Disclosures and Enquiries

Disclosures and Enquiries

The UK tax system works on the basis of self-assessment, meaning that taxpayers calculate the tax they owe each year based on the income, gains and profits declared to HMRC.

Despite a taxpayer’s best efforts, mistakes happen, and it may be that the incorrect amount of tax has been declared on a tax return. For example, assets may have been inherited or received as a gift and the income arising on those assets was forgotten, or arrivers to the UK may not have understood the scope of UK tax on overseas income and gains.

Tax Innovations helps individuals make voluntary disclosures and respond to HMRC enquiries. We establish the correct tax position, explain how the error arose and work to minimise any penalties, with the records and supporting explanation needed to justify the outcome.

Correcting a tax return

There is scope for taxpayers to amend their return within 12 months of the original filing deadline, or to make disclosure to HMRC of any underpayments of tax if the amendment window has passed. Taxpayers can also claim relief for overpaid tax, subject to the conditions for overpayment relief, normally within four years of the end of the relevant tax year.

HMRC also have scope to investigate a taxpayer’s return. This may be because other information they hold suggests the tax reported is incorrect, but HMRC also make a certain number of random checks each year – a tax investigation does not necessarily mean there is anything wrong.

HMRC enquiry support

If HMRC open an investigation into your return, then Tax Innovations can assist with answering their queries and ensuring the correct tax position is arrived at. We can help whether or not we prepared the original return.

An enquiry may concern a single entry or involve a detailed examination of complex affairs. We help you provide the information needed to answer HMRC’s questions, checking that their requests are relevant and within their powers. Where HMRC’s interpretation of the facts or tax treatment is open to challenge, we explain why and put forward the supporting evidence.

The circumstances behind an error matter. We will examine whether HMRC’s view of your behaviour is justified, as this can affect both the penalties and how far back they can assess tax.

What will the error cost? HMRC penalties for undeclared income

Offshore income and gains

Where the inaccuracy involves an offshore matter, the penalties may be increased depending on which category the territory of the offshore matter falls within:

• Category 1 includes the UK, and has the penalty ranges as set out above.
• Category 2 has penalty ranges increased by 50% from those above (i.e. up to 150% of the tax underpaid).
• Category 3 has penalty ranges doubled from those above (i.e. up to 200% of the tax underpaid).

The applicable rules depend on the tax and years involved. Certain historic offshore failures can fall within the ‘Failure to Correct’ rules, where the standard penalty is 200% of the tax involved, normally reducible to no lower than 100%.

Are there time limits?

What should I do if my tax was underdeclared?

We would always recommend that, on discovering an underpayment of tax, full disclosure is made to HMRC in order to minimise any penalties.

Waiting to see if HMRC will notice, resulting in prompted disclosure, can result in substantially higher penalties as well as increased interest.

For genuine mistakes where you have tried to be accurate, and have taken reasonable care, the usual outcome is that you have to pay the tax and late payment interest. Paying the outstanding tax promptly limits further interest.

Even if HMRC deem you to have been careless, if you make unprompted disclosure and give HMRC full assistance, then it is still possible that you will have no penalties. This depends on the rules applying to your disclosure, including any offshore element and the time taken to put matters right.

How to make a voluntary disclosure to HMRC

The first step is to establish what was omitted, which tax years are affected and whether a return can still be amended. If a separate disclosure is needed, the appropriate route depends on the income or gains involved and whether HMRC have already contacted you.

Where HMRC’s Digital Disclosure Service is appropriate, you notify HMRC first, then calculate the tax, interest and penalties and submit the disclosure. The usual deadline is 90 days from HMRC’s acknowledgement of the notification, with payment or agreed payment arrangements required by that deadline.

If you need to make a disclosure or Overpayment Relief claim to HMRC, then Tax Innovations will work with you to ensure your tax is correctly calculated and full details are provided to HMRC in order to expedite repayments and to minimise the cost of any historic errors.

We also explain the circumstances behind the omission and the steps you have taken to correct it, so that HMRC can properly assess the disclosure and any penalty reduction.

Tax investigation fee protection

We can also arrange tax investigation protection insurance for returns we prepare – for a small additional fee, our fees for dealing with an investigation are covered, subject to the policy’s terms, limits and exclusions. This cover needs to be arranged in advance.

If you have discovered income or gains that were not declared, or received an enquiry letter from HMRC, contact us to discuss what needs to be done and how we can help.