HMRC’s very own “tax gift that just keeps giving”…
The effect of Automatic Exchange of Information Agreements, including the Common Reporting Standard (CRS), and United States Foreign Account Tax Compliance Act (FATCA), has placed HMRC in a very powerful position, having in many cases, full line of sight to exactly what taxpayers should have been reporting on their Tax Returns.
This is allowing them to effectively cherry pick names from a very large list, and send letters out to those individuals where their submitted UK tax returns, for whatever reason don’t reflect details of income or gains provided to HMRC from overseas countries.
Nudge letters are nothing new, but have perhaps up to this point, been a bit of an educated guess by HMRC, based on very broad details supplied to them.
Targeted Updated Version
The July version of these nudge letters have been issued from the HMRC “Risk and Intelligence Service, Offshore Unit", and have been updated to reflect the more detailed overseas income information they now possess, and have been reworded because of this – for example:
- HMRC confirm that they have compared the information exchanged to individuals tax record / tax return before sending out the letter
- It indicates that HMRC believe the individual may not have paid the right amount of UK tax
- It confirms the letter is not speculative, and they are only contacting taxpayers where they are unable to reconcile the figures received when comparing these to tax records and returns
- They mention that historic tax advice received relative to assets overseas could now be out of date following changes in tax laws, implying this should be revisited
- They go on to recommend that professional tax advice should be obtained if there is any doubt
- All the letters include a Certificate of Tax Position declaration form which asks the individual to complete and return if they have any tax to disclose or not
HMRC could still be wrong
The UK are pretty unique in the fiscal tax year approach to reporting, compared to most other countries taxing their residents according to the calendar year. This means that information provided to HMRC from another country could relate to two different UK tax years, and so it’s likely that in most cases, HMRC will simply not have enough detail to be certain of the correct position.
It’s also probable that one global income figure reported in any UK Tax Return, will relate to many different income sources, and HMRC can’t see that breakdown without asking the taxpayer concerned. This again, can lead to misinterpretations of expected income sources.
What should you do if you receive a letter from HMRC
- First - double check what you have reported previously / make absolutely certain you are comfortable all sources have been correctly reported to date, and if necessary seek professional advice to provide that certainty.
- Second – if a disclosure is required, then we would definitely recommend that you obtain professional advice from a suitably experienced tax qualified specialist. The reason being that non declaration of overseas income and gains can potentially lead to criminal prosecution, and at the very least significant tax penalties of up to 200%. An experienced advisor will be able to support and guide you through the process, confirming the most appropriate course of action to make full disclosure, including utilisation of Worldwide Disclosure Facility if appropriate.
- Third – If you are satisfied that any and all overseas sources have been correctly reported to date, then we would not recommend that the certificate of tax position is signed and returned to HMRC. There is no de minimis level of liability outlined on the certificate, nor does it automatically restrict liability to one year, and importantly there is no legal obligation for this to be completed. In view of the serious consequences if making a false declaration, it is likely to be preferable to respond by letter to HMRC, which allows for an opportunity to outline any background to complex overseas details, perhaps then avoiding a full scale enquiry.
The letters request a response within 30 days, and irrespective of the background, we would always recommend that a reply is made in one form or another within that time frame.
We are perfectly placed to help. If you require any more information please contact Lynn Gracie, Private Client Tax Director, or your usual AAB contact.