Where an individual (including a personal representative or executor of a deceased taxpayer), trustee or company needs to make a disclosure to HMRC of historic unpaid tax liabilities then, other than cases which fall under the exceptions listed below, the appropriate process to use is the Digital Disclosure Service (DDS).
The DDS wouldn’t be appropriate where:
- The time limit to amend a return is still open.
- Returns have been issued and are still in time to be filed.
- The taxpayer does not qualify for an existing HMRC campaign, such as the Worldwide Disclosure Facility (WDF) or Let Property Campaign (LPC).
- The matter arises from the taxpayer’s “deliberate” behaviour and there is a concern HMRC may consider the case appropriate for criminal prosecution.
Where the error or omission arises from the taxpayer’s deliberate behaviour then consideration should be given to Code of Practice 9 (COP9) and the Contractual Disclosure Facility CDF. COP9 is relevant where HMRC either suspect, or the individual chooses to voluntarily disclose, that their deliberate action or inaction has led to an insufficient amount of tax being paid. The main benefit of COP9 for taxpayers is that provided a full disclosure is made, HMRC will guarantee the individual receives immunity from criminal prosecution.
How does the digital disclosure service work?
Where COP9 isn’t appropriate then the DDS offers a straightforward way for the taxpayer to bring their tax affairs up to date. An online notification is made to HMRC informing them of an intention to make a disclosure under the DDS. On receipt of the letter confirming the taxpayer’s acceptance into the DDS, HMRC allow 90 days for the taxpayer, or their advisor, to calculate the tax, interest and potential penalties due. Payment of the liabilities will also be due at the time the disclosure is submitted but if this isn’t possible, then payment terms can be agreed with HMRC in certain circumstances.
Menzies’ approach is to also prepare and submit a separate disclosure letter to HMRC to explain the background and make representations on the taxpayer’s behalf.
The tax calculations can potentially go back up to 20 years depending on the circumstances. The nature of the underlying “tax offence”, i.e. whether it is an error in a filed return or whether the taxpayer has failed to notify HMRC of their liability to tax, as well as the “behaviours giving rise to the loss of tax”, will determine how many years to include in the disclosure.
When can the digital disclosure service be used?
The DDS can be used to disclose underpayments of income tax, capital gains tax, inheritance tax, corporation tax, national insurance (NIC) and the annual tax for enveloped dwellings (ATED).
The DDS cannot be used to disclose employer liabilities (such as an underpayment of PAYE) or Value Added Tax (VAT) and alternative options will need to be considered.
What happens if you do nothing?
If you need to make a disclosure and choose not to come forward, then you can expect HMRC to open an enquiry into your tax affairs. The downsides of adopting this approach include:
- Not retaining control over the enquiry and facing uncertainty that can last many months or years.
- Higher financial penalties.
- The risk that HMRC will start focusing on other aspects of your tax affairs, even if there are no other issues to disclose.
If you would like to discuss the voluntary disclosures, Digital Disclosure Service or Code of Practice 9, please contact Menzies’ Tax Disputes and Disclosures team on our free confidential helpline.