The Disclosure Quandary – To disclose or not to disclose

What is a HMRC Disclosure?

The HMRC disclosure service is designed to allow you to bring your tax affairs up to date where mistakes have been made or things have been missed in the past.

A disclosure can be voluntary or prompted. A disclosure is unprompted if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy, under-assessment, failure to notify, deliberate withholding of information or wrongdoing. Otherwise it is prompted.

To disclose or not to disclose

People decide to correct their tax affairs for a number of reasons – a pang of guilt, a letter from HMRC, the sudden realisation that they’d made an error or omission, or they need to represent their finances to a mortgage lender.

Whatever the motivation, the prospect of making a disclosure can be daunting if you’re not in the habit of communicating with HMRC and worry they’ll be unkind.  HMRC exist to collect the correct amount of tax from UK taxpayers and, under their Charter, they are required to treat everyone fairly – assuming innocence unless they have “good reason” to think otherwise.

That being said, anyone who’s had the pleasure of calling HMRC recently will agree that the delays in communication do nothing to allay their anxieties.

HMRC aside, there are very few people outside the industry (and even some within if they’ve not had to manage an enquiry or disclosure) who know what is involved.

The period of disclosure depends not only on the behaviour of the taxpayer, but also whether they have made an error in a historic tax return, or simply failed to notify HMRC.

HMRC have “strict” (less so after the judgement in Tooth) time limits within which to open an enquiry or raise an assessment.  Taxpayers are therefore due some element of protection from past years (the line of thinking presumably being that HMRC have had plenty of time to get their ship in order.  I make no comment).

Where a person has “failed to notify” HMRC, the period for which HMRC can raise assessments is 20 years unless the taxpayer has a (qualifying) reasonable excuse and the notification was made within a reasonable time period after that excuse cased.  Ignorance of the law is not a reasonable excuse and HMRC have been known to take an unsympathetic view on what qualifies.

HMRC have twelve months from the date of submission to correct an obvious error or open an enquiry into a return.  This time limit is extended if the return is submitted late.

If HMRC do identify an error that leads them to suspect previous returns may be similarly incorrect, they may raise an assessment for additional tax they believe is due.

They have four years to do this if the error occurred despite the taxpayer taking “reasonable care” over their tax affairs.  Helpfully, “reasonable care” is not defined in legislation but it is generally accepted that it means “actions taken by a reasonable person in the circumstances taking into account their knowledge and experience”.

Where the taxpayer failed to take reasonable care (they were “careless”) the period is extended to six years from the end of the relevant tax year.

Where HMRC are successful in arguing that the behaviour was deliberate, they can look back over 20 years.  The important thing to note here is that the burden of proof in regards whether an act is deliberate or not lies with HMRC.  However, their argument is that any errors covering a period in excess of six years would be deliberate as the taxpayer is considered to have had sufficient time to ensure compliance.

Deliberate acts which have lead to an underpayment of tax are considered fraudulent.  As such any individual in this position should consider whether they actively engage with HMRC to assist the calculation of tax, interest, and penalties.  If the tax at stake is potentially significant, the taxpayer “should have known better” (typically finance professionals), or the arrangements are complex, then the taxpayer may wish to consider a request for inclusion in HMRC’s Contractual Disclosure Facility (“CDF”).  Fraud is a criminal activity, and any person acting fraudulently risks prosecution from HMRC, provided a taxpayer engages with HMRC and makes no material errors in their (verbal or written) statements then they are protected from prosecution under the CDF.

This is not to say that any taxpayer not at risk of being found to be committing fraud shouldn’t consider actively engaging with HMRC by making a disclosure.  Making a disclosure goes some way to reduce the potential penalty exposure with reductions given for telling HMRC about the error, helping HMRC calculate the tax liability, and giving them access to records.  HMRC are famously understaffed and with over 400 employees striking over pay and working conditions in May and June this year, any assistance given would be greatly received.

That being said, any taxpayer or their agent should be mindful that any information being requested by HMRC is reasonably required to assist them in determining the correct amount of tax due.  In the past we have been engaged to assist where an enquiry has been extended following the provision of information relating to connected parties.  This is a fine line to tread as failing to provide information when reasonably required can lead HMRC to impose higher penalties for concealing information from them.

If in doubt you should speak with a suitably qualified and experienced advisor as it’s far easier to do this before things get out of hand! Contact a member of our team here!

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About the Author Cate Jackson

Areas of expertise:

• Employment status
• Residency Status
• Property Tax

Cate joined Edge in 2014 and subsequently became a qualified member of the Association of Tax Technicians and qualified as a Chartered Tax Adviser in 2019. Cate manages enquiries, tax compliance and tax health checks.