

Keep records: Maintain detailed records of your disclosure process, including all communications with HMRC.

The Aftermath of Disclosure

After making your disclosure, HMRC may carry out further checks before accepting it. If they accept your disclosure, you’ll receive a letter of acceptance, forming a binding contract with your offer letter. However, if HMRC finds your disclosure to be incorrect or incomplete, they may not accept it, potentially resulting in higher penalties or a criminal investigation in cases of fraud. Once your disclosure is accepted and settled, it’s crucial to ensure you stay compliant with your tax obligations going forward. This might involve setting up new record-keeping systems or seeking regular professional advice. Making a voluntary disclosure to HMRC about undeclared income or gains can help minimize penalties and avoid more serious consequences. Remember, the key is to be proactive, honest, and thorough in your disclosure. While the process can be complex, resources, including HMRC’s own guidance and oue professional tax advisors, are available to help. Ultimately, making a voluntary disclosure is about more than just settling your tax affairs. It’s about peace of mind and the confidence of knowing you’re operating within the law and contributing to a fair and functioning tax system.