Beware, the taxman is coming! HMRC has launched a new campaign targeting shareholders who may still need to declare dividend income on their tax returns. This campaign focuses specifically on dividends paid to their shareholders by small private companies. If you’re a shareholder in a small company, read on to find out if you could be at risk and what steps you should take if HMRC comes knocking.

What’s behind this campaign?

HMRC regularly runs campaigns to recover lost tax revenue in specific areas where taxpayers may need to be more compliant.

This latest campaign focuses on dividends paid to individual shareholders, which HMRC believes may need to be properly declared on tax returns. By analyzing company accounts, they can identify discrepancies between dividends paid to shareholders and what those individuals declared on their Self Assessment tax returns.

Where HMRC spots a discrepancy, they will write to shareholders asking them to review their affairs. The letters allow taxpayers to voluntarily disclose and pay any additional tax due before HMRC launches a formal investigation.

Who is at risk?

This campaign particularly targets small or medium-sized private company shareholders, where dividends may not be handled as rigorously as in larger corporations.

You could be at risk if:

• You’re a small private company shareholder who has paid you dividends you’ve omitted or under-declared on your tax return.
• You’re a director who has taken informal dividends or ‘director’s loans’ that have yet to be declared income.
• Your company’s accountants must provide correct advice or information on dividend tax obligations.
• You’ve not fully understood the tax implications of the dividends you receive

What should you do if HMRC writes to you?

Keep your head in the sand if you receive a letter from HMRC about undeclared dividends. Ignoring it won’t make the issue go away.

You have two options:

1. Confirm to HMRC that your tax returns are correct and that you have fully declared all dividend income received.
2. Make a voluntary disclosure of any previously undeclared income using HMRC’s online disclosure facility. This allows you to pay the tax owed plus interest and potentially reduced penalties.

The key advantages of using the voluntary disclosure process are:

• As long as you notify HMRC promptly and make an accurate and complete disclosure, higher penalties may be mitigated, and HMRC will not publish your name.
• It demonstrates cooperation with HMRC, which can encourage a more lenient approach compared to an investigation further down the line.
• You take control by quantifying what tax you owe upfront rather than leaving HMRC to determine it for you later.

In most cases, voluntarily disclosing undeclared income is preferable to burying your head in the sand. And making a disclosure certainly avoids handing control of the situation over to HMRC to investigate formally.

What does the voluntary disclosure process involve?

The process has a few key steps:

Notify HMRC: First, you must notify HMRC that you intend to disclose unpaid tax. At this stage, you don’t need to provide full details; inform them that a disclosure is pending.

Gather records: You must gather your company records, accounts, dividend vouchers, tax calculations, etc., to quantify the additional tax owed. If records are incomplete, you may need to make reasonable estimates.

Submit disclosure: Within 90 days of notifying HMRC, you must send your disclosure through the online disclosure facility, detailing the previously undeclared income and calculating the additional tax and interest due.

Pay the Tax: You must settle the full amount owed when disclosing or agreeing on a payment plan with HMRC in advance if paying in instalments.

Cooperate with HMRC: It would help if you cooperated fully with any additional queries HMRC may have to validate your disclosure. Retain records in case of future review.

By cooperating with the voluntary disclosure process, you take control of resolving your tax affairs with HMRC. The alternative is to endure an investigation further down the line, where HMRC will be in the driving seat.

Can you get help?

Seeking specialist tax advice can be invaluable when faced with a tax investigation. The rules on dividends and disclosures can be complex, so unless you have expertise in this area, we recommend you go with it. Our tax advisers can help verify your tax position, ensure everything is noticed from your disclosure, and handle communications with HMRC on your behalf. This could be money well spent to achieve certainty and closure for you.

Dealing with tax investigations is rarely stress-free. But by taking the right advice and working positively with HMRC, you can reach an outcome that draws a line under the issue as smoothly as possible.

Take control of your tax affairs.

If HMRC has concerns about your declared dividend income and you receive one of these letters, you shouldn’t ignore it. Sticking your head in the sand is tempting but likely worsens matters in the long run.

You have an opportunity here to take control of resolving your tax affairs, either by confirming to HMRC that your returns are accurate or by cooperating with their voluntary disclosure facility. Taking the right advice, cooperating fully and maintaining open communication with tax officials means achieving the best outcome in an extremely difficult situation.