TheFirst-tier Tribunal (FTT) decision in the case of D’Souza v CRC (published on 19 March 2012) provides a good illustration of how making a voluntary disclosure to HMRC may not go as planned and how proper planning and preparation is essential.
Mr D’Souza voluntarily disclosed that he had failed to declare the interest arising on his offshore bank account for the tax years 2004/5, 2005/06 and 2007/08. The total tax at stake was reported to be £44.61. HMRC requested bank statements to verify the disclosure was complete but Mr D’Souza resisted HMRC’s informal requests. HMRC then issued a 'Schedule 36' notice requiring Mr D’Souza to produce “bank statements in relation to accounts you may have held outside the UK between 6 April 2006 and 5 April 2009”. Mr D’Souza appealed against the notice; however, the FTT dismissed the appeal having been satisfied that on the balance of probabilities the information notice was lawful.
When we read this decision we were struck by the fact Mr D'Souza, while wishing to sort out the past, was seemingly not prepared for HMRC's request for him to provide his overseas bank statements. There are obvious reasons why he may have perceived this to be 'an open and shut' case and the request unnecessary from his perspective – the tax owed related to only three tax years and the total tax at stake was reported as only £44.61.
Nonetheless, Mr D’Souza was disclosing an overseas bank account and it is standard procedure for HMRC to request bank statements – principally because this is good way of verifying the source of the funds deposited into the account.
In our experience, it is essential that before contacting HMRC practitioners should gather all of the available information, take a step back and then ask themselves:
- Do the facts available stand up to scrutiny;
- Will HMRC perceive this as merely ‘the tip of the iceberg’ and decide further information is required;
- Will the facts satisfy HMRC the disclosure is complete or do they raise more questions than they answer;
- Will HMRC be able to raise a discovery assessment (was the problem due to innocent error, carelessness or was it deliberate on the client’s part) and therefore is a disclosure necessary; and
- Is there a disclosure facility that the client could utilise to their benefit (such as the Liechtenstein Disclosure Facility, Plumbers Tax Safe Plan or the e-Markets Disclosure Facility).
Despite the fact that the client is making a voluntary disclosure, HMRC will still critically analyse the information to determine whether the facts are complete and will enquire into the disclosure made, even if the reviews are limited to checking the tax history of the client and information held by HMRC. For example, if a client historically declared income of approximately £40,000 on his tax returns and Land Registry confirmed the house the client lived in was worth £2 million, HMRC would normally enquire into how the client was able to afford the property and indeed fund the mortgage. Whilst there are often perfectly reasonable explanations for this, the practitioner needs to try to identify the more obvious issues before contacting HMRC so that the explanations are available, if needed.
By considering these points the practitioner can hopefully manage the client’s expectations and seek the information needed to provide the background to the loss of tax, the details of the income and/or gains not disclosed, the extent of the problem and the tax liabilities.