Cryptocurrency Voluntary Disclosure warning
On November 29, 2023, HMRC released updated guidelines and launched a fresh campaign urging crypto investors to disclose past cryptocurrency tax liabilities through the newly introduced CryptocurrencyVoluntary Disclosure Service. This new initiative from HMRC allows taxpayers to voluntarily reveal any previously unpaid taxes linked to cryptocurrency gains or income.”
HMRC actively urges taxpayers to voluntarily disclose any past tax discrepancies or errors through the Voluntary Disclosure process. Those who come forward voluntarily are less likely to face investigations and reduced penalties.
Voluntary Disclosure Campaigns by HMRC are aimed at encouraging individuals to address their tax issues promptly, ensuring compliance, and preventing future errors. These campaigns target various sectors, such as landlords, recipients of Coronavirus Job Retention Scheme grants, and those with offshore income.
Specific campaigns, like the Let Property Campaign and Worldwide Disclosure Facility, offer taxpayers opportunities to rectify their tax affairs with leniency. HMRC also provides the Digital Disclosure Service for those who don’t qualify for existing campaigns, enabling declarations on various taxes like Income Tax, Capital Gains Tax, National Insurance contributions, and Corporation Tax. Making a full and honest disclosure typically results in lower penalties compared to discoveries made through investigations or checks by HMRC.
Why It’s Beneficial to Address HMRC Matters Before They Pursue You?
Find below seven compelling reasons for Crypto Investors to heed the Cryptocurrency Disclosure Warning”
1. Higher Penalty for unprompted Disclosure
HMRC imposes penalties for tax return inaccuracies or failure to notify. Inaccuracies leading to unpaid, understated, or over-claimed taxes, whether due to carelessness, deliberation, or concealment, may result in penalties. Additionally, not notifying HMRC within specified time limits can also incur penalties.
The severity of penalties depends on certain factors:
Behaviors:
Reasonable Care: Taxpayers are expected to take reasonable care with their tax affairs, which includes maintaining accurate records, seeking advice when unsure, and following that advice. If despite reasonable care, an inaccuracy occurs, HMRC typically won’t penalize.
Carelessness: Refers to failure in taking reasonable care.
Deliberate: Knowing about an inaccuracy when submitting documents.
Deliberate and Concealed: Knowing about an inaccuracy and actively hiding it before or after submission.
Timing:
Unprompted Disclosure: Proactively approaching HMRC to voluntarily declare any tax discrepancies or unpaid amounts shows commitment to compliance. This action typically results in milder penalties.
Prompted Disclosure: Occurs when HMRC initiates contact, requiring disclosure.
Here’s a summary of the different penalty rates applied and the extent of HMRC investigations in terms of timeframe;
| Type of Behaviour | Unprompted disclosure | Prompted disclosure | How many years to Disclose |
| Reasonable care | No penalty | No penalty | 4 Years |
| Careless | 0% to 30% | 15% to 30% | 6 years |
| Deliberate | 20% to 70% | 35% to 70% | 20 Years |
| Deliberate and concealed | 30% to 100% | 50% to 100% | 20 Years |
2. Cryptocurrencies fall under the purview of money laundering regulations and measures to prevent financing for terrorist activities.
In January 2020, the UK incorporated the EU’s 5th Anti-Money Laundering Directive into domestic law, expanding regulations to include Virtual Currency Exchange Platforms and Custodian Wallet Providers. The Financial Conduct Authority (FCA) oversees compliance with anti-money laundering procedures for cryptocurrency firms, wielding powers to rectify compliance issues, collect information, and enforce disclosure to customers. HMRC has intensified scrutiny on UK crypto exchanges, using statutory powers to request customer information. Exchanges must conduct KYC checks, submit Suspicious Activity Reports to the National Crime Agency, and share account data with HMRC. For instance, Coinbase shared user details with HMRC, leading to “nudge letters campaign” reminding investors to report crypto assets and strengthen the crypto tax investigation efforts.
3. Strengthened Enforcement Measures for Confiscating Cryptocurrency Assets
Increased Authority to Confiscate Cryptocurrency under Proceeds of Crime Act 2002 (POCA), Anti-Terrorism, Crime, and Security Act 2001, as well as the Terrorism Act 2000, aims to align with evolving terrorist financing threats. These updates guarantee civil forfeiture and seizure capabilities concerning cryptocurrency assets. These recent revisions empower law enforcement to more efficiently probe, confiscate, and reclaim illicit gains within the crypto asset landscape.
4. The Spring 2023 budget introduces distinct reporting obligations for cryptocurrency assets
The government is updating Self-Assessment tax return forms to explicitly detail cryptocurrency amounts. Starting from the 2024-25 tax year, cryptocurrency data won’t be grouped under CGT or miscellaneous income, ensuring clearer identification. These adjustments aim to assist HMRC in pinpointing cryptocurrency-related cases for potential investigation. Additionally, the OECD is developing a framework for global data sharing, specifically focusing on Crypto-asset reporting, further supporting this initiative.
5. By 2027, tax authorities will exchange cryptocurrency data as part of the Crypto-Asset Reporting Framework (CARF).
The UK and 47 other nations have committed to implementing the Crypto-Asset Reporting Framework (CARF) by 2027, signalling a substantial advancement in global tax transparency. CARF, approved by the OECD in March 2023, prioritizes information exchange among countries. The recent collective statement, released on November 10th, underscores the dedication of these countries, including the UK, toward adhering to this standard. The implementation of CARF intends to enhance tax compliance, counter tax evasion, and reinforce due diligence in Anti-Money Laundering endeavours.
6. Improved Artificial Intelligence Capabilities for Investigating Crypto Taxes
HMRC is intensifying its utilisation of data mining tools, notably the “Connect AI Systems”, to scrutinize financial records meticulously. Connect enables HMRC to cross-check details furnished in tax returns against diverse financial data from individuals’ and businesses’ records elsewhere. It aggregates information from numerous public and private sources, swiftly identifying discrepancies or potential underreporting. With an investment of £80 million since 2008, HMRC currently employs over 150 analysts to extract insights from this data. The Connect system now autonomously amalgamates details from over 30 databases, encompassing taxpayers’ earnings, banking activities, loans, property and vehicle ownership, social media and internet browsing activities, transactions on e-commerce platforms, flight and UK Border Agency records, along with offshore financial data gathered via CSR reporting. Moreover, HMRC holds authority to request comprehensive data in bulk from third parties like exchanges and wallet providers.
7. HMRC employs cryptocurrency tracking software for crypto tax investigation purpose
HMRC and various government agencies utilize crypto and blockchain analysis software like Chainalysis Investigations Solutions to track and comprehend blockchain activities. This software empowers investigators and analysts with live cryptocurrency insights, enabling the mapping of addresses to identified services, immediate detection of illicit activities, and the construction of cases in real-time.
It’s crucial to recognize that cryptocurrency transactions on the blockchain aren’t anonymous; the record is publicly available and immutable. Blockchain technology grants access to real-time crypto information, eliminating the need to wait for clients to provide transaction data. Transactions are permanently recorded in the blockchain ledger, and their history cannot be altered or erased. These inherent characteristics facilitate tracking transactions even after extended periods. Even if some decentralized exchanges don’t comply with KYC requirements, transactions can still be traced back to incoming and outgoing wallet addresses to identify specific trades.
DISCLAIMER
© My Accountancy Team 2023 All Rights Reserved – The above articles are provided for guidance only and may not cover your personal circumstances so you should not rely on them. It is important that you seek appropriate professional advice which takes into account your personal circumstances where you can provide the full facts of the case and all documents related to your case. My Accountancy Team Ltd t/a mycryptotax.co.uk, cannot be held responsible for the consequences of any action or the consequences of deciding not to act.
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