Crypto Assets and Disclosures

Crypto assets are here to stay, but as the ‘new kid on the block’, in contrast to more traditional options, they can cause uncertainty around the area of tax implications.

This is the seventh and final article in a series of short articles that explore the emerging world of crypto assets, focusing specifically on how past errors or omissions can be rectified and declared to HMRC.

In the previous article, we established that audit trails are created with every crypto transaction and that HMRC has powers to obtain information and use it to correct the tax position of its customers. This puts those taxpayers who have errors in their reported tax affairs at risk of enquiry by HMRC, which can be a very long and stressful process.

What if a mistake is discovered?
Where a taxpayer identifies that there is an error in one of their tax returns leading to an underpayment of tax, whether that be an incorrect figure or an omission, the best course of action is to be proactive and disclose this to HMRC. Not only is the disclosure process more cost effective than the enquiry process, but by making a disclosure, you will be subject to a much more favourable penalty position. How favourable the position will be will depend on whether the disclosure is unprompted (i.e., no activity from HMRC), or prompted (i.e., by a nudge letter from HMRC), and how comprehensive the disclosure is.

A full disclosure must include all tax liabilities which are within time limits to be assessed by HMRC, so it is important to consider how far back in time the disclosure should cover. Depending on the behaviour which led to the error being made, this could be as many as 20 years, to as few as four years. Where liabilities which are within HMRC time limits are omitted from a disclosure, HMRC may see this as inadequate and decide to enquire into, or assess these years, to recover the additional liability, which would be subject to a higher penalty.

Disclosure Processes Available

HMRC’s Digital Disclosure Service (“DDS”) is the facility where most disclosures of underdeclared crypto asset gains or income are likely to be made. This service is available to individuals and companies and covers all of the various taxes relevant to crypto assets. The process consists of two main parts:

1. Registration for DDS – this notifies HMRC that you wish to make a disclosure and should be completed as soon as an error has been identified. HMRC will issue a Disclosure Reference Number and a Payment Reference Number.

2. Disclosure – this will contain the full details of the error, including how the error occurred and how much you believe you owe. Submission of this disclosure should take place within 90 days of registration and payment of the tax owed should be made at the same time as submission. Time to pay can be requested, if needed.

HMRC will then review the disclosure and will either accept it and issue disclosure within two weeks, or will not accept it, but will instead contact you to discuss the disclosure. The latter occurs where HMRC is not satisfied that it has received a full disclosure.

For more serious issues of deliberate behaviour (fraud), the Contractual Disclosure Facility (“CDF”) may be a better option. Also known as ‘COP9’, individuals can ask for this where they intend to make a disclosure of serious issues. The benefit of the CDF is that once accepted into that process, as long as a full disclosure of all issues is made, the individual will be given immunity from a criminal investigation or prosecution. Any tax, penalties and interest will need to be quantified and paid, but that is clearly preferable to a custodial sentence.

In summary, if you believe that you may have income or gains arising from crypto assets which you have failed to declare, you should consider making a disclosure before HMRC opens an enquiry. There are well laid out routes for making a disclosure. Making a proactive disclosure will reduce penalties and, in the most serious of cases, may protect you from a criminal investigation.

This concludes the series of articles focusing on crypto assets and the various tax implications of buying and selling them. If you have any questions about tax on crypto assets, believe you may have underpaid tax and wish to make a disclosure, or have any tax issues in general, please get in touch on 0203 675 8122 or email Jeremy at jeremy.johnson@intaxltd.com.