Peace of mind

Most professionals heaved a sigh of relief when the 31 January deadline for the submission of self-assessment tax returns was met. No need to think about tax for another year? Not quite.

Solicitors are the latest target of a campaign by HMRC to persuade different business sectors to voluntarily disclose tax that may be owed. It was launched in December and should not be ignored, however pressing other compliance issues might seem to be by comparison.

Reduced penalties

This is a chance to bring tax affairs up to date without too many questions being asked, and to pay a reduced penalty – typically between 10 per cent and 20 per cent – of the tax due plus interest. This compares with penalties of up to 100 per cent when inspectors come knocking outside these disclosure windows, not to mention the potentially ruinous risk of a criminal prosecution. Clearly, there is a powerful incentive to seize this opportunity to become compliant.

The campaigns – amnesties in all but name – certainly work for HMRC, which since 2007 has collected £552m in tax from people coming forward and a further £224m from follow-up activities, largely involving putting businesses back on the tax-paying straight and narrow.

Earlier campaigns have focused on, among others, plumbers and doctors, tending to target professions where self-employment is common. They are a straightforward carrot-and-stick approach to getting financial affairs in order, aimed at sectors where HMRC believe there is scope to chase for tax owed.

This latest campaign is an opportunity for any solicitor, whether a sole practitioner, partner, officer or employee, to bring their tax affairs up to date if they are concerned that they have undisclosed income or gains.

The campaign can also be used by a solicitor disclosing on behalf of others, for example if they act as personal representative of a deceased person, or on behalf of a company if they are a company director or secretary.

Risk of prosecution

It is tempting to ask what the advantages are of coming forward. The most compelling is that it provides an opportunity to stop worrying about possible errors in your tax affairs, something that can be embarrassing in a highly regulated profession, such as the law, where ethical standards are policed.

A more pragmatic reason is that HMRC rarely embarks on a campaign to shake a particular sector’s tree without some good evidence that fruit will fall.

The evidence usually comes from a multi-million pound computer system called Connect, which uses various information sources to identify particular industries where tax is likely to be owed. The same system is also used to identify individuals about whom the same is suspected.

The other important reason for disclosure, apart from lower penalties, is to avoid the risk of a criminal prosecution, and all that implies for a legal practice. A successful prosecution could threaten not only legal standing but the very right to practise.

The campaign has very little time left to run. It is important to act now to avoid scrutiny and potentially far harsher consequences.

The first step is to notify HMRC by 9 March that you would like to make a disclosure. The next step is to make the disclosure and pay the tax, interest and penalties by 9 June.

The number of years for which underpaid tax will be payable under the campaign will depend on how the tax came to be underpaid: four years if reasonable care has been taken, six years for those deemed careless.

This amnesty comes hot on the heels of a number of tax changes that many felt targeted professional firms, and may feel like another attack on the sector by HMRC. But it is also an opportunity for peace of mind, to bring and keep tax affairs in order with improved settlement terms that are far less punishing than the enhanced penalties that could apply outside the campaign. SJ

Jennifer Williamson is a business services partner at Kreston Reeves

@KrestonReeves