If you are a shareholder in a company you have little involvement in, you might not realise a share disposal can trigger Capital Gains Tax (CGT).
Shares might have been put in your name decades ago by a parent or a partner, but you may have had little involvement in the business since. It is likely tax wasn’t ever mentioned.
You’ve sold your shares and the money has reached your account – what needs to be done now to avoid HMRC ‘failure to notify’ penalties?
How should you notify HMRC of a share disposal?
If you are already registered for Self Assessment, you typically need to report a share disposal using the CGT pages of the tax return.
For those who do not normally file a tax return, there are two options available.
The first is HMRC’s ‘real time’ transaction reporting service, which can be used to report gains originating in the current or previous tax year.
If you decide not to use the real time service, you’ll be required to register for a Self Assessment tax return to disclose the share disposal.
As you might not have submitted a tax return in the past, you will need to contact HMRC by 5 October following the end of the tax year you have tax liability to pay.
The gain will then need to be reported on the return by 31 January following the year of assessment.
It is worth considering that a gain from several years ago doesn’t automatically disappear from HMRC’s radar.
HMRC might only have four years to raise an assessment, but this can be extended if a taxpayer has failed to notify them of a tax liability.
What happens if you don’t notify HMRC?
Failing to notify HMRC of a tax liability can result in a penalty, which can differ based on how your behaviour is viewed and whether you proactively disclosed your mistake.
HMRC categorises behaviour as either deliberate or non-deliberate. Where disclosures are made, they are either prompted or unprompted.
For example, if you forgot to notify HMRC about a share disposal, but you realised quickly and disclosed it yourself, this might be classed as a ‘non-deliberate unprompted disclosure.’
Penalties for non-deliberate behaviour can range from zero to 30 per cent of the ‘potential lost revenue’ (PLR), which is the amount of tax that HMRC has lost from a failure to notify.
Minimising non-deliberate penalties
A penalty can be reduced to nil if you have a reasonable excuse for failing to notify.
However, HMRC often treats the defence of ‘I didn’t know’ as a poor argument, so your actions when you found out often hold the most weight.
While non-deliberate behaviour typically yields the lowest penalty, unprompted disclosures to HMRC can help minimise penalties.
This is because prompted disclosures more than 12 months late cannot fall below 20 per cent PLR, even if they are non-deliberate.
Deliberate, or deliberate and concealed?
Where behaviour is deemed to be deliberate, it is categorised as concealed or not concealed.
You might have intentionally not told HMRC about a tax liability, but did you take active steps to conceal your behaviour?
While the maximum penalty for non-concealed deliberate behaviour is up to 70 per cent of PLR, it can rise to 100 per cent if HMRC believes it to be actively concealed.
Seeking help from a financial specialist
Reaching out to an accountant can help you confirm CGT liabilities and calculate how much tax is payable to HMRC.
An accountant can help you determine the correct tax to be paid and ensure it is reported within key deadlines, mitigating the risk of failure to notify penalties.
Where a tax liability hasn’t been reported, tax specialists can manage correspondence with HMRC to provide disclosure of mistakes and defend penalty positions.
Worried about an unreported gain? Contact one of our accountants for guidance.
