If you're losing sleep over an innocent mistake made on your tax return and live in dread of the tax man's call, then worry no more. In a first for HM Revenue and Customs (HMRC), tax payers are being given a form of amnesty for all tax irregularities including VAT, Income & Corporation Tax and PAYE.
The move stems from the fact that HMRC is likely to be kept very busy following its success in obtaining from five high street banks details of UK residents (individuals and companies) with an address in the UK and an offshore bank account. Over the next few years HMRC will serve similar information notices on all banks trading in the UK, including the branches and subsidiaries of foreign banks. It's estimated that this exercise will yield almost a million pieces of information.
It hopes the amnesty will encourage tax payers to make a clean breast of previous irregularities and pay up now, leaving HMRC free to target the hard core who choose not to come clean.
While the legislation was originally designed to deal with those who hold, or have held, an offshore bank account, tax payers who have never held an offshore bank account are entitled to take part in the same way.
The amnesty process is divided into two phases. Retailers have until June 22, 2007 to notify HMRC of their intention to disclose any irregularities. In doing so they can, with certain limited exceptions, be certain of receiving a fixed penalty of 10% of the tax/duty to be paid (and no penalty at all on disclosures of untaxed amounts less than £2,500).
The tax/duties to be disclosed are those underpaid for the years 1987/88 to 2005/6. However, for the years 2000/1 and earlier, undeclared income and gains which were 'trivial' need not be disclosed. No guidance has been given on what exactly 'trivial' means, though.
The facts and figures
Those who have notified then have until November 26, 2007 to quantify their disclosure. Retailers without an offshore account need to send their disclosure to their local tax office along with: a formal letter of offer to pay; a declaration that the disclosure is correct and complete; and payment of the full amount disclosed, including interest and the 10% penalty.
Where the full amount cannot be paid by November 26, HMRC needs to be told, and a statement of assets and liabilities and proposals for clearing the debt provided.
If the disclosure comes from someone without an offshore account, evidence will have to be provided to satisfy HMRC that the disclosure is complete. HMRC will check out a number of disclosures where its risk assessment highlights the most significant possibilities of under-declaration. Those which are unlikely to be accepted include disclosures which are found to be materially incorrect or incomplete, and disclosures from those into whose affairs an investigation or an enquiry has already begun.
Immediately after the initial phase ends HMRC investigators will move to target those who have, or have had, offshore accounts who have not notified their intention to make a disclosure and whose accounts suggest that tax may have been underpaid.
Those who decline to disclose under the amnesty can expect to be charged significantly higher penalties if they are found to have evaded tax and may even face criminal prosecution.
A clean slate
The opportunity to make a clean breast of all past tax irregularities, a fixed 10% penalty and the very slim chance of any detailed enquiry make this an attractive proposition for tax payers with skeletons in their tax returns.
However, affected retailers must realise there is a very short period of time for making a notification and for compiling disclosures. It is likely that complete documentary evidence will not be available, meaning that estimates and reasoned assumptions will have to be made. And the consequences of making a materially incomplete disclosure are likely to be serious.
Andrew Watt is director of tax investigations at Chiltern Plc.