HMRC Voluntary Disclosure Guidance for Cryptocurrency investors
Problem: In the UK, many people who invest or trade in cryptocurrencies are not fully aware of their tax responsibilities. This lack of awareness can lead to unpaid taxes on profits made from cryptocurrency transactions. HMRC is increasingly focusing on this area, meaning those who have not declared their crypto-related income or gains might face inquiries or penalties. The challenge for crypto users is understanding and fulfilling these tax obligations to avoid legal complications.
Outcome: The UK tax authority HMRC has this week urged individuals with unpaid taxes from cryptocurrency transactions to disclose this information voluntarily. This action is focused on taxes related to capital gains or income from cryptocurrencies, including Bitcoin, NFTs, and utility tokens. HMRC’s guidance clarifies the process for reporting and paying these taxes, aiming to help individuals comply and avoid possible penalties.
Our expert tax lawyers and in-house consultant accountants can help to reduce penalties and risks of criminal prosecution, call us today for a Free Consultation on 0207 459 4037.
UK Cryptocurrency Tax Investigations and Voluntary Disclosure HMRC
Cryptocurrency tax investigations by HMRC are designed to ensure compliance with tax laws relating to crypto transactions. These investigations can scrutinise income or capital gains derived from cryptocurrencies.
Two types of tax liabilities will apply to cryptocurrency:
- Income Tax: If you earn cryptocurrency through mining, airdrops, or as payment for services, it is treated as income. Income tax and National Insurance contributions apply based on the value of the crypto at the time of receipt.
- Capital Gains Tax (CGT): When you sell cryptocurrency for more than you paid for it, the profit is subject to CGT. This also applies when you exchange one cryptocurrency for another, spend crypto on goods or services, or give it away (except to a spouse or civil partner).
Illustrative Example
Imagine you bought 1 Bitcoin for £10,000 and later sold it for £30,000. The sale has given you a profit, or ‘gain’, of £20,000. In the UK, you have a tax-free allowance for capital gains (£12,300 for the 2020/21 tax year). If your gain from the Bitcoin sale is your only gain, you will only be taxed on the amount over this allowance, which in this case is £7,700. The exact tax rate depends on your income tax band and any tax-free allowance.
HMRC’s Approach to Tax Investigations
HMRC is using data and information from various sources to identify people who have not declared their cryptocurrency-related income or gains. If they find discrepancies, they may launch an investigation. It is essential for individuals dealing in cryptocurrencies to keep detailed records of their transactions, including dates, values in GBP, and the type of transaction.
Understanding and complying with these tax obligations can be complex, and failing to do so can lead to serious consequences. This is why it is advisable to consult with a tax professional or a lawyer specialising in cryptocurrency to ensure full compliance.
What is Voluntary Disclosure?
Voluntary disclosure is the process by which individuals proactively inform HMRC about previously undeclared tax liabilities. This includes any unpaid or underreported taxes on income, capital gains, or other taxable activities related to cryptocurrency transactions. The key aspect of voluntary disclosure is that it is initiated by the taxpayer before HMRC discovers the non-compliance through their investigations.
In Nicholson v Morris (H M Inspector of Taxes) 51 TC 95 the tribunal emphasised that:
“It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, “Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults.” That is not a duty on the Revenue…It is the duty of every individual taxpayer to make his own return and, if challenged, to support the return he has made, or, if that return cannot be supported, to come completely clean…”.
It is in simple terms the taxpayer’s responsibility and duty to ensure they accurately self-assess and disclose their taxes to HMRC.
How far back can HMRC Voluntary Disclosure go?
HMRC’s voluntary disclosure can cover tax liabilities for a significant period in the past, depending on the circumstances. The look-back period for voluntary disclosure typically depends on the reason for the underpayment:
- Error or Mistake: If the underpayment of tax is due to an error or mistake, HMRC usually looks back up to 4 years from the end of the tax year in which the error occurred.
- Carelessness: In cases where the underpayment is due to carelessness (negligence), HMRC can go back up to 6 years from the end of the relevant tax year.
- Deliberate Underpayment: For instances where there is a deliberate underpayment or tax evasion, HMRC can extend its investigation up to 20 years from the end of the relevant tax year.
It is important to note that these periods are general guidelines. The specific look-back period can vary based on individual cases and the discretion of HMRC. The longer the period of non-compliance, the more complicated and potentially severe the consequences can be, which is why it is advisable to make voluntary disclosures as early as possible.
What is the process of making Voluntary Disclosure to HMRC?
Our expert tax lawyers and consultant accounts can assist if you are considering getting your tax affairs in order. In general terms, making a voluntary disclosure to HMRC involves a specific process that individuals and businesses should follow to ensure compliance and potentially reduce penalties including:
- Initiate the Disclosure: Inform HMRC that you intend to make a voluntary disclosure. This can usually be done through the HMRC website, where you would find the relevant forms and instructions for starting the disclosure process.
- Gather and Disclose All Relevant Information: Collect all necessary details about the undisclosed income, gains, taxes, and duties. This includes information on all income and gains that you have not previously informed HMRC about. Ensure that the disclosure is complete and accurate.
- Calculate the Tax Owed: You have 90 days to calculate and pay what you owe. This calculation should include the tax due, interest on late payment, and any potential penalties.
- Make a Formal Offer: After disclosing the unpaid taxes, you should make a formal offer to HMRC to settle the matter. This includes the payment of the calculated amount.
- Cooperate with HMRC: If HMRC requests additional information or clarifications, provide full cooperation to expedite the process and demonstrate your commitment to resolving the issue.
- Payment of Liabilities: Arrange for payment of the owed amount, including any interest and penalties. Payment terms can sometimes be negotiated with HMRC, especially if paying the entire amount immediately is not feasible.
- Receive Confirmation from HMRC: After the disclosure and payment, HMRC will typically send a letter confirming the receipt of the disclosure and payment, and that the matter is resolved.
If you have any questions, or require help with the process of getting your tax affairs in order please do hesitate to let us know. Everything you tell us will be subject to privilege and confidentiality.
New HMRC Guidance on Cryptocurrency Tax
Recently, HMRC has updated its guidance to encourage individuals dealing in cryptocurrencies to disclose any unpaid taxes. This move reflects HMRC’s increasing attention to crypto-assets and their commitment to ensuring tax compliance in this area. The guidance outlines:
- Scope of Disclosure: It covers all forms of crypto-assets, including exchange tokens (like Bitcoin), NFTs, and utility tokens.
- How to Disclose: Taxpayers are instructed on how to accurately report their unpaid taxes, calculate what they owe, and understand the deadlines for payment.
- Consequences of Non-Disclosure: HMRC warns of the potential for investigation and penalties for those who fail to voluntarily disclose and are later found to have unpaid tax liabilities.
This proactive approach by HMRC underscores the importance of understanding and meeting your tax obligations when it comes to cryptocurrency. For those who have undeclared crypto-related taxes, now is a critical time to address these issues to avoid the more severe consequences of HMRC’s investigations.
Benefits of Voluntary Disclosure
Voluntary disclosure in the context of crypto tax disputes offers several benefits, both to the taxpayer and to HMRC including:
- Reduced Penalties: One of the primary benefits of voluntary disclosure is the potential for reduced penalties. HMRC is generally more lenient in terms of penalties when taxpayers proactively disclose unpaid taxes rather than waiting for the discrepancies to be discovered during an investigation. HMRC has the right to impose higher penalties, up to 100% of the unpaid liabilities (or up to 200% for offshore-related income), if they discover the unpaid taxes before you disclose them.
- Avoidance of Criminal Investigation: In cases where tax evasion is significant, there’s a risk of criminal investigation. By voluntarily disclosing unpaid taxes, taxpayers may avoid criminal proceedings, as it demonstrates a willingness to rectify the situation.
- Lower Stress and Uncertainty: Dealing with a tax investigation can be stressful and time-consuming. By voluntarily disclosing, taxpayers can resolve their tax affairs more swiftly and avoid the anxiety associated with a prolonged HMRC investigation.
- Financial Clarity: Voluntary disclosure allows individuals to understand their financial liabilities clearly and plan accordingly. It eliminates the uncertainty of unexpected tax bills or penalties discovered later during an audit.
- Reputation Management: For businesses and high-profile individuals, voluntary disclosure can help manage reputational risks. Dealing with tax issues discretely and responsibly can prevent negative publicity associated with tax investigations.
- HMRC Cooperation: When taxpayers come forward voluntarily, HMRC is often more cooperative and supportive in the process of resolving the tax issue. This cooperative stance can make the process smoother and more manageable for the taxpayer.
- Closure: Voluntary disclosure provides a sense of closure, allowing taxpayers to rectify their mistakes and move forward without the looming fear of discovery and the associated consequences.
- Better Terms of Settlement: Often, taxpayers who voluntarily disclose can negotiate better terms of settlement with HMRC, such as payment plans, compared to those whose non-compliance is discovered by HMRC.
In summary, voluntary disclosure in crypto tax disputes can provide significant advantages, including reduced penalties, avoidance of criminal charges, and peace of mind. It’s a proactive step towards compliance and demonstrates a responsible approach to tax obligations.
Should you make a Voluntary Disclosure?
If you think you have not declared and paid the correct amount of tax and you wish for us to consider your tax compliance history, please get in touch with us for a Free Consultation on 0207 459 4037.
You should always consider disclosing your tax affairs at the earliest opportunity and getting your tax compliance in order. We are here to help you and we have a proven track record of getting optimal outcomes for our clients quickly; this gives our clients peace of mind.
If you fail to disclose your tax affairs and properly pay the correct tax, HMRC are likely to be harsh with you and the penalties could be as much as 100% of the liability due or up to 200% for offshore-related income and you could face criminal prosecution.
Expert Tax Lawyers in London
We understand that tax disputes can have serious consequences for you. You can face large penalty payments or even criminal charges if you do not cooperate with HMRC tax investigations. It is therefore vital to get legal advice from our specialist tax lawyers and consultant accountants as soon as possible.
Some of our lawyers are trained mediators and can provide a unique insight into HMRC’s tactics and mindset which can be crucial in negotiations and appeals. Our team of established tax lawyers and mediators have a proven track record of delivering solutions for our high net worth individual and corporate clients. Uniquely, we also have tax consultants that work with our lawyers in-house to ensure that the voluntary disclosure is accurate, and any returns are prepared for you.
Our tax lawyers and accountants have an excellent track record of negotiating on behalf of our clients to ensure that their voluntary disclosure is not only accepted by HMRC based on our calculations, but HMRC have also agreed to waive penalties and interest thereby avoiding any criminal liability for clients.
You will be in safe hands and we are here to help you every step of the way including:
- Advising you on whether you should be making a voluntary disclosure to HMRC (including which campaign should be used)
- Help with your voluntary disclosure (including with our in-house tax consultants)
- We will take full control of the voluntary disclosure process (including calculating the tax liability due)
- We will make the initial outline voluntary disclosure
- Discuss all the options with you concerning the undeclared income
- Prepare a full disclosure and agree figures with you and HMRC
- Make a submission with HMRC (and make it as easy as possible for HMRC to accept our calculations)
- Arrange a payment plan with HMRC where required
- Agree that HMRC waives any penalties and interest
- Liaise and assist HMRC with any queries and requests for further information
If you are concerned about your tax compliance history, please do not hesitate to call us today for a Free Consultation on 0207 459 4037 or use our booking form to discuss your tax issue.
