This is a more common problem that many people believe. There are many people who set out as self employed (especially in times of recession and redundancies) and find it a struggle to keep up with all of the paperwork. They often mean to register for tax and then do not quite get round to it as looking after a new business takes a lot of time and effort. Year two will then pass (with the best intentions of registering to pay tax but never quite getting round to it due to other pressures). The individual then often becomes frightened and believes that if they go to the tax man they will get thrown in jail. They then spend the next few years dreading the brown envelope from the tax man hitting their doorstep.
HMRC recognise that there are many people in what they call the Hidden Economy and have a number of "Hidden Economy Teams" around the country who's sole aim is to bring people back into the tax system.
Prosecutions for this type of offence are very rare and if a person voluntarily comes forward to HMRC to disclose untaxed income for a number of years HMRC normally will accept a settlement to include tax, interest and a penalty.
A problem for many individuals is that business records have not been maintained for the whole of the period. Although this makes the task of preparing the figures more difficult this is not impossible, especially if your advisor has experience of reconstructing past information and estimates.
The main cost, in most instances, of getting back into the system for tax purposes is a financial one. It can be done and once most people have started the process, as long as they have the right guidance and advice they often feel much happier.
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