HMRC receives a vast amount of information in respect of overseas assets belonging to UK residents.
This information is of particular interest to HMRC as it allows for them to:
- identify wealth outside of the UK belonging to UK residents, and
- consider whether the UK treasury has been in receipt of the correct amount of tax in respect of these overseas assets.
The latter point stems from the fact that some taxpayers have been known to transfer/create assets abroad, with a view to concealing them (and the associated taxable income and gains) from the UK tax authority.
When considering bank accounts operated overseas, historically HMRC has obtained information in many ways:
- an exchange of information with other jurisdictions e.g. the US via the Foreign Account Tax Compliance Act (FATCA), and the Crown Dependencies,
- data Leaks e.g. Panama Papers and the HSBC Swiss information or,
- paid for information
From 30 September 2017, the information received by HMRC has grown exponentially, because of the “Common Reporting Standard” (‘CRS’). Under the CRS, which has been adopted by over 100 jurisdictions, financial institutions (including banks) are required to collect and share financial information of foreign account holders with the country that the individual is obliged to pay tax. For example, if an Indian national has a German bank account, his/her financial and personal information will be reported to the Indian tax authorities by the German authorities.
Likewise, under the CRS, HMRC also receives annually the offshore bank account details of its UK nationals. The information being shared includes the account holders name, address, date of birth, account number, the account balances amongst other personal information.
What is HMRC doing with this information?
HMRC cannot process all the information that is received. Instead, they are writing to taxpayers to tell them that they have information that suggests they have assets overseas and “nudging” them to review their tax position (historic and current) to ensure the correct amount of tax has been and is being paid in respect of these assets.
What do the nudge letters say?
The nudge letters being sent by HMRC are evolving, but the most recent letters tell the taxpayer that HMRC is aware the taxpayer has overseas income and/or gains, and that they have compared the information received with the taxpayer's tax returns, and that HMRC considers the correct amount of tax has not been paid.
HMRC invites the taxpayer to review the position and asks for the taxpayer to complete and return the accompanying “Certificate of Tax Position” by a specified date. The tax certificate allows the taxpayer to select various options e.g. confirmation that the historical tax position is correct, or that an amendment needs to be made.
The certificate, however, carries a prosecution warning: “I understand that dishonestly making a false statement to evade paying tax is a criminal offence and I may be subject to investigation and prosecution”.
What should you do if you receive a nudge letter?
While there is no statutory basis for having to comply with HMRC’s request with regards to signing the certificate, it is the view of the tax profession in addition to the leading accounting professional bodies that HMRC’s request is complied with but under a separate cover letter as opposed to signing HMRC’s certificate. This will prevent HMRC from commencing enquiries where the concern can be nipped in the bud at the outset.
It is highly recommended, however, that individuals who have income/gains bearing assets overseas undertake a comprehensive review of their tax affairs to ensure they are fully tax compliant in the UK before responding to HMRC.
Given the penalty regime for failing to disclose the correct amount of income/gains arising from an overseas-based asset range from 100-300%, it is not only those who receive HMRC’s nudge letter who should consider undertaking a review of their affairs. If there has been an inaccuracy in the past, it is considerably advantageous to make a disclosure to HMRC before being in receipt of a nudge letter.
Written by Kam Gill Senior Manager - Tax Investigations
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