I frequently attend meetings with potential clients whose tax affairs are not entirely in order and who want to put things right.  In almost every one of those meetings I will at some point be asked “how much trouble could I be in?”. Some are worried about the amount of money they might have to pay but many are much more concerned about the possibility of unwittingly having committed a criminal offence. 

Fortunately, I can usually be reassuring. Provided there has been no deliberate attempt to mislead HMRC, there is generally no material risk of a criminal prosecution. Instead, the client will usually need to pay the outstanding tax, together with interest (currently set at the base rate plus 2.5%) and civil penalties. The latter vary depending on factors such as how much time has passed since the error was made (once three years have passed certain minimum penalties can apply), whether the client took reasonable care, which jurisdictions are involved ("offshore" tax matters are often subjected to higher penalties) and whether the client approached HMRC voluntarily (an “unprompted disclosure”) or whether HMRC approached the client (a “prompted disclosure”).  

We often see penalties in the 0% - 45% range in practice, with many towards the bottom end of that scale. Whilst the tax, interest and penalties can all combine into a significant sum overall, if the error is dealt with appropriately, HMRC will get what they are owed, the client will get peace of mind and that is the end of the matter. By using one of the available “disclosure facilities” it might even be possible to wrap the whole process up in just a few weeks.

In contrast, the consequences of trying to hide information from HMRC have been emphasised only recently in the prosecution of Bernie Ecclestone. In particular, making false representations in any form can have catastrophic results.

The Crown Prosecution Service has stated that Mr Ecclestone (famed for his involvement in Formula One) became the subject of a HMRC tax investigation in 2012. During that investigation he was asked whether he was the settlor or beneficiary of any offshore trusts and he said that he was not. The CPS notes that “Information provided to HMRC by the authorities in Singapore showed Ecclestone had lied.” Information sharing between tax authorities is now very much standard practice and the days of HMRC not knowing what is going on in other countries are long gone. 

Mr Ecclestone has now been prosecuted for fraud relating to dishonest representations to HMRC and hit with the maximum available tax penalties (which, because of the time periods involved, were 200% of the tax due). In total, he is reported to have made a payment to HMRC of more than £650 million.  Mr Ecclestone's lack of honesty ultimately cost him hundreds of millions of pounds and led to a suspended jail sentence. 

Whilst most clients do not need any reminding that honesty is the only viable approach, Mr Ecclestone's example is a lesson in just how serious matters can get if it is forgotten.

The best advice for anyone who thinks that they may need to correct past errors in their tax affairs is:

  • Take advice early: the longer you wait the more interest will accumulate on any unpaid tax and the higher the penalties might become;
  • Take advice from the right people: tax is a specialist area but within that there are numerous sub-specialisms. Make sure that whoever you speak to has experience of handling the type of issue you are dealing with. This is not only important in terms of getting the right result, it can actually help reduce penalties in some circumstances;
  • Be as open as possible with your lawyer: there is a balance to strike between (a) ensuring that HMRC are given everything that is appropriate and (b) not over-sharing (which can deluge HMRC with irrelevant information, cause confusion and slow the whole disclosure down) but don't try and make those judgments yourself. Trust your adviser to help determine what is relevant and how best to explain this to HMRC;
  • Assume that HMRC will ultimately be told about any assets or structures you are connected to worldwide: In the age of the “Common Reporting Standard” (a data sharing network between tax authorities across the world) it is usually just a matter of time before information about assets in other countries is notified to HMRC.

Time and time again we see clients who are worried about coming forward but ultimately find the process more straightforward than they feared. They also realise that making  a disclosure can remove an enormous weight from their shoulders, allowing them to focus on the important things in life rather than worry about their tax affairs.