If you need to correct an earlier tax return for missing crypto-asset gains, or for anything else, you need to be warned about the real risk of penalties being imposed. HMRC’s default position is that a penalty is due, unless it can be shown that the taxpayer took reasonable care in completing the return (see factsheet CC/FS7a).
Relying on the advice of a competent and qualified tax adviser may be accepted as taking reasonable care, but if our clients have refused to heed our advice about disclosing taxable transactions, the taxpayer’s behaviour will be considered careless or even deliberate. In that case the penalty can be up to 70% of the lost tax.
Where the taxpayer makes an unprompted full disclosure before HMRC has approached him or her with data received from a third party (such as a crypto exchange), the penalty can be reduced to zero. However, that reduced penalty will only apply if the taxpayer’s behaviour was not deliberate.
It is crucial to provide an explanation of the mistake to HMRC which demonstrates that the taxpayer’s behaviour was not deliberate, and the error was certainly not concealed.
Where you can show that the mistake was careless, but a penalty is still applied, it may be possible to have that penalty suspended. This means that the penalty is not payable as long as the suspension conditions are complied with for the suspension period – which is usually two years (see factsheet CC/FS10). The suspension conditions are individually negotiated with each taxpayer according to the circumstances which created the error.
If the taxpayer is issued with a second penalty for another mistake within the suspension period, the first penalty will automatically become due for payment. A penalty for the second mistake will also be due, and its very unlikely that HMRC will agree to suspend the second penalty.
Written by the Tax Advice Network