HMRC ‘nudges’ taxpayers holding overseas assets to make disclosure
Thousands of taxpayers have received so-called nudge letters from HMRC asking them to review their tax affairs. There have been several tranches of letters over the past 18 months indicating that HMRC holds information on the overseas income and gains.
The letter goes on to ask that the recipient complete a certificate to confirm that they either need to disclose undeclared income and capital gains or that they consider their affairs to be up to date. The letter also contains the warning that false statements could result in a criminal investigation.
Over the past four years, HMRC has received a vast amount of data through the exchange of information with the Crown Dependencies and British Overseas Territories. The biggest source of information though has been the automatic exchange of information initiative with over 100 countries, commonly known as the Common Reporting Standard (CRS). The OECD initiative started in 2017 and the early adopters, which included the UK, have been overwhelmed with data from overseas jurisdictions.
HMRC has struggled to find sufficient resource to investigate all of the taxpayers named. This has prompted them to issue the letters to ‘nudge’ taxpayers towards making a disclosure, where necessary, of the undeclared foreign income and capital gains. While there is no statutory requirement to respond to the letter, HMRC asks that the recipient reply within a month. Care should be taken before a response is sent to HMRC. The taxation of overseas income and gains is a very complex area of tax, especially for non-UK domiciled individuals. It may therefore take time to confirm whether there is anything that needs to be brought to HMRC’s attention.
Here at Moore Kingston Smith, we are often asked whether the recipient should sign the form that accompanies the letter. While the letters are formally worded, there is no legal obligation to complete the certificate and it would be more appropriate for the adviser to respond on behalf of their client.
There are a myriad of reasons as to why something might not be right. Tax advice can easily become out of date due to changes in the law or the circumstances of the person that set up the overseas assets or structure. Alternatively, advice might have been obtained in the state in which the asset(s) are held on the assumption that the same advice would apply in the UK.
Often, the reason why the overseas income hadn’t been reported is that the taxpayer had already paid tax and declared the income and gains in the country where the assets were held but had not necessarily reported these to HMRC. It is a common misconception that, if tax has already been paid, there is no need to report the income. In some cases, the income may have suffered tax at source. HMRC pursues these cases, as UK taxpayers are normally taxable on their worldwide income and gains. There are exceptions to this where the taxpayer is non-UK domiciled and entitled to make a claim that they wish to be taxed on the remittance basis.
Seeking expert advice at the earliest possible stage is key to sorting out the historical tax position, as well as speaking to advisers with detailed working knowledge of the UK tax system and how to interpret the tax legislation and HMRC guidance.
We have a deep understanding of the pitfalls to avoid and the best course to plot. While the tax liability might not change, we can minimise the risk of HMRC seeking to charge the maximum penalty. Furthermore, we have a proven track of resolving the most complex of tax matters for our clients. Whatever the problem, we will find the right solution.
In some cases, there may not be any tax to pay, even if overseas income and gains have not already been declared. We can advise on the best way to present this to reassure HMRC that there is no liability and resolve matters as quickly and simply as possible.
Where there is a tax liability, it is important to understand how and why the issue arose. HMRC has the power to publish the details of deliberate defaulters where the tax owed is more than £25,000 and HMRC considers that the taxpayer acted deliberately. By being proactive and fully cooperating with HMRC, we can limit these risks.