In recent years, the rise of cryptocurrencies and digital assets has presented new challenges for tax authorities worldwide. Governments are keen to ensure that individuals and businesses are fulfilling their tax obligations, even in the realm of crypto. In the UK, the HM Revenue and Customs (HMRC) has taken a proactive approach by urging crypto users to make voluntary disclosures of any unpaid taxes related to their cryptoassets. Failure to do so could result in additional penalties and interest charges. In this comprehensive guide, we will explore the process of making a voluntary disclosure for unpaid tax on cryptoassets, including exchange tokens, non-fungible tokens (NFTs), and utility tokens. Let’s dive in!
Understanding the Need for Voluntary Disclosure
The HMRC’s call for voluntary disclosure stems from the importance of tax compliance and ensuring a fair system for all taxpayers. By voluntarily disclosing any unpaid tax on cryptoassets, individuals can avoid potential fines and penalties while rectifying any past non-compliance. It is crucial to address unpaid taxes promptly to maintain a good standing with the tax authorities and uphold the integrity of the tax system.
Steps Before Making a Voluntary Disclosure
Before making a voluntary disclosure to the HMRC, there are several essential steps to follow. These steps will ensure that you have all the necessary information and documentation to accurately report your unpaid tax on cryptoassets. Let’s break down these steps:
Step 1: Collecting Information
To begin, gather all the relevant information about your cryptoassets on which you owe tax. This includes personal details such as your name, address, email address, and contact telephone number. Additionally, ensure you have your National Insurance number on hand. This information will be crucial for the HMRC to identify and process your voluntary disclosure effectively.
Step 2: Determining the Scope
Next, determine the number of cryptoasset transactions you have conducted and the proceeds or income that you have not previously declared. Calculate the number of years for which you need to disclose unpaid taxes. This step is crucial in assessing the extent of your tax liability and ensuring that you cover all relevant periods.
Step 3: Assessing Reasonable Care
The number of years you need to disclose will depend on the circumstances surrounding your previous tax compliance. If you can demonstrate that you took reasonable care but still failed to pay the correct amount of tax, you will only need to address unpaid taxes for the past four years. This recognition of reasonable care acknowledges that mistakes can occur despite diligent efforts.
Step 4: Addressing Lack of Care
If you did not pay enough tax due to a lack of care, you must pay the HMRC what you owe for a maximum of six years. It is important to ensure that your tax affairs for the current and future tax years are accurately reported on your tax returns and submitted by the deadline. By doing so, you demonstrate your commitment to compliance moving forward.
Step 5: Deliberate Misleading of HMRC
In cases where you deliberately misled the HMRC about your income from cryptoassets, you may be liable to pay what you owe for a maximum of 20 years. Deliberate misleading refers to situations where you knowingly withheld information or submitted incorrect figures on your tax returns. It is crucial to be transparent and honest during the voluntary disclosure process to avoid further penalties.
Calculating Your Tax Liability
Once you have determined the scope of your voluntary disclosure, it is essential to accurately calculate your tax liability. This involves considering Capital Gains Tax and Income Tax, depending on your specific circumstances. Let’s explore how to calculate these tax obligations:
Capital Gains Tax Calculation
When calculating your Capital Gains Tax, you need to determine the gain you made after considering your personal allowance. Your personal allowance is the amount of income you can earn tax-free in a given tax year. To calculate your Capital Gains Tax accurately, consult the relevant tax guidelines and seek professional advice if needed.
Income Tax Calculation
In addition to Capital Gains Tax, you may also be liable for Income Tax on your cryptoasset income or gains. Understanding the tax brackets and rates applicable to your income is crucial for accurate calculations. Consider factors such as your employment status, other sources of income, and any applicable tax reliefs or deductions.
Assessing Interest and Penalties
In the voluntary disclosure process, it is crucial to consider any interest and penalties that may apply to your unpaid tax. The HMRC charges interest on late payments, calculated on a daily basis from the due date until the payment is made. To avoid rejection of your disclosure, ensure that you include the correct amount of interest in your calculations. The penalties you may face depend on the circumstances of your non-compliance. Let’s explore how to assess interest and penalties accurately:
Interest Calculation
To calculate the interest you owe, determine the amount of tax owed for each year before calculating the interest. The penalties and interest calculator provided by the HMRC can assist you in accurately determining the interest due. By including the correct interest amount in your voluntary disclosure, you demonstrate your commitment to resolving unpaid taxes promptly.
Penalties Assessment
The HMRC provides guidelines on penalties for inaccuracies in tax returns and failures to notify. These guidelines outline penalty percentages within a specific range, considering the severity of the non-compliance. By referring to the relevant factsheet on penalties, you can determine the appropriate penalty percentage and understand how it can be reduced. The penalties and interest calculator will aid in determining the penalty to include in your voluntary disclosure.
Making the Voluntary Disclosure
Once you have gathered all the necessary information, calculated your tax liability, and assessed any interest and penalties, you are ready to make your voluntary disclosure to the HMRC. This step is crucial in rectifying your non-compliance and ensuring that you fulfill your tax obligations. Here’s how to make the voluntary disclosure:
- Start by accessing the HMRC’s online portal for tax reporting and disclosures.
- Use your Government Gateway user ID and password to log in. If you do not have a user ID, you can create one during the sign-in process.
- Fill out the disclosure form provided, ensuring that you accurately input all the information gathered during the preparation process.
- Include the full amount you owe, including the unpaid tax, penalties, and interest, in your offer to the HMRC. This demonstrates your commitment to resolving your tax obligations comprehensively.
After Making the Voluntary Disclosure
Once you have made your voluntary disclosure, there are a few important steps to follow to ensure a smooth process and timely resolution of your unpaid taxes. Let’s explore what to expect after making your voluntary disclosure:
- Payment Reference Number: The HMRC will send you a letter containing your payment reference number after receiving your disclosure. This number will be crucial for making the necessary payment to settle your unpaid taxes.
- Payment Deadline: It is essential to make the payment for your unpaid taxes within 30 days of submitting your disclosure. Failure to meet this deadline may result in additional complications. If you are unable to pay within the specified timeframe, contact the HMRC helpline to discuss your options.
- HMRC Assessment: Once the HMRC has checked your disclosure, they will either send you a letter confirming the acceptance of your offer or inform you that they cannot accept your offer. If the HMRC suspects that you knowingly provided incorrect information, they may conduct further checks, and you may be subject to higher penalties.
- Providing Additional Information: In some cases, the HMRC may require additional information or evidence to complete their checks. It is crucial to cooperate and provide the requested information promptly. Failure to do so may result in the rejection of your offer.
Conclusion
Making a voluntary disclosure of any unpaid tax on cryptoassets is crucial for maintaining tax compliance and avoiding penalties. By following the steps outlined in this comprehensive guide, you can navigate the process effectively and ensure that you fulfill your tax obligations. Remember, accurate calculation of your tax liability, assessment of interest and penalties, and transparent disclosure are key elements in resolving unpaid taxes related to cryptoassets. Stay proactive, transparent, and timely in addressing your tax obligations to maintain a good standing with the HMRC and contribute to a fair and robust tax system.
