Worried about HMRC finding your undeclared income? You should stop trying to hide it in the first place. With powerful computer systems and access to huge amounts of data, HMRC has some pretty powerful tools to uncover any earnings you might be trying to hide. So there’s not much point even trying. And if you’re caught out? You could end up facing some huge penalties.
But how does HMRC actually find out about hidden earnings? And what can you do to protect yourself? This blog will shed light on HMRC’s methods and offer guidance on handling potential tax issues you might come across.
This guide covers:
- What happens if you don’t declare your income?
- How HMRC identifies unregistered businesses and undeclared Income
- Role of HMRC’s Connect software
- The importance of voluntary disclosure
- Contractual disclosure form and professional advice
- Can HMRC trace bank accounts?
- How to tell if HMRC is investigating you
- Does HMRC always prosecute?
- What happens after you report undeclared income?
- Understanding the tax implications of your crypto activity
What happens if you don’t declare your income?
If HMRC finds out you haven’t paid tax on the money you should have, you will find yourself in some trouble. It’s never worth the risk because you might end up having to pay extra money, like interest and penalties.
In really bad cases, you could even be sent to prison. To put it plainly, there is no way you can get away with not paying the tax you need to, even if your income is from crypto.
How HMRC identifies unregistered businesses and undeclared Income
HMRC is literally always looking for people who aren’t running their businesses properly or who aren’t paying the right amount of tax. They do this by:
- Searching the internet
- Visiting people’s homes
- Getting information from people who know about someone
- Using information from other government departments
- Checking up on other businesses
Role of HMRC’s Connect software
HMRC uses a clever computer program called Connect to find people who might not be paying the right amount of tax. This program looks at lots of information and can spot things that don’t add up. HMRC can also get information about people’s spending, such as what they buy with their cards or sell online.
The importance of voluntary disclosure
If you’ve made a mistake with your taxes, it’s better to tell HMRC yourself before they find out. This could help you avoid getting into serious trouble. If you’re honest and work with HMRC, they might be a teeny tiny bit more lenient with you. They might even let you pay what you owe over time…
- Voluntary Reporting: Reporting the situation voluntarily before HMRC becomes suspicious is less likely to result in any prosecution.
- Cooperation: Disclosing your income and fully cooperating with the ensuing investigation or inquiry can help reduce potential penalties.
- Tailored Agreements: HMRC often strives to reach an agreement regarding your outstanding tax that aligns with your ability to pay.
Contractual disclosure form and professional advice
If you’ve received a letter from HMRC indicating suspicion of tax fraud, completing a Contractual Disclosure Form could potentially help you avoid prosecution, but it’s advisable to seek professional advice before doing so to ensure your disclosure is comprehensive and accurate! Don’t leave this to chance, always get help if you need it.
Can HMRC trace bank accounts?
HMRC has extensive authority to uncover information they need for income taxation enforcement, which includes access to your bank account. Key sources feeding into HMRC’s Connect system include:
- Other Government Departments and Agencies
- Tax Returns
- Financial Records
- Global Strategy Data
- Online Marketplaces
- Social Media Presence
Even some peripheral information, such as flight sales, passenger manifests, and Google Earth, may contribute to building cases against individuals attempting to hide parts (or the entirety) of their income.
How to tell if HMRC is investigating you
Receiving a letter from HMRC notifying you of a tax fraud investigation can occur due to a range of triggers, such as:
- Inconsistencies in your tax return
- Tips from informants
- Industry scrutiny by HMRC
- Issues detected through the Connect system
If you become the subject of a compliance check, seeking professional assistance promptly is really critical. Even if your accounting records are well-maintained, have your accountant review all intricate aspects of your financial situation.
Does HMRC always prosecute?
If you have unreported income, seeking professional assistance immediately is essential. The sooner you inform HMRC about undeclared income, the more favourable the outcome for you. Prosecution is less likely to occur if:
- You voluntarily disclose undeclared income to HMRC before suspicion arises.
- Your case involves failing to report income without additional fraudulent activities.
- The unpaid tax amount is relatively small (typically under £50,000).
What happens after you report undeclared income?
Once you inform HMRC about unreported income, an inspector will be assigned to your case. The process typically involves:
- Completion of tax returns for all relevant years
- Submission of additional documents and information
- Potential meetings to discuss your undeclared income case
HMRC’s ability to review your tax history ranges depending on the circumstances. The extent of their review is based on whether reasonable care was taken in submitting accurate returns or if there was deliberate undeclared tax liability.
Understanding the tax implications of your crypto activity
You need to have an understanding of how tax affects your crypto activities. This means you can stay within the law and avoid any expensive penalties.
- Holding crypto: Simply owning cryptocurrency doesn’t trigger a taxable event. However, capital gains tax may apply when you sell, trade, or use it to buy goods/services.
- Owning cryptocurrency: This isn’t, in itself, a taxable event. However, you may owe capital gains tax when you sell, trade, or use your cryptocurrency to buy goods or services. Capital gains tax is a tax on the profit you make from selling an asset. So, if you buy Bitcoin for £10,000 and then sell it for £15,000, you would have a capital gain of £5,000. You would then owe capital gains tax on that £5,000 profit.
- Mining and staking: The value of crypto received from mining or staking is considered income and subject to income tax. You might also owe capital gains tax when you eventually sell these coins.
The value of crypto that you receive from mining or staking is considered income and is subject to income tax. This means that you need to report the value of the crypto that you mined or staked on your tax return. You may also owe capital gains tax when you eventually sell these coins.
For example, if you mined 1 Ethereum (ETH) in January 2023 and the value of ETH at that time was £2,000, you would need to report £2,000 of income on your tax return. You would also owe capital.
The key takeaways?
Don’t be silly with your tax. Neglecting your tax liabilities can lead to really horrendous fines and legal complications. Maintaining accurate records of your financial activities is so important because it helps you avoid accidentally slipping up.
Need Expert Crypto Tax Advice?
Don’t do your crypto taxes alone. Andy Wood, a leading expert in UK crypto taxation, is here to help. Join the Crypto Tax Degens community for exclusive access to Andy’s insights and personalised advice tailored to your unique trading activities. Stay fully compliant and make the most of your crypto investments.
Alternatively, choose Tax Natives for professional crypto tax advice in the UK.