It is important to understand that it is an offense to not declare the capital gains that can create a problem for you like a fine or make you pay even more than you owed in interest. At the same time, there are certain conditions and reliefs which may lower your capital gains tax. You should be aware of what happens if you don’t declare capital gains tax.
To avoid any inconvenience, it is essential to tell HMRC when selling land or property, even if you make a loss or your gain is below the tax-free allowance.
What is Capital Gains Tax?
Capital gains include the profit you got by selling something you owned. Its calculation is based on the criteria of an increase in the price of sale compared to the price of purchase. Capital gains tax is applied to the asset you held for more than one year.
Capital gains tax is applied to the given assets:
- Investment funds
- Shares
- Inherited properties
- Second properties
- Valuables like jewelry, antiques, and art
- The sale of a business
- Assets transferred below the market
Difference Between Gains Tax and Income Tax
The taxation rate on the above-mentioned assets is different from income tax. The difference in the tax rates is because of the risk involved in buying the assets, investment, or entrepreneurial. In other words, it is a potential reward and encouragement from the government for taking risks in purchasing assets to increase production.
Consequences of Tax Evasion
Those found guilty of tax evading may have to face serious penalties, unlimited fines, and prison sentences. Of course, breaking the law results in more than just physical misery; it also has financial and legal ramifications including asset freeze, legal bills, litigation, inquiry, confiscation, and reputational harm. These issues can become counterproductive for an individual or a business.
What Happens if You Don’t Declare Capital Gains Tax in the UK?
There are legal criteria and obligations for all the citizens of the UK in respect of tax filing and reporting capital gains on different types of assets we mentioned above. To answer the question, do I have to declare capital gains tax? Consider the following:
Timing and Intentions Matter in Penalties
When it comes to penalties, there are certain factors that are taken into consideration like timing, duration, and intentions of an individual and company. The following are the penalties for not declaring capital gains tax:
The penalty for being late for three months will be charged £10 per day for up to 90 days, which is the maximum equivalent of £900.
The penalty for being late in paying a due tax for 6 months will be different from 3 months lateness. Its penalty is 5% of the due tax or £300, if greater.
The penalty for not declaring tax for 12 months is also 5% or £300, if greater. However, these punishments are only applicable when the taxpayer deliberately conceals information to avoid paying taxes.
Behavior and Intention Factors
Intention and behavior factors are important in assessing the penalty for capital tax avoiders. If someone is found guilty of deliberately concealing tax information for 12 months to avoid tax, they will have to pay 100% of the due tax or £300 if greater.
Deliberation not Concealment of Tax
The penalty for those who deliberately did not pay the tax for 12 months but also did not conceal the tax-related information, the law will treat them softly compared with those who are deliberate tax offenders. They will have to pay 70% of the tax due, or £300 if greater.
Deliberation and Concealment
If someone deliberately conceals tax-related information to avoid taxes, he will have to pay 100% of the due tax, or £300 if greater.
How to Suspend a Penalty
If the taxpayer takes HMRC into confidence and makes time to pay the agreement, in this way, he can suspend the penalty.
It is important to understand that if the suspension agreement is broken, then the taxpayer will be liable for the penalty.
Appeal
According to UK law, the taxpayer has 30 days to file an appeal with HMRC against a tax penalty. During COVID-19, this date was extended by three months for the 2019-20 tax year.
The tribunal judge or the HMRC may decide to accept a late appeal. There is the process of lodging an appeal against each penalty in the legislation relevant to the taxation system. It is important to lodge an appeal in the legally correct way to suspend or get some relief from the penalty.
What is Tax Evasion?
Tax evasion may be termed as a deliberate and dishonest effort to conceal the tax owed to HMRC. He who does not declare taxable gains or income he has received can be accused of tax evasion. HMRC, which is the customs and tax authority of the UK, identifies and initiates legal inquiries against those taxpayers who knowingly suppress information to reduce tax payments or avoid tax.
Consequences of Tax Evasion
Those found guilty of tax evading may have to face serious penalties, unlimited fines, and prison sentences. Of course, breaking the law results in more than just physical misery; it also has financial and legal ramifications including asset freeze, legal bills, litigation, inquiry, confiscation, and reputational harm. These issues can become counterproductive for an individual or a business.
What are the Types of Tax Evasion?
Non-reporting Taxable Trading Income: This type of practice involves deliberately hiding revenues or failing to file tax returns.
Carousel Fraud: This is the type of illegal practice when an individual imports goods VAT-free, sells them to customers with added VAT, and then does not file a report of VAT charged to the HMRC.
False Invoices: Building trade uses this type of practice. This involves filing personal expenditures or non-existent expenditures on home renovations to avoid tax.
Imported Goods: This practice involves not declaring imported goods or stating the value of imported goods lower than the actual price to evade import duties.
Tax-allowable Claim on Expenditure: There are certain expenditures that carry tax breaks like spending on eco-forest or film industry. If the taxpayer spends on some other purposes and claims the tax-allowable expenditure, this is tax evading practice and crime.
False Identity: Conducting taxable transactions under the identity and name of someone else and then disappearing is a fraud to evade tax.
Crypto Transactions: This trading transaction is for avoiding paying tax on gains or income because it is hard to trace records on it.
What are the Penalties for Tax Evaders?
There are different penalties, like heavy fines, but the maximum penalty for tax offenders in the UK is jail time. Consider the following to understand what happens if you don’t declare capital gains tax:
Penalties for Tax Evasion: If an individual evades tax, they can end up in jail for 6 months or fined up to £5,000. The maximum penalty in the UK for tax evasion is an unlimited fine or seven years in prison.
Evasion of VAT: In the court of the magistrate, the maximum sentence is a fine of up to £20,000. Or it can be 6 months in jail.
Cheating Public Revenue: Public cheating is a serious crime and the maximum sentence for cheating the public revenue is an unlimited fine or life in prison.
Is Tax Evasion Illegal?
Yes, tax evasion is a type of fraud and criminal offense in the UK.
Is there any difference between tax avoidance and tax evasion?
Usually, tax avoidance is the result of poor record-keeping and human error. Failure to register a new business and failure to file a tax return on time can lead to tax avoidance. You can still be prosecuted by the HMRC if it finds that it was intentional to avoid due tax.
While on the other hand, tax evasion is a serious offense. It carries a maximum penalty of seven years in prison and a heavy or even unlimited fine.
How does HMRC Trace Tax Evasion?
HMRC collects tax to use for public services. It has an expert team that uses a highly incredible database known as ‘Connect’ to trace tax evasion.
If there is any questionable activity occurring in relation to your accounts, action is taken immediately. The same goes for any discrepancies with your tax return. It also uses several applications, from Apple, Amazon, and Airbnb, to find companies and people who are dodging taxes.
HMRC also works in coordination with other law enforcement and investigating agencies, such as the Serious Fraud Office. Therefore, they can watch and catch tax evaders.
To keep watch on offshore tax evasion, HMRC keeps itself in touch with international law enforcement agencies. Hence, HMRC knows if British citizens are moving money illegally offshore to avoid UK tax laws.
