Should you make a Disclosure to HMRC if you have outstanding UK tax issues?

The UK tax system is one of the most complicated in the world. Not surprisingly, taxpayers do get it wrong from time to time and need to put things right. However, should the Contractual Disclosure Facility (CDF) be used, or should you simply telephone HMRC? And then say what exactly to HMRC?

For many taxpayers, being prosecuted is the worst imaginable outcome. Therefore, everything I do is focused from the outset on getting HMRC to agree that it is a civil matter (that results in a financial Settlement) rather than a criminal matter (that goes to court). This is HMRC’s decision, not a taxpayer's decision or your decision. But what is said and how it is said can greatly influence HMRC in making their decision.

When HMRC is made aware of something for the first time, it is referred to as a Voluntary Disclosure or an unprompted Disclosure. It follows that making an unprompted disclosure will be looked upon more favourably than if it is prompted Disclosure in response to any contact from HMRC.

Things often get worse before they get better

A Disclosure is not simply correcting an error or mistake. A Disclosure is required to:

• Correct something that was done deliberately and knowingly;
• That may relate to more than one tax year;
• That may relate to more than one tax and more than one taxpayer;
• Trigger more tax to pay.

Either way, as the tax is paid late, interest will also be due. The amount of tax due is a calculation, as is the amount of interest. Neither the tax nor the interest is negotiable as tax rates and interest rates are fixed.

Under a civil Settlement, there may also be a financial penalty. Penalties vary according to the taxpayer’s behaviour.

The initial aims are firstly to get HMRC to accept that it is a civil matter and secondly to obtain the maximum reduction in penalties. It is a common misconception that penalties start at zero and increase when, in fact, they start at the maximum (between 100% and 200% of the tax) and decrease.

There are various channels through which a Disclosure can be made in seeking a civil Settlement. What is said and how it is said can be crucial in getting the right outcome for the taxpayer.

When to use the Contractual Disclosure Facility (CDF)

The CDF is to be used where the taxpayer has acted deliberately, not by accident or as a result of a misunderstanding of the rules or legislation. The taxpayer is aware that an incorrect amount of tax is being paid. HMRC may consider this to be fraud, in which case the CDF should be used.

The CDF is a process that follows a specific pathway and can take weeks, months, or even years to be concluded. Matters tend not to be resolved online, and a Settlement of the tax, interest and penalty is formulated over time after several meetings.

On some occasions, not only has the taxpayer done something deliberately, but it has also been concealed. This is still fraud but at a higher level and specialist advice is needed in order it to be kept as a civil matter, not a criminal matter.

When to use the Worldwide Disclosure Facility (WDF)

By contrast, the WDF is often used where there is no fraud, but for example, a source of income or gains has been omitted and not taxed from outside the UK. This could involve receiving a pension from an overseas employer that has been overlooked because it was taxed in the country of origin. It may be at the wrong tax rate, though.

The WDF is an online portal in which a Settlement computation is submitted to HMRC.