Commencing on 16 January 2023, HMRC has started to issue letters to taxpayers who they believe have undisclosed income from their online trading activities. The letters are based on third-party information HMRC has obtained and should not be ignored, even where the taxpayer believes the information HMRC holds is inaccurate or incomplete.
Whether someone has an UK tax obligation depends on a number of factors, and consideration needs to be given to the question of whether someone is “trading”. This is a complex area and it is prudent to seek professional advice before responding to HMRC’s letter.
Have you received a letter from HMRC?
Over recent years HMRC has made increasing use of their so-called “nudge letter” or “one to many” approach. This is where HMRC send one standard message to many taxpayers. If you have received a letter from HMRC which is written in very general terms, which may also be accompanied with a request to complete a Certificate of Tax Position (see below), then you have been identified by HMRC as someone who may need to make a tax disclosure.
Menzies’ advice to taxpayers who are asked by HMRC to complete and return a Certificate of Tax Position, which were introduced in January 2019, is to remind them that there is no legal obligation to do so. The certificates do not specify the tax year(s) which they relate to and do not set a de-minimis level. There are serious consequences for providing a false declaration to HMRC and therefore taking professional advice is essential. Despite not returning the Certificate of Tax Position the letters from HMRC should not be ignored.
What to do if a disclosure is required?
This depends on the specific facts of the case and each should be considered on its own merits. For most cases, an online notification is made to HMRC informing them of an intention to make a disclosure under the Digital Disclosure Service (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. 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 no tax returns have been filed, as well as the “behaviours giving rise to the loss of tax”, will determine how many years to include in the disclosure.
In more serious cases then it may be necessary to consider making a disclosure to HMRC under the Contractual Disclosure Facility and Code of Practice 9 (COP9).
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, particularly in cases where HMRC has issued a nudge letter to the taxpayer.
- 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 above further, please contact Menzies Tax Disputes and Disclosures team: