Telling HMRC about mistakes voluntarily, without being prompted, is known as making a ‘voluntary disclosure’. This is defined as telling HMRC at a time when the taxpayer has no reason to believe that HMRC has discovered (or is about to discover) non-compliance.

The test for whether a disclosure is unprompted or prompted is based on the specific facts and circumstances of the case, not merely the belief that it was made voluntarily or in response to HMRC’s actions.

For instance, a national campaign targeting a particular area of the trading community that HMRC is focusing on would not automatically classify a disclosure as prompted. However, a disclosure would be considered prompted if it occurred after one of the following events:

• HMRC contacted the individual to inform them that a compliance check of their return was going to take place
• HMRC arranged to visit the individual’s premises to examine identified risks
• HMRC informed them that the Valuation Office Agency had been asked to assess the value of a property in an inheritance tax return
• HMRC received information through an automatic exchange of information agreement that would, once reviewed, lead to the discovery of the issue being disclosed. This does not apply if the individual had no reason to believe the information had been provided to HMRC.

A disclosure made during an ongoing compliance check is generally considered prompted unless it pertains to a matter the compliance officer has not yet discovered or is not about to discover.

It’s important to note that a disclosure can only be made for something the taxpayer knows is wrong. Even if they were genuinely unaware of the mistake, any disclosure made after HMRC challenges a specific issue cannot be considered unprompted.

Unprompted disclosures can apply to both inaccuracies and under-assessments. When you realise there's an error or omission in your tax affairs, acting promptly is crucial. The moment you identify the mistake, you should contact HMRC immediately. This demonstrates your intention to rectify the situation and can lead to more favourable treatment, as HMRC tends to view voluntary, unprompted disclosures more favourably than those that are prompted by their own investigation or action.

Once you've decided to make a disclosure, it’s important to follow the appropriate method depending on the nature of the error.

For deliberate errors, you should use the Contractual Disclosure Facility (CDF), which is specifically designed for cases involving intentional tax underpayment. The CDF provides an opportunity to inform HMRC about any tax fraud you have been involved in.

It is important to note that the CDF is exclusively for admitting tax fraud. It should not be used to disclose errors, mistakes, or tax avoidance schemes that are not related to fraud.

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The Digital Disclosure Service

The Digital Disclosure Service (DDS) is available for individuals and companies who wish to disclose errors related to various UK taxes, including income tax, capital gains tax, inheritance tax, corporation tax, national insurance contributions, and annual tax for enveloped dwellings (ATED). However, the DDS cannot be used to disclose errors related to VAT.

You can use the DDS to disclose errors that have occurred due to several reasons, including:

• taking reasonable care but still making a mistake
• carelessness
• deliberate actions.

Examples of situations where you may need to use the DDS include a business that has failed to declare all its income or a business that has been trading without registering with HMRC for the relevant taxes.

If you qualify for one of HMRC’s current campaigns, it is important to follow their specific guidance for disclosure.

Worldwide Disclosure Facility (WDF)

If you’ve received a letter concerning your money or assets abroad, and after reviewing your tax affairs you determine that a disclosure is necessary, the WDF is the appropriate method to report these matters to HMRC.

Offshore issues include income arising from sources outside the UK, assets held or situated in territories outside the UK, or activities conducted wholly or mainly in a territory outside the UK. It also covers cases where funds connected to unpaid or omitted UK tax have been transferred to or are owned in a territory outside the UK.

If HMRC is aware or suspects that the assets or funds disclosed are partially or wholly made up of criminal property, they have discretion to refuse your application to participate in the facility. This means it's important to ensure that all disclosed information is fully accurate and transparent.

HMRC will also refer all disclosures made by taxpayers who are under enquiry, including those relating to tax avoidance schemes, to the relevant investigating officer. This officer will decide whether the disclosure can be accepted. Additionally, if you have previously made a settlement after an in-depth enquiry or disclosed tax matters before, HMRC may investigate your new disclosure further. If the disclosure covers the same period, there could be a higher penalty.

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R&D Disclosure Service

The R&D Disclosure Service is available for companies that meet the following conditions: they have claimed too much R&D tax relief, cannot amend their tax return to correct the R&D claim due to the time limit having passed, and need to pay additional corporation tax or repay overpaid tax credits for R&D relief.

The R&D Disclosure Service should not be used if the company is still within the time limit to amend the company tax return. Additionally, the service is not suitable if the company’s behaviour was deliberate. For example, if the company knew at the time the claim was made that they owed tax or had overclaimed R&D tax credits but chose not to inform HMRC, or if the figures on the tax return were wrong when submitted, the Contractual Disclosure Facility should be used instead.

Furthermore, the service is not appropriate if the company is disclosing something other than overclaimed R&D tax relief. In such cases, the company should follow the guidance for making a voluntary disclosure for unpaid tax. If there is no corporation tax to pay and no tax credit to repay, the company should contact RD.IncentivesReliefs@hmrc.gov.uk, including the subject heading ‘R&D Disclosure overstated losses’, along with revised computations, an explanation of how the error arose, and details of the nature of the behaviour that led to the inaccuracy, supported by evidence-based reasons.

It is important to note that if the company waits for HMRC to contact them, there could be extra interest and penalties. HMRC may also decide to open a criminal investigation if the circumstances warrant it.

The disclosure process

The first step in the disclosure process is to notify HMRC of your intention to make a disclosure. At this stage, you don’t need to provide detailed information; you simply need to inform HMRC of your intention to disclose. This can help establish that you are proactively addressing the issue before it is discovered by HMRC.

After notifying HMRC, you should gather all the relevant financial records and information to prepare a detailed account of the errors or omissions. It’s important that this information is comprehensive and accurate to avoid further complications down the line. Once you have all the necessary documentation, you will typically have 90 days to submit the full details of your disclosure to HMRC.

In your disclosure, it’s also advisable to explain any mitigating circumstances that may have led to the error. For example, if there was a genuine misunderstanding of tax rules or if you failed to account for changes in tax legislation, including these details can help HMRC understand your situation. Being transparent and open about why the error occurred can show your willingness to correct the mistake and prevent it from happening again in the future.

Along with the disclosure, you should also calculate the amount of tax owed, including any interest and applicable penalties. Offering to pay the amount due as part of your disclosure shows that you are taking responsibility for the mistake and are committed to settling the issue.

Finally, it’s important to demonstrate your commitment to future compliance. HMRC will want to see that steps are being taken to prevent similar errors from occurring in the future. This could include implementing better record-keeping systems or seeking regular tax advice to stay updated on changes to tax laws.

Throughout the process, it’s vital to be transparent and cooperative with HMRC. Provide them with full access to your financial records and respond promptly to any additional inquiries they may have. This cooperation will help ensure the process runs smoothly and that you receive the most favourable outcome possible.

Voluntary disclosures are a crucial tool for taxpayers to correct mistakes, offering peace of mind and potentially providing both financial and reputational benefits. However, it is essential to approach this process with care and experience, ensuring the correct disclosure method is chosen. By avoiding common pitfalls and working closely with HMRC, taxpayers can reach a mutually acceptable agreement that resolves the issue effectively.