Tax Disclosure - report overdue taxes to HMRC

You don't want to mess with HMRC. If you're aware that your taxes are incorrectly filed, contact HMRC before they issue an inquiry. You'll save yourself stress and money. A TaxOne client's story should encourage you to do so.

Bogdan is a professional builder. A man full of initiative, intelligent, and entrepreneurial. He came to Scotland 8 years ago, and after just one year, he decided to work for himself, mainly because, according to his friends, "starting work here as self-employed is a piece of cake compared to Poland. HMRC is a gentle lamb – nothing like the Polish ZUS."

Business was going very well. Orders were plentiful, but Bogdan, by nature, didn't trust authorities or financiers, so he kept the details of his business to himself. He did, however, file tax returns for HMRC (self assessments), but the English language was a problem for him, not to mention the professional HMRC jargon, which causes problems even for native Britons.

Bogdan's tax returns didn't reflect the truth; they were simply made up. The situation dragged on for years until 2020 finally arrived – a year of change. Bogdan converted his business into a Limited company. He read an article by Dawid on Emito.net about the penalties HMRC imposes on dishonest business owners – it turned out that this institution has effective mechanisms for checking self-employed individuals and small businesses. What's more!

Every three months, a blacklist of business owners deliberately avoiding taxes is updated, and Poles are also on it. The link for the curious is here: Current list of deliberate tax defaulters - GOV.UK.

HMRC Penalties for Undisclosed Income

Regarding inaccuracies in tax returns, HMRC operates on a "behaviour-based" system. Penalties range from zero to 100% of the tax due (Lost Revenue in HMRC terminology).

A 0% penalty applies when a client exercised reasonable care in filing their returns, but later discovered their error and reported it to HMRC. At the other end of the penalty scale are taxpayers who deliberately concealed their returns, hid this fact, and only accept the error after it has been challenged by HMRC. In such cases, the penalty can be as much as 100% of the amount due.

The Finance Act 2007 outlines four main categories of penalties for errors in UK income tax returns:

- Reasonable care and reporting the error upon discovery – no penalty;

- Careless, negligent conduct, but without deliberate intent - 0% - 30% of the amount due. If HMRC contacts you, a minimum of 15%;

- Deliberate inaccuracy - 20% to 70% of the amount due. If HMRC contacts you, a minimum of 35%;

- Deliberate and concealed inaccuracy, hindering HMRC's work - 30% - 100% of the amount due. If HMRC issues a demand for payment, a minimum of 70%.

Interest reflecting inflation must be added to each of these amounts.

Slightly different rates apply for undeclared overseas income (which can be up to 200%). You can read about this in the next article.

Disclosing income to HMRC, also known as Tax Disclosure

Bogdan came to our office at the beginning of 2020. We analyzed his situation and agreed that we wouldn't wait for the infamous grey envelope from HMRC with a demand for payment. We took matters into our own hands and wrote a letter – an offer – to HMRC, explaining that Bogdan had unknowingly misfiled his taxes but was ready to face the consequences and repay the debt.

Remember, if you take the initiative yourself, HMRC will look upon you more favorably.

This was also the case here.

In the letter to HMRC, we referred to specific tax regulations, his carelessness, Bogdan's poor English, and proposed that HMRC allow him to repay the debt with 0% interest.

After several months, Bogdan received a written reply, which turned out to be a pleasant surprise.

HMRC not only offered 0% interest and installment payments for the debt but also informed him that the debt for one year had become time-barred!

The decision was justified by the fact that Bogdan had declared his income every year but was unaware he was doing it incorrectly, and he had voluntarily approached the tax office. Additionally, the fact that the office took several months to respond to our correspondence led to the debt for one year becoming time-barred.

Procedure Tax Disclosure

We began the process by calculating how many years and what amount Bogdan owed HMRC. We then informed the office. It happens that a debt becomes time-barred, but how far back we will be audited depends on our conduct.

We calculated the income for the previous few years, the due income tax and national insurance, adding interest and a 30% penalty (the maximum amount), or 0% in the best-case scenario.

The summary showed an amount of £6,420 owed to HMRC Income Tax, National Insurance, Interests and Penalties.

The next step was writing a letter Tax Disclosure to HMRC, in which we included a proposal for debt repayment. The appropriate wording of the letter and knowledge of regulations make it easier for the office to make a decision. You have 3 months from reporting to the office, while HMRC has another 3 months to Tax Disclosure to answer.

So, it can be assumed that the timeframe for resolving similar cases is approximately 6 months.

Each case should be analyzed individually. As seen in Bogdan's example and with those on the "blacklist," knowing the regulations and acting appropriately can save a lot – both money and stress.
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