Statistics suggest that the UK tax gap, ie the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid, fell to the lowest rate on record for the 2018/19 tax year @ 4.7%. This is a major achievement for HMRC and reflects investments made in automating many administrative systems to make it as easy as possible for taxpayers to pay the right tax, at the right time. It also reflects their success acting against those who have sought to deliberately evade their Offshore tax obligations. More than £3 bn has been secured by the UK Government since 2010, just from initiatives that focused on Offshore non- compliance.
But around 10% of this tax gap statistic, is apparently due to taxpayer basic errors involving “Offshore aspects”. HMRC recognise this is not always about individuals deliberately concealing overseas details, but simple misunderstanding and lack of knowledge/awareness connected to UK tax policy.
What are Offshore Aspects
Offshore aspects refer to income or gains from a jurisdiction outside the UK and would include sources such as bank interest, dividends from overseas companies and rental income from foreign properties. From a taxpayers’ perspective, it definitely pays to get it right first time. Penalties are severe – a minimum of 100% of any unpaid tax, plus interest, not to mention the unwelcome stress and close attention of HMRC focusing on your financial affairs. HMRC can be sympathetic up to a point, and can understand that taxpayers make genuine mistakes, defined by them as anything from clear negligence to carelessness, however all these mistakes, including UK and Offshore tax matters, now account for around 28% of the 4.7% tax gap. It’s therefore not surprising they are keen to understand what can be done to help taxpayers get it right first time.
With this in mind, HMRC have published a discussion document, seeking views on ways to help taxpayers get their offshore tax right first time. Interested parties have until 15 June 2021 to respond, and this is perhaps a welcome opportunity to highlight some of the issues and complexities faced by UK resident individuals, who are required to report overseas sources.
UK Tax Returns – Offshore Reporting Issues
The responsibility for filing a correct Tax Return is absolutely the taxpayers responsibility. It is the very nature of “Self Assessment”, but reporting Offshore Income and Gains can be particularly complex:
- Foreign jurisdictions report their income sources based on their country’s tax year, which is usually a calendar year. This doesn’t neatly align to the UK fiscal tax year, and can lead to confusion as to what exactly should be reported in the UK return, plus delays in accessing the details needed.
- Some sources of income or gains require a particular reporting approach according to the UK Double Tax Treaty agreement with overseas jurisdictions.
- Identifying how some Foreign investment structures would be treated according to UK tax legislation can be difficult. For example, what is seen as a pension in one jurisdiction, could be viewed as an overseas savings plan by HMRC.
- Exchanging income or gains correctly to GBP in some cases isn’t straightforward. Gains on sales of foreign assets should be exchanged at the point of acquisition and sale respectively. Many do not appreciate this aspect and incorrectly exchange the gain made on foreign currency itself.
- Claiming foreign tax paid against UK tax due on the same source is probably one of the most common areas where mistakes are made. In most cases, it must be restricted according to Treaty aspects and the UK tax on each separate source.
HMRC Helping Taxpayers
HMRC suggest that one method of helping individuals correctly report their tax position, would be for HMRC to somehow share or use the offshore data now being sent to them by overseas financial institutions. Global Exchange of information Agreements, including CRS and FATCA, have been incredibly successful and HMRC directly receive offshore details for millions of taxpayers. This has led to HMRC currently identifying non-compliance after the event, but perhaps they can share details with taxpayers or agents, to prevent this happening in the first place.
Another suggestion is that the Foreign pages of the Tax Return are amended to allow taxpayers to provide full details of sources of offshore income. For example, the particular bank and account number, allowing identification of income per account held. This would prevent HMRC raising formal enquiries at a later date, ie when they are cross checking details supplied to them via overseas institutions and not seeing an exact match.
Ultimately however, HMRC recognize that general awareness of reporting offshore sources is low. For example, a very common misconception is that no UK reporting of overseas income is required if tax has been paid in the foreign jurisdiction, or if you are not UK Domiciled (and despite being resident for many years), there is no need to report any overseas income provided not brought to the UK.
HMRC are therefore inviting suggestions connected to raising awareness around Offshore tax matters, simply trying to help those affected to get it right. This could include real time digital prompts when completing returns, highlighting known offshore sources, or maybe sending communications to those who aren’t already in self- assessment, suggesting they should actually register to file a Tax return.
It is good to see that HMRC are accepting that Offshore tax aspects are complex and that in many cases, taxpayers need some help to get this right. It will also be good to see clearer commentary from HMRC to help raise awareness and assist individuals with their reporting obligations. We must not forget however, that ultimately the onus to file a correct tax return, is the responsibility of the individual and many will still need professional help to ensure they get it right.
The Private Client International Team are here to help you. We have the necessary specialist expertise to ensure your UK Tax Returns reflect the correct overseas tax aspects, plus we are perfectly placed to help you plan to mitigate short and long term UK tax liabilities.