Option B: Disclosing income direct to HMRC
Undeclared income guide
Disclosing income via an adviser?
Where you have substantial undeclared trading income over many years or significant undeclared taxable gains or investment income you may wish to take the first steps. This is particularly so if there is no HMRC campaign disclosure facility for the type of income or gains you have made.
In such cases you should seek professional help and then approach HMRC. HMRC will treat the case as a tax enquiry. Cases which involve fraud or false accounting or other irregularities will need specialist professional advice.
After seeking professional help, you may wish to use the HMRC Voluntary Disclosure Helpline.
What happens next?
At HMRC, your case should be passed to an inspector who is trained to deal with tax enquiries. The inspector will write back to ask for more information and documents, and/or to suggest a meeting to discuss the case. The inspector will also normally want tax returns completed for all the years concerned.
From this point, your case will probably follow a similar course to an enquiry under self assessment. For more information on this, see sections 10 and 11 in our Tax Return guide.
Will I be prosecuted?
If you have undeclared income, you have broken the law and, from HMRC’s point of view, are guilty of tax evasion. This means that HMRC can prosecute, but will normally only do so in cases which involve fraud or false accounting.
HM Revenue and Customs does prosecute people for failing to declare their income, but there are relatively few prosecutions every year.
- You are unlikely to be prosecuted if you voluntarily disclose your failure to HM Revenue and Customs before they have any suspicion of wrongdoing.
- You are unlikely to be prosecuted if you are guilty only of failing to declare your income. HMRC concentrates on cases where there has been further wrongdoing, for example the creation of fraudulent documents or the deposit of profits in foreign bank accounts.
- You are less likely to be prosecuted if the tax evaded is small. Most prosecutions involve unpaid tax of over £50,000.
However, if you are prosecuted you could face a prison sentence. So if there is any suggestion from HM Revenue and Customs that it might take criminal proceedings, you should seek legal advice immediately.
How will the matter end?
In almost every case HM Revenue and Customs will be seeking a financial settlement, which will be the end of the matter (although you may expect the tax office to take a closer interest in your tax affairs in future years).
A financial settlement is an agreement between you and the tax office that you will pay HM Revenue and Customs a certain amount to cover the unpaid tax plus interest and some penalties.
By law, the penalties may be equal to the amount of unpaid tax. The level of penalty depends on the taxpayer’s behaviour. Attempts to mislead HMRC will result in higher penalties.
In practice HM Revenue and Customs will normally provide a calculation of the tax and interest due, and indicate the level of penalty that it would expect. You would then be ‘invited’ to make an offer to agree to pay the total sum. There is not usually any point in offering less than the amount indicated by HM Revenue and Customs.
Once the amount of the payment has been agreed, HM Revenue and Customs will draft a letter for you to sign, in which you offer to pay this figure, by a specified date(s), in full settlement of all matters.
The inspector may also want you to sign a letter stating that you have made a complete disclosure of all your income and gains. This should be taken very seriously. If it turns out later that you have not told the whole truth, you could face prosecution.
If you cannot reach agreement with HMRC you can take the case to the Tax Tribunals. The Tax Tribunal will make a conclusive decision as to the level of income to be taxed – see
http://www.justice.gov.uk/tribunals/tax for details.
Once you have signed the agreement there is no going back. Only sign is you are sure this is the best solution
How many years will HM Revenue and Customs go back?
The time limits are:
- 4 years in all circumstances where the taxpayer has taken reasonable care to submit a correct return
- 6 years in all circumstances where the taxpayer has failed to take reasonable care
- 20 years where the taxpayer has failed to notify liability, or has deliberately understated a tax liability