What should you do if you’ve miscalculated your tax return?

Tax rules are constantly changing and becoming ever more complex, so it’s unsurprising that, from time to time, people get it wrong, miscalculating their tax liabilities or omitting to file a tax return at all. The question is, if you realise you’ve made a mistake, what do you do about it?

If you filed a tax return for the year in question, you have a year from the filing deadline (31 January following the end of the tax year) to file an amended return. If you need to go back further, you can use the Digital Disclosure Service (DDS).

Facing criticism of their service levels, HM Revenue & Customs (HMRC) have been clear that they can’t afford to employ more staff and their vision of the future is for more of their services to be provided online. This reduces the pressure on HMRC’s call centres but leaves taxpayers to try to solve issues on their own.

Two-step process

Using the DDS requires two separate submissions. The first simply advises HMRC that you’ve found a mistake and intend to correct it. Full details of what was wrong aren’t needed at this point and you’ll get 90 days to supply these.

The importance of this notification is that once you’ve made it, HMRC can no longer “prompt” you to make a disclosure, affecting any penalties that could be charged.

Full disclosure

Where income has gone unreported for several years, the first thing to consider is how many of those years you’ll be required to disclose. HMRC accept that there needs to be a cut-off, after which matters are considered settled, even if errors were made, but this needs to be balanced against the need to tackle genuine tax evasion.

The timescales for disclosures below are based on the taxpayer’s behaviour, whether they:

• took reasonable care – 4 years
• were careless – 6 years
• were deliberately not disclosing correctly – 20 years

As well as calculating any tax underpaid in the relevant period it’s up to the individual to assess their own interest and penalties.

This is where making an unprompted disclosure to HMRC helps as it reduces the rate of penalties that could be applied. For example, the unprompted disclosure of a careless inaccuracy will result in a penalty between 0% and 30%. The same inaccuracy if disclosed following a prompt from HMRC would carry a penalty between 15% and 30%.

What level of penalty should be applied from within the relevant range is determined based on the quality of the information provided to HMRC; specifically, telling HMRC about the error, providing reasonable help to correct it and giving them access to records. Demonstrating each of these results in a proportionate reduction from the highest level available to the lowest.

Interest is calculated based on the due date of payment for the tax year regardless of behaviour. This is currently charged at 7.75%

Acceptance

The submission of your disclosure needs to be accompanied by payment of the amount you believe is due. Only once payment has been made will HMRC consider the facts and either accept the amount offered or make further enquiries.

It’s important how you present the facts, as HMRC insist on full disclosure but provide little space on their form to elaborate on your circumstances. Nobody wants to pay more in penalties than necessary, but applying too low a rate can result in rejection or further scrutiny.

How we can help

Disclosures can be a complex area, and there are also specific facilities for overseas income (which has a separate range of penalties) and let property income. If you have any queries or concerns about historic tax issues, please get in touch with one of our tax specialists today.

Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Chris Bale