The subject of voluntary disclosure is very topical for us as we are working with two separate clients at the moment in preparing to make a voluntary disclosure to HMRC for PAYE related errors. One disclosure will definitely be a six figure sum, the other one probably will be as well.

This is an area that is often misunderstood and feared and so hopefully this article will shed some light on why a voluntary disclosure to HMRC should be embraced and not run away from.

 

General reluctance to disclose voluntarily

Many employers, and their accountants, go grey when you suggest that a voluntary disclosure should be made when some PAYE tax errors come to light e.g. around employee expenses, P11D reporting, termination payments, etc etc.

Many prefer to sweep things under the carpet and keep their fingers crossed that HMRC will never find out about the errors. We explain below why this is an ill-advised approach to tax compliance but this is also fundamentally wrong from a professional ethics point of view as well. Under Institute of Tax rules, we have to stop acting for clients who are not prepared to report known tax errors but this can also open up a can of worms from a Money Laundering reporting point of view as well.

 

The downside(s) of disclosing voluntarily to HMRC

Clearly, contacting HMRC to admit errors is going to cost money. Not only will the underpaid tax and NI have to be settled but there could also be interest and possibly penalty charges as well for failing to tax or report employee payments in line with legislation.

This is THE only real downside to making a voluntary disclosure. Admittedly, this can be a huge problem in some cases where the errors involve a lot of extra tax and NI but the alternative, i.e. not disclosing voluntarily, could be much worse.

Fears of a voluntary disclosure prompting HMRC to come in to "do their worst" are usually borne of ignorance of how these things actually work and so we do not consider this to be a real negative given the positives listed below.

 

The advantages of making a voluntary disclosure to HMRC

1) Reduced penalties

This is the obvious, and most cited, one. The tax penalty regime changed a few years back to clearly reward taxpayers, by way of much reduced penalties, where errors were brought to HMRC's attention rather than HMRC finding these themselves e.g. during an audit. The difference in penalties to be charged can be as much as 70% between errors being "unprompted" (voluntarily disclosed) and "prompted" (HMRC identified).

2) Control

This, to us, is as important as the penalty situation.

Making a voluntary disclosure gives the employer (or more usually their advisor) much more control in how the situation is dealt with, e.g.:

  • Timing - deciding the optimum timing to raise the issue with HMRC. If HMRC find the error, everything is run at their pace and to their timetable.
  • Presenting the facts - the key to a good disclosure (i.e. one that is going to achieve a sensible outcome without too much protracted correspondence) is how the errors are explained and presenting the facts and employer in as positive a light as possible. That all goes out the window if HMRC spot the error - things will be taken out of context, various assumptions made and before you know it HMRC are adding 2 + 2 and coming up with £10,000 !

3) Opportunity

This links in with getting the timing right for the employer. When errors are identified by HMRC the deed is done and no amount of back tracking or bolting the stable door when the horse has already escaped will convince HMRC to deal with the situation leniently.

However, spot the errors early and there is a huge opportunity to get your house in order before approaching HMRC. This can make an absolutely huge difference in how HMRC deals with the underpayment(s) and, as importantly, what further attention they pay the business in other areas.

Things we are talking about here include:

  • Fixing the compliance gaps that resulted in the underpayments arising in the first place
  • Ensuring processes and procedures are fit-for-purpose, especially around employee expenses
  • Having up-to-date and robust policy documents to demonstrate compliance is taken seriously
  • Ensuring P11D Dispensations and PAYE Settlement Agreements are in place and up-to-date
  • Making absolutely sure that no other errors or areas of concern are lurking in the background just waiting to be found

4) Room for negotiation

As well as the penalty situation, it is far easier to negotiate better settlement terms with HMRC when errors have been reported upfront and where HMRC can see that the employer is trying to do their best and "play" fair. Areas where decent terms can be negotiated to knock-down the value of the settlement include the period to be assessed, the method in which any gross-ups will be calculated and the values to be assessed.

Of course it is still possible to negotiate such matters with HMRC following a PAYE audit but there is usually a lot more blood, sweat and tears involved with much less chance of success, and more fees for the client as well to reflect all the extra hard work involved !

5) Better ongoing relationship with HMRC

It is all about risk profiling in HMRC nowadays. If HMRC considers your business to be a high risk for PAYE tax compliance then they will almost certainly be looking more closely at your affairs, and more regularly, than they did before.

Demonstrating an honest, proactive and effective approach to PAYE compliance when making a voluntary disclosure could have long term benefits in the relationship with HMRC.

Conclusion

No-one likes admitting mistakes, especially when it could cost your business a lot of money or where the finger of blame could be pointed at certain individuals.

However, in terms of tax compliance, making a voluntary disclosure when mistakes are identified is absolutely the right thing to do, not just morally or ethically but also to ensure the best outcome for the business both short and long term.

Accountants or advisors who are still telling old wives tales to their clients of HMRC "doing their worst" when mistakes are flagged-up voluntarily need to get up to date. Good behaviour and open communication with HMRC does bring benefits in real life.

As with all things in life though, care has to be taken in making a voluntary disclosure to maximise the advantages in doing so. If you try and cut corners you could end up in a much worse position than we have alluded to above.

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