Following on from our December 2012 article on the advantages of making a voluntary disclosure to HMRC when PAYE errors are made, we consider this month the key elements that need to be considered when making a disclosure to HMRC.

This is probably one of the areas where we can add most value to a client as an inaccurate, unhelpful or incomplete disclosure could result in a much worse situation for the employer than not making a disclosure in the first place so great care has to be taken in HOW a disclosure should be made.

All voluntary disclosures are different in relation to PAYE errors but the common elements that need to be considered in nearly all cases include:

1. The reason or "excuse" for the error(s)

Being in a behaviour led regime for tax penalties, the background to the error(s) arising is extremely important to HMRC in deciding the level of 'punishment' to dish out in the form of penalties.

Careful consideration needs to be given as to how to present the facts so that the employer can be shown in the best light possible in failing to comply with tax reporting laws. It works all the better if reassurances can be given that the reason for the error arising has been fixed going forward.

Reasons which are likely to incur the wrath of HMRC (in other words they are too lame) include:

  • The accountant never told us about this
  • We didn't know/realise the payment was taxable
  • We couldn't afford tax advice
  • The company down the road does this
  • We spoke to the HMRC helpline but forgot to get the officer's name and we forgot to get confirmation from HMRC in writing

Position things wrong at this stage and it will be an uphill battle to get a reasonable conclusion.

2. What to include

 A voluntary disclosure SHOULD include items that are clearly taxable and have previously not been reported by the employer.

A voluntary disclosure SHOULD NOT include items that are clearly NOT taxable (unless of course this results in P11D reporting failures which could potentially be subject to P11D filing penalties).

But what about those payments that fall into the ever increasing "grey area" of tax law where it is often unclear whether a payment is within or outside the scope of tax? Where the law is vague and HMRC guidance says one thing but what is allowed in practice is often quite different.

There is a fine balance between giving HMRC enough information or too little or too much !

3. What years to cover

This is a difficult one as the number of years HMRC are entitled to claw money back where PAYE errors have been made all depends on what penalty category the errors fall into.

The normal time limit is now 4 years (used to be 6) for genuine mistakes. However, where the errors are considered to fall into the "careless" definition, the time limit for HMRC to go back increases to 6 years. Where HMRC considers the errors to be "deliberate", the time limit is actually 20 years.

Excluding or including older years needs to be given some serious thought especially in the context of making a full disclosure to HMRC.

4. To calculate or not

There are conflicting views amongst tax professionals on whether a disclosure letter should include full calculations or not.

Those for including say that anything that helps HMRC to consider the disclosure counts towards a better quality of disclosure which in turn can result in lower penalties.

Those against including the calculations argue that by doing HMRC's work for them removes any room for negotiation on the tax and NI to be recovered by HMRC from the errors disclosed.

5. Penalty proposals

It is often (but not always) a good idea to put a proposal to HMRC within a disclosure as to what penalty charges may be appropriate in the circumstances. Whilst HMRC may completely ignore any proposal made around penalties, it can sometimes help to steer HMRC into a line of thought and help to reduce the amount of time and effort in negotiating penalty charges to conclude matters.

Can "reasonable care" be justified ? If a penalty is probable, is it really credible to claim the errors are "careless" ? If the errors are not "deliberate" why not ? There has to be some sense and evidence in whatever is being proposed to HMRC.

What about the quality of the disclosure as well ? Have you REALLY been as helpful as you possibly could be to HMRC and have you made ALL information available for HMRC to consider the errors made ?


Making a voluntary disclosure to HMRC when PAYE errors are uncovered is absolutely recommended. But it is vital to get the disclosure right to ensure that your business gets the full benefits of flagging up issues to HMRC upfront (compared to HMRC finding errors themselves).

Carefully consider the points raised above when pulling together the disclosure letter and take appropriate advice in the process because HMRC WILL pull it apart if there is an "amateur" feel to the information being provided which could have huge repercussions for the business.

And remember that £££ spent on tax advice from someone like Optimum PAYE at the outset could save many £££,£££s in the long run !!




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