Voluntary Disclosure of Undeclared Income

Mistakes happen. The HMRC voluntary disclosure process allows individuals or businesses to come forward and correct tax errors, omissions or undeclared income before HMRC has initiated an inquiry, having discovered the error itself. It gives taxpayers the opportunity to pay what they owe, explain how the error occurred, and often receive lower penalties for doing so. Errors involving income tax, National Insurance contributions, corporation tax or capital gains tax can be reported, including the incorrect claiming of reliefs or deductions that should not have been claimed and failure to register for a relevant tax. However, VAT errors and non-disclosure follow a different process.

Unprompted or Prompted?

A disclosure by a taxpayer of an error is unprompted if HMRC has not discovered the error. HMRC’s guidance states that the measure of whether a disclosure is unprompted is objective. The most important point to remember is that such disclosure needs to be made before HMRC gets in touch, as if they make contact first, in terms of mitigating possible penalties.

Process of Disclosure

(a) Notification
The most commonly used route for disclosure is online via the digital disclosure service (DDS). At this stage, the form serves as a notification to HMRC that a disclosure will be made, and no details are required yet.

Once the business or individual has informed HMRC of their intention to disclose, HMRC will issue a unique disclosure reference number and payment reference number to use when paying the outstanding amount.

(b) Disclosure
Disclosure must be made within 90 days of the date that HMRC acknowledges the notification. The disclosure should include additional liabilities for each year only; resubmitting income that has already been declared is not necessary as tax has already been paid on that income.

Payment must be made at the same time as the disclosure. If payment cannot be made, then arrangements must be made with HMRC by the same 90-day deadline. It is important to note that only one disclosure form is allowed per person or company. For example, if a husband and wife have undisclosed income, they must each fill out separate disclosures, indicating their respective shares of income. If HMRC requires a disclosure for a company and a director, two separate disclosures must be submitted.

Follow-up Process

An acceptance letter should be issued within a couple of weeks following the disclosure (and payment). If any further action is needed, a letter will be sent to inform the taxpayer. If HMRC rejects the disclosure, they will send a letter explaining the reasons for the rejection.

How Many Years to Disclose?

The answer depends on the reason for non-disclosure and to how many years the non-disclosure relates. If the taxpayer took care to ensure the return was correct, but still failed to pay enough tax, a maximum of four years can be disclosed. If the underpayment is due to the taxpayer’s ‘carelessness’, the maximum period is six years. However, if HMRC deem the underpayment to be due to the taxpayer’s ‘deliberate’ behaviour where they have deliberately withheld or mislead HMRC about income, the time limit can be 20 years. Should HMRC have previously issued a notice to submit a return that remains outstanding, that return must be completed, and the information for those tax years must not be included on the disclosure form.

VAT Disclosure

Should the net error be less than £2,000 in total, it can be adjusted on a subsequent VAT return. If the error exceeds £2,000, the business must make a separate disclosure, making payment at the same time.

Non-Disclosure of Dividends

To avoid lengthy investigations, HMRC is conducting what they call ‘nudge campaigns’ when they are aware that shareholders have received dividends that have not been declared. These campaigns encourage taxpayers to review whether their returns are correct and complete. Affected taxpayers are instructed to use the online disclosure form.

Practical Tip

If HMRC determines that the error was deliberate and the amount of tax underdeclared exceeds £25,000, it may publish the taxpayer’s name on the list of deliberate defaulters. This could (for example) potentially impact any mortgage or finance applications. Overall, specialist advice on disclosures to HMRC is highly recommended.