If you're aware of any irregularities in your tax affairs, the most effective means of reducing the financial penalty that you will pay to HMRC is by making a voluntary disclosure. However, as Mark Taylor demonstrates in this case study, always do so with specialist guidance.

If you’re aware of any irregularities in your tax affairs, the most effective way to minimise your exposure to tax, interest and financial penalties is by making a voluntary disclosure. However, as this case demonstrates, without the use of a specialist, doing the right thing is not always recognised by HMRC and can make matters more complicated.

The visit

The proprietor (Mr X) of a well-established and popular London restaurant received an unannounced visit at 11pm, just as his staff were closing up, from five HMRC officers conducting what he described as a ‘raid’. Mr X was shown their IDs and handed countless papers, which left him with the impression that it was a search warrant.

What Mr X had actually received was an unannounced visit, approved by an HMRC officer, under para 10 of Sch36 of the Finance Act 2008. This permits HMRC officers to visit business premises unannounced, during ‘business hours’. Clearly, 11pm was not business hours and the visit finished at 3am, by which time HMRC had downloaded computer data, interviewed staff, and instructed an employee to ‘cash up’ and observed them doing so. HMRC also removed physical records.

The secret

The unannounced visit served as a catalyst for Mr X deciding to make a disclosure to HMRC, and reveal activity he had been keeping secret. For the four years preceding HMRC’s visit, Mr X had regularly, and inexcusably, topped up the staff tip jar with motivational and performance-based cash bonuses. These were funded by him either removing sales from the till via ‘refund mode’, thus suppressing sales, or by Mr X himself personally funding the bonuses (often by him withdrawing cash from a local cash point). He roughly calculated that over the four years, he had suppressed 1% of the business income and the revenue lost to HMRC was around £33k. Mr X knew his actions were wrong.

The disclosure

Given that HMRC had not discovered this during their visit, Mr X met with his accountant, admitted the irregularities and expressed his desire to disclose his actions to HMRC. Mr X’s accountant told him to sit tight and he would find a specialist advisor to assist in making the disclosure. Unfortunately, such was Mr X’s will to disclose, Mr X decided not to wait.

He instead advised the HMRC lead officer who visited his business premises unannounced that he wished to disclose unrecorded sales. While his intentions were acknowledged, he was not advised that HMRC would take the nature of the irregularities at face value, and his behaviour would be considered deliberate. Mr X was also not advised that he could make a disclosure using HMRC’s Code of Practice 9 facility thus ensuring he would be immune from prosecutions in relation to the irregularities disclosed. Instead, some five days later, Mr X disclosed what he had done and the estimated lost revenue.

Mr X did so expecting to receive harsh penalties in addition to the tax/National Insurance Contributions and interest he would have to pay. What he did not expect was the potential loss of his liberty, business, and personal relationship, as a result of a three-year long investigation.

Criminal action

Following Mr X making his disclosure, he heard nothing from HMRC for six months. He then received a visit to his business premises but this time during ‘genuine’ business hours. The visitors were from HMRC’s Fraud Investigations Service who personally delivered a letter, inviting him to voluntarily attend (at a scheduled venue, date and time) an interview under caution.

Mr X immediately recognised the seriousness of the situation and looked for legal representation, together with a forensic expert. This led Mr X to meet and appoint Buzzacott’s Tax Investigations & Dispute Resolution team. We formed a strategy that, while admitting irregularities had occurred, argued for the case to be dealt with civilly given, in our view, it was not in the public interest to proceed criminally against Mr X. We prepared expert reports disclosing all the facts and circumstances of the case, the revenue lost as a result of Mr X’s actions, together with mitigating factors and robust representations. Some 18 months later, Mr X received confirmation from the Crown Prosecution Service that there was insufficient evidence to proceed criminally and the case was to be settled civilly.

Civil settlement

What should have been a straightforward civil settlement actually turned into prolonged, protracted correspondence with HMRC. In the Disclosure Report commissioned by Mr X, he admitted ‘deliberate’ behaviour and provided confirmed quantified lost revenue figures. However, HMRC inexcusably attempted to push the behaviour boundaries, arguing that Mr X’s behaviour was ‘deliberate and concealed’. It was not.

Some 12-months later, HMRC accepted, without reservation, the complete findings of the original Disclosure Report. However, by this time, due to HMRC not raising protective assessments in time pursuant to Mr X’s disclosure, HMRC was time bound from collecting the full amount of the loss disclosed by Mr X. Had HMRC initially accepted the original disclosure report, it would have collected the full amount and avoided unnecessary costs and stress to Mr X.

Our view

While we do not condone Mr X’s actions, we would suggest that they did not warrant or justify a three-year long investigation that, in our belief, would have cost the Exchequer in excess of £200k, especially given a full voluntary disclosure had been made with a £33k loss of revenue.

Prosecuting a taxpayer who voluntarily comes forward to disclose, provides a full account of their irregularities and offers to pay the lost revenue plus penalties seriously undermines the disclosure process and would prevent individuals coming forward.

Unfortunately, Mr X’s case is all too common and was exacerbated by him making an inexpert disclosure prolonging the case, but for Buzzacott’s involvement would have led to more severe penalties.