If you have not declared your income

Introduction - risks of not disclosing

We are contacted by many people who are worried because they have not declared some or all of their income to the Revenue. Quite often this is because they have not had the money to pay their tax and thought (wrongly) that it was best to 'keep quiet'.

This is unwise. If the Revenue finds out that you have not declared income on which tax is due, you may be charged interest and penalties on top of any tax bill, and in more serious cases there is even a risk of prosecution and imprisonment, and from January 2001:

• you may face a new £100 penalty if you fail to register for class 2 National Insurance Contributions within three months from by the end of the month in which you start self-employment
• in more serious cases you may be charged with fraudulent evasion of income tax, punishable by a large fine and possible imprisonment.

So the situation is very serious, but you will generally benefit from disclosing the position to the Revenue without delay because:

• if you report the situation voluntarily, before the Revenue suspects anything, you are most unlikely to be prosecuted
• if you disclose your income and cooperate fully with the investigation or enquiry that will follow, this should help to reduce any penalties payable.

It may also help to know that the Revenue will often try to reach an agreement with you, regarding your outstanding tax, that reflects your ability to pay.

What should you do?

While we would advise you to report your failure to the Revenue as soon as possible, it is usually a good idea to seek advice from an accountant or tax adviser first. After reviewing the situation, they should be able tell you how much tax you have failed to pay, how seriously the Revenue will view your situation, and how best to approach the Revenue.

If you cannot afford to pay for this advice, we may be able to help you.

Once you have received this advice, the matter should be reported to the Revenue. This may be done by you or the adviser. It should normally be in writing, as it gives the chance to present your case in full, explaining any personal reasons why you failed to declare the income, and to include accounts or summaries which indicate the level of income involved.

This should help to ensure that the Revenue responds to you appropriately.

Tip

It is not a good idea to visit a tax office, to tell them of your failure to declare your income, before you have written. The staff work ing on the reception desk will not normally be trained to deal with such cases, nor will you have a record of what you have reported, which may be very important later on.

The new confidential helpline

The Revenue has recently established a confidential helpline
(0845 608 6000) which you may contact to discuss your situation, without revealing your identity.

This may be a good way of intiating contact with the Revenue.

Once you have clarification from the helpline as to how the Revenue will view your situation, you may decide to give them your identity and they will pass your case to a tax office to continue negotiations with you.

What happens next?

At the tax office, your case should be passed to an inspector who is trained to deal with enquiries (or investigations). The inspector will write back to ask for more information and documents, and/or to suggest a meeting to discuss the case. The inspector will also want tax returns completed for all the years concerned.

From this point, your case will probably follow a similar course to an enquiry under self assessment. For more information on this, click on Questions about tax and then select the category Tax investigations and enquiries.

Criminal prosecutions

The Revenue does prosecute people for failing to declare their income, but: There are only a few prosecutions every year.

• You are unlikely to be prosecuted if you voluntarily disclose your failure to the Revenue before they have any suspicion of wrongdoing.
• You are unlikely to be prosecuted if you are guilty only of failing to declare your income. The Revenue concentrates on cases where there has been further wrongdoing, for example the creation of fraudulent documents or the deposit of profits in foreign bank accounts.
• You are unlikely to be prosecuted if the tax evaded is small. Most prosecutions involve unpaid tax of over £50,000.

However, if you are prosecuted you could well face a prison sentence. So if there is any suggestion from the Revenue that it might take criminal proceedings, you should seek legal advice immediately.

How will the matter end?

In almost every case the Revenue will be seeking a financial settlement, which will be the end of the matter (although you may expect the tax office to take a closer interest in your tax affairs in future years).

A financial settlement is an agreement between you and the tax office that you will pay the Revenue a certain amount to cover the unpaid tax plus interest and some penalties.

By law, the penalties may be equal to the amount of unpaid tax, although in practice they will be reduced:

• by up to 30% to reflect the extent to which you have disclosed information about your income (especially if this is voluntarily)
• by up to a further 40% to reflect the extent to which you have cooperated in the enquiry, and
• by up to a further 40% to reflect the gravity of the case.

e.g. Graham has worked as a minicab driver since 1995 but did not declare his income. In February 2000 he became worried that the authorities would find out about him and so wrote to disclose the position to the Revenue, enclosing accounts for all years, and he co-operated in the enquiry. The inspector said he would be prepared to reduce the penalty by 20% for disclosure, 35% for cooperation and 20% for gravity, giving a total reduction of 75%. So he would want a penalty equal to 25% of the tax unpaid.

In practice the Revenue will normally provide a calculation of the tax and interest due, and indicate the level of penalty that it would expect. You would then be 'invited' to make an offer to agree to pay the total sum. There is not often any point in offering less than the amount indicated by the Revenue.

Once the amount of the payment has been agreed, the Revenue will draft a letter for you to sign, in which you offer to pay this figure, by a specified date(s), in full settlement of all matters.

The inspector may also want you to sign a letter stating that you have made a complete disclosure of all your income and gains. This should be taken very seriously. If it turns out later that you have still not told the whole truth, you could face prosecution.

If you do not have the money to pay the tax, interest and penalties

In the course of the enquiry the inspector will ask about your current assets and liabilities, and income and expenses. If you could not afford to pay all the tax, interest and penalties immediately, the Revenue may accept an offer to pay it over a period of time, for example:

• within six months, if you are planning to sell your home to raise the necessary funds, or
• by monthly instalments, if you could pay it from your earnings over no more than a year or two.

If you have no valuable assets, and your income is not very high, the inspector may conclude that you could not make an offer that would be acceptable. If so, the inspector will usually pass the matter over to a collector, to pursue payment of tax and interest in the same way as any other unpaid bill It is unlikely that you will be charged any penalties.

How many years will the Revenue go back?

If you have been guilty of fraud or neglect, there is no limit to the number of years the Revenue can go back. However, in most cases it goes back no more than six years.