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Voluntary Tax Disclosures and Penalty Mitigation

Discovering a potential tax error can be a worrying time for any business or individual.  In such circumstances, the best course of action is invariably to establish the extent of any errors before making a voluntary disclosure to the tax authority.

Global investigations expertise

The CMS Tax Disputes & Investigations team forms part of the firm’s wider investigations practice, and helps clients to manage multi-jurisdictional, internal investigations in order to identify tax errors (using forensic methods and cutting-edge technology available in-house such as CMS Brainspace).  
 

Why use CMS for voluntary tax disclosures

Where errors are identified, we can make detailed disclosures in order to regularise the position and mitigate financial penalties (including under official disclosure facilities such as the Worldwide Disclosure Facility, Profit Diversion Compliance Facility and Contractual Disclosure Facility).

Contractual Disclosure Facility

For further information on how we can help with Code of Practice 9 investigations and the related Contractual Disclosure Facility, please click here.

Frequently asked questions

Should I voluntarily disclose tax errors?

HMRC can charge penalties to any taxpayer who carelessly or deliberately provides HMRC with an inaccurate document (e.g., a tax return).  The amount of the penalties charged can be material, in some cases up to 200% of the additional tax due.

However, the penalty system is designed to encourage transparency and cooperation.  Penalties for tax errors can be heavily mitigated by taxpayer disclosure and, in many cases, eliminated altogether.  In some cases, the potential penalty reductions will outweigh any professional fees involved in making a disclosure.  A full and unprompted disclosure should also prevent taxpayers being publicly ‘named and shamed’ for any deliberate errors.

The CMS Tax Disputes & Investigations team will handle every aspect of making a voluntary disclosure.  This includes initial notification to HMRC, investigating the errors, preparing a detailed disclosure report, and agreeing the final liability with HMRC.

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Will any internal investigation be confidential from HMRC?

The disclosure report submitted to HMRC must set out all relevant facts in order to maximise the potential for penalty reductions.  Although HMRC will inevitably have queries regarding the errors, a full and unprompted disclosure prepared by professional advisers should reduce the risk of HMRC starting their own detailed investigation.

Unlike accountancy firms or tax advisers, any confidential correspondence with our clients regarding our legal advice can benefit from legal privilege – meaning that it does not have to be disclosed to HMRC.  Other materials produced during the course of an internal investigation may also be able to benefit from legal privilege under certain circumstances.  Our specialists will structure any internal investigation to maximise the likelihood of establishing legal privilege, which is a complex and constantly evolving area of law.
 

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What is the Worldwide Disclosure Facility (WDF)?

The WDF is a voluntary disclosure facility that allows taxpayers to disclose a UK tax liability relating (in whole or part) to an offshore issue.  This includes income arising, assets situated or held, or activities carried on (wholly or mainly), in an offshore jurisdiction - as well as anything having effect as it were such income, assets or activities.  It also includes funds connected to underpaid UK tax transferred to, or owned in, an offshore jurisdiction.

Taxpayers who make an accurate and complete disclosure should benefit from reduced penalties and, where applicable, avoid being publicly ‘named and shamed’.  Registration under the WDF should also minimise the chances of HMRC starting a criminal investigation, if applicable.

Once registered under the WDF, taxpayers have a period of 90 days (potentially up to 180 days in complex cases) to make a full disclosure.  Our specialists will handle all aspects of the process to ensure that the disclosure is carefully managed in the best interests of our clients.

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What is the Profit Diversion Compliance Facility (PDCF)?

It is not uncommon for multinationals (MNEs) to find themselves with outdated transfer pricing policies that do not reflect the reality of how their businesses operate in practice.  Groups making this mistake could find themselves subjected to a new type of forensic HMRC investigation focused on whether profits have been artificially ‘diverted’ from the UK, as well as an upfront tax charge with no immediate right of appeal (usually involving very large amounts).

To avoid this, HMRC are urging use of the PDCF: a voluntary disclosure facility that allows MNEs to disclose tax errors relating to profits diverted out of the UK.  MNEs who make an accurate and complete disclosure should benefit from reduced penalties and, where applicable, avoid being publicly ‘named and shamed’.  Registration under the PDCF should also minimise the chances of HMRC starting a criminal investigation, if applicable.

Once registered under the PDCF, taxpayers have a period of six months to make a full disclosure.  Our specialists will handle all aspects of the process to ensure that the disclosure is carefully managed in the best interests of our clients.

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Key contacts

Stephen Hignett
Partner
Co-Head of Tax
London
T +44 207 067 3397
Sam Dames
Partner
London
T +44 20 7367 2470
Jack Prytherch
Of Counsel
London
T +44 20 7367 2173
Kristin Shelley
Associate
London
T +44 207 367 3560