An increasing number of individuals are setting up Family Investment Companies; these are simply companies within the scope of UK corporation tax which invest family money and whose shares are owned by family members. These companies are used for long-term investment of family wealth, because the relatively low-tax environment allows for the compounding of after-tax investment returns more effectively than if the investments are held personally. If money is paid out from the company as a dividend, then income tax is payable on the dividend, so again, the companies are used as a long-term vehicle, as the benefit is relatively limited if the company pays out all investment returns as they are realised.
The use of such companies has arisen primarily because of the difference in corporation tax rates (currently 19%) paid by companies on income and gains, and income tax and capital gains tax rates (up to 45% and 28% respectively) paid by individuals.
The Conservatives have said that they will not implement the proposed reduction of corporation tax from 19% to 17%, whereas the Labour manifesto proposes to increase the rate to 26%. However, Labour also propose to increase the top income tax rate to 50% and to increase the top capital gains tax rate to 50%.
What this means is that, if the Labour proposals are implemented, the benefits of a family investment company would be only slightly eroded, in terms of reducing the ongoing tax on the investment return as compared with the tax paid by an individual making the same investment.
The following table shows the effect for investment income.
|Investment return of £100 taxed as income||Current rates||Proposed rates|
|Individual can reinvest||£55||£50|
|Company can reinvest||£81||£74|
|Company can reinvest more than individual by||£26||£24|
Currently, the income tax rates on dividends are lower than the rates of tax on other income, in effect to take account of the fact that dividends are paid out of company profits which have already been subject to corporation tax. Labour are proposing to tax dividends at the same rate as other income, up to a top rate of 50%. Therefore, using savings to equity-fund a Family Investment Company will increase the total tax liability if the company pays out the investment return as a dividend at the end of the year, so that you are worse off than simply investing as an individual. However, such a company still has value as a long-term deferral strategy.
The proposal to align capital gains tax rates with income tax compared would create a greater incentive to use family investment companies when investing for gains.
|Investment return of £100 taxed as a capital gain||Current rates||Proposed rates|
|Individual can reinvest||£80||£50|
|Company can reinvest||£81||£74|
|Company can reinvest more than individual by||£1||£24|
Additionally, a combination of the proposed abolition of entrepreneurs’ relief (which reduces an individual’s effective rate to 10%), and the ability of companies to utilise the substantial shareholder exemption to allow qualifying sales of stakes in trading companies to be free of corporation tax, would make companies more attractive.We have advised on a variety of different circumstances in which Family Investment Companies can be used, and there are other potential advantages in addition to the tax rate on returns. If you would like to discuss setting up such a company, contact Trident Tax Ltd.
A recent First Tier Tribunal case found that trustees of a UK resident trust were entitled to pay CGT at 10% rather than 20% on a disposal of shares, READ MORE because they qualified for Entrepreneurs’ Relief (“ER”) in a circumstance where HMRC’s guidance says that no relief is available. In the course of the hearing, Counsel for HMRC said that if their opponent was correct, trustees could take action immediately before the disposal to obtain the tax relief.
The case concerned a situation where an individual who met the ER conditions for his own disposal of shares on the sale of a trading company was also a beneficiary of a trust which held shares in the company. The individual had been given an interest in possession in the trust before the trustees sold the shares, but less than a year before that sale. The judge held that on a plain reading of the legislation, it was not necessary for the individual to have held the interest in possession for the year before the sale, and so the trustees were entitled to the relief.
Thus, before a sale of shares in a trading company (or the holding company of a trading group), trustees of a discretionary trust can, where the trust deed permits, give an interest in possession to such an individual, and claim relief from Capital Gains Tax. Note that giving the interest in possession doesn’t give that individual rights in relation to the proceeds of sale, which are capital. It would give the individual the entitlement to investment income realised on the proceeds. Note also that property development companies can qualify as trading companies, and that companies which meet the conditions for furnished holiday lettings can also qualify, so the effect of a claim to Entrepreneurs’ Relief could be a tax reduction of 18% not just 10%.
So, trustees should consider this, and also ensure that they consider whether there could be any adverse tax consequences of taking such an action. Trustees of non-UK resident trusts which are settlor-interested should note that James Kessler QC considers that trustees of a trust within s86 can claim Entrepreneurs’ Relief. We would be happy to advise on this.
We want to recruit a Tax Advisory specialist at Manager or Senior Manager level to support continuing growth.
Trident Tax is a tax advisory and tax resolutions practice established 10 years ago, comprised of former Big 4 and HMRC specialists. We operate from offices in London, Birmingham and Manchester.
Our advisory practice provides specialist tax advice across business, personal and trust taxes for corporates, High Net Worth and Ultra High Net Worth clients based in the UK and overseas.
We also work extensively on referrals from other professionals: accountants, solicitors, trustees and wealth managers.
The quality and complexity of our work is comparable with that of the largest accountancy and law firms. Our work frequently involves property transactions, corporate projects and planning, exit planning, overseas trusts and companies, residence and domicile issues, offshore funds, private equity and succession planning.
We are a close knit, owner-managed team with an informal but highly committed approach to our work. You’ll find a conspicuous lack of bureaucracy or office politics within in our organization.
You must be CTA qualified with very strong technical knowledge and desire to develop it further. It’s also essential that you work well in small teams and are able to brainstorm within the team to help develop solutions to complex problems.
You will be client-facing and must be able to develop strong and enduring relationships with clients and other professionals. Ideally, but not essentially, you will be based in the Midlands.
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Please send your CV to Alan Kennedy: firstname.lastname@example.org
One aspect of the taxation of non-UK companies was previously straightforward: they were generally not chargeable to corporation tax. Only UK resident companies paid corporation tax but this changed from 2016 and now there are further occasions when non-UK resident companies will have to pay corporation tax.
New rules will bring non-UK resident companies within the charge to corporation tax for the taxation of rental income in addition to the rules for capital gains connected with UK property. These various rules have different starting dates depending on the activity or the nature of profit or gain concerned. To complicate matters further, directors of non-UK companies will need to take different steps depending on circumstances.
This an important change for the trustees of non-resident trusts that hold UK property through a non-UK resident company.
Non-Resident Capital Gains Tax (NRCGT)
The latest rules for NRCGT came into effect for disposals or transfers of property from 6 April 2019. The position for companies has been made simpler. Previously, a non-UK resident company could be charged to capital gains tax under the ATED-related gains and NRCGT rules or both; each with different reporting deadlines. The new rules charge corporation tax on gains made on the disposal of UK residential property that relate to the period from 6 April 2015 onwards and for non-residential property, gains are charged to tax on any growth from April 2019.
A company must register for corporation tax within 3 months of the disposal, as compared with 30 days within which to file a return under the old rules. Registration can be made online and HMRC will issue the company with a corporation tax reference number to allow it to file returns online. The company will pay tax on property gains at the corporation tax rate rather than 28%, the rate that was payable under the previous ATED related gains regime for some companies and which is still payable for individuals and trusts.
The important point to note is that the directors of the company have a requirement to register for corporation tax and file returns otherwise the company will be charged penalties
Non-Resident Landlord Scheme (NRL)
Non-UK companies that receive rental income from UK property will soon become chargeable to corporation tax. The change will take effect from April 2020. That means companies currently registered under the NRL scheme will need to complete NRL and SA700 returns for 2018/19 and 2019/20 before the first CT return is due.
HMRC stated some time ago that it would be writing to all such companies over the summer of 2019 to advise them of the change and provide a CT reference number. A company will be treated as having notified chargeability to CT, relieving the directors of any separate requirement to notify chargeability to CT if they are already registered for NRL. The company will then be required to submit a CT return within the normal CT deadlines. This will depend on the company’s accounting period; returns must be filed within 12 months of the end of an accounting period.
Helpfully, there are rules that will grandfather any existing income tax losses so that they can be carried across to set against future CT profits from rental income. There will be no deemed disposal of the property for capital gains tax when the company moves from its current income tax basis of assessment to corporation tax and so no claim for incorporation relief will be required.
It appears that directors of non-resident companies can wait for HMRC to take the lead in the transition. However, an important point to note is that the company will come within the corporation tax legislation which includes the loan relationship rules for debts relating to the rental business. This could change the amount of tax paid by a company e.g. interest that is charged on a loan from a related party to purchase a property but is not paid i.e. rolled up, can currently be claimed as a deduction for income tax but will not be allowable for corporation tax under the loan relationship rules. It will be worth looking at the interest costs in any rental business to understand what the consequences will be going forward.
Non-UK property development company
UK property development carried on by a non-UK resident company is now within the scope of corporation tax. HMRC’s guidance is less clear here and simply says you should contact HMRC if you are developing property or land in the UK. This is probably because of the complexities that can arise in the taxation of property development. The actions required by the directors of a non-UK resident company will depend on whether development activity is a trade and if not a trade, whether it is caught by specific anti-avoidance provision such as the Transactions in Land rules. The different treatments could have different commencement dates or income recognition rules.
Directors or trustees of a non-UK resident company or trust should take advice as early as is practicable if they are considering entering into any arrangement that is linked to the building, development or improvement of a property. This is a complex area of taxation on which we advise frequently.
We have published four articles in which we focused on HMRC’s increasing use of so-called “nudge letters”, and there are further developments to report. The most frequent scenario is that HMRC receives information that a UK taxpayer has received typically overseas investment income or gains (most likely through one of the automatic information exchange agreements from one of many participating jurisdictions) and those receipts have not been declared on their UK tax return. HMRC prompts the taxpayer, in writing, either to certify that their tax returns are correct or, if not, they should put things right by making a disclosure of unpaid tax.
In recent weeks HMRC has expanded this direct approach by focusing on the payment of rents to overseas owners of UK residential property.
Who are these letters being sent to?
In recent weeks a wave of new nudge letters have been issued to non-UK resident owners of UK residential property (possibly a company or overseas trust). However, and perhaps more worryingly, letters have also been received by tenants of those properties.
What are the letters getting at?
The nudge letters remind UK property owners of the non-resident landlord scheme and ATED regime (Annual Tax on Enveloped Dwellings). They prompt recipients to register, as necessary, and to consider returns which ought to have been filed. We note that there is an obligation to submit a nil ATED return (a “relief declaration return”), so even if no ATED tax is due, there may have been a failure. For example, if no ATED tax is due because full market rent has been paid, then there should have been a non-resident landlord return, but if a relief declaration return hasn’t been made, there have been two failures.
Tenants, on the other hand, are reminded of their responsibilities to deduct tax in certain circumstances on their payment of rents to overseas owners. However, they are also asked to provide details regarding the owner of the property including the ownership structure. If a tenant is paying rent to a UK letting agent, then they have no responsibility to withhold tax, and therefore no responsibility to inform themselves about the owner. If the property is owned by a trust with a life tenant, then the trustees may mandate the income direct to the life tenant, and they are not taxable on the rental income. HMRC are able to establish from the Land Registry who the legal owner of the property is. Thus, asking the tenant who they think owns the property is likely to cause confusion which will be expensive to sort out.
What should overseas owners of UK property do?
A review of UK property owners’ exposure to the non-resident landlord and ATED regimes is highly recommended. Financial settlements with HMRC can be expensive. Costs can be reduced by an unprompted accurate disclosure, paying any tax and interest due, before the start of any correspondence on mistaken facts.
We’ve recently published three articles on HMRC’s use of “nudge” letters in various contexts. HMRC are expected to issue another batch of nudge letters in the Autumn in relation to Profit Diversion, and in this article we consider the potential cash benefits of registering for the Profit Diversion Compliance Facility (“PDCF”) before such a letter is received.
HMRC’s approach here is very similar to that we’ve outlined in our previous articles; they have used their ability to collect significant amounts of information to produce a list of taxpayers who they consider may not have paid the full amount of tax due. Then, rather than opening an enquiry, they issue a nudge letter suggesting that the taxpayer considers carefully what tax they owe and discloses it to HMRC. The nudge letter doesn’t specify what their information is, and the strategy is not to tell the taxpayer, with the aim of eliciting disclosures of other matters HMRC is unaware of.
The PDCF is similar to other disclosure facilities, in that it puts the onus on the taxpayer to calculate the tax, interest and penalties due. A taxpayer is required to register and then has to make the full disclosure on a fixed timetable. For the PDCF, a taxpayer who registers before they are “nudged” will be charged lower penalties, on the basis of “unprompted disclosure”. We’ve set out below why penalties are possible in this context, and what the PDCF means for penalties.
This article covers;
• When HMRC will charge a penalty for a transfer pricing adjustment
• How many years they might seek a penalty for
• The penalty reduction available when a group registers for the PDCF before HMRC open an enquiry
• Why registering before 31st December 2019 can also save a Diverted Profits Tax penalty
• Why penalties can apply to a group which has taken transfer pricing advice from appropriate professionals
Registering before you are nudged reduces penalties, which can save costs and reputational damage.
How can HMRC charge a penalty for a transfer pricing adjustment?
Tax directors might be thinking that transfer pricing is a technical area where a range of outcomes is possible, so a transfer pricing adjustment is a difference of technical opinion not subject to a penalty. They may also be expecting to rely on the professional advice they took to prevent penalties being charged.
This is not HMRC’s view. The guidance that they’ve issued for the PDCF refers to situations where the transfer pricing position in the returns is not backed up by the facts on the ground. It is not uncommon for careful arrangements for significant people functions to be in low-tax jurisdictions to have lapsed as people drift over time back to offices in the UK.
More importantly, when HMRC refer in their guidance to transfer pricing policies which are not “BEPS-compliant”, they have very specific examples in mind of arrangements which were introduced before 2015 putting contractual risk and entrepreneurial reward into low-tax jurisdictions, which isn’t supported by substance. The key point is that an arrangement which was common in the past is in HMRC’s view incorrect now and vulnerable to penalties.
HMRC say specifically in their guidance that it is careless to submit a corporation tax return after 31st December 2016 without reviewing the BEPS action report published in October 2015 and amending the return if necessary. A penalty can be charged for careless behaviour.
HMRC say in their guidance (we’ve inserted the italics);
“Having taken advice on a transfer pricing position is not enough, by itself, to show that you took reasonable care to submit an accurate return. You will need to show, amongst other things, that you have asked for appropriate advice, have given your advisors accurate and complete information, have checked the advice in light of the facts and implemented the advice given.”
In our experience, regular reviews to confirm and demonstrate that TP policies and practices have been implemented correctly are not standard practice; it appears HMRC see this as one of the key triggers for a PDCF disclosure.
We discuss below the taxpayer’s obligation to determine whether the group has been careless.
How much does registering save in penalties for a transfer pricing adjustment?
A group with a 31st December year end which has not checked whether its transfer pricing is BEPS compliant has two potentially careless returns, for 2016 and 2017. So, supposing that the corporation tax profits are understated by £1m in each year, HMRC will be looking for penalties for corporation tax on £2m.
If they find this in an enquiry after issuing a nudge letter, then the minimum penalty rate is 15%, because this is “prompted disclosure”. If the group registered and disclosed this, the minimum penalty is nil. Registering could save around £60,000 in penalties on our example figures (3% of the tax). Registering could prevent a penalty being charged, and hence avoid the reputational damage of being penalised for tax inaccuracies.
How far back will HMRC look if they have shown that behaviour has been careless?
A group which registers has to put forward a report showing all of the tax, interest and penalties which are due. In particular, a group which registers has to determine whether or not its behaviour has been careless, in order to determine whether penalties are due.
If the recent returns have been careless, then it will be necessary to consider whether earlier returns, submitted before the BEPS report, have also been careless. This is because if a careless return has been made, HMRC have longer time limits to open an enquiry. For the example of a company with a 31st December year end, the returns for 2013, 2014 and 2015 are in scope if carelessness applies.
It may be that the transfer pricing arrangements were in line with the view of transfer pricing at that time, (before the BEPS action report) and not careless. However, the point about whether the transfer pricing position taken agrees with the facts on the ground is still important. If the reality of the group’s activities isn’t in accordance with the position taken on returns, then assessments can be made and penalties charged.
Thus, penalties might apply for up to 5 accounting periods, and the reduction for registering and qualifying for unprompted disclosure treatments could be even more significant.
Penalties and your CFO
If HMRC charge penalties for carelessness, and the company is within the Senior Accounting Officer regime, then this exposes the Senior Accounting Officer, usually the CFO, to personal penalties.
In their PDCF guidance, HMRC say
“Where a business makes a full and accurate disclosure through the facility and then fully co-operates, an admission of careless behaviour by the business in connection with the disclosure made will not, of itself, be used by HMRC as a reason to consider a possible related past SAO main duty failure or inaccurate submission of a SAO certificate.”
Penalties for failure to notify potential chargeability to Diverted Profits Tax
There is a wide obligation to notify HMRC of a potential liability to Diverted Profits Tax, and a group which can show it has no liability is still required to notify.
The HMRC guidance says that provided a group registers before 31st December 2019, and that its failure was not deliberate, the penalty will be reduced to nil. If a group doesn’t register, and is subsequently found to have failed to notify, then the minimum penalty is 20% of the potential lost revenue.
How do we establish whether the risks mean we should register?
A group needs expert transfer pricing advice, and it also needs advice from experts in the classification of behaviour as careless or not in terms of HMRC’s powers.
The team at Trident has very extensive experience of making voluntary disclosures over many years, a critical part of which is to assess the question of whether there has been careless behaviour. Please contact us if you would like to discuss your approach to the PDCF.
In our first article dated 22nd August 2019, we considered the increase in the issue of nudge letters by HMRC which seek to challenge the accuracy of UK taxpayers’ self-assessment returns. Such challenges can arise where HMRC receives information from overseas tax authorities under one of the Automatic Exchange of Information Agreements (“AEIA”), regarding overseas income and gains received but not declared by UK residents. HMRC then write to the taxpayer saying that they have information that the individual may have offshore income and gains which is taxable in the UK.
Where the taxpayer’s situation is more complex than some, it may be helpful to ensure that sensible steps have been taken to make it clear to HMRC why certain offshore income and gains are not shown on his tax return.
Is it clear to HMRC that the remittance basis is claimed?
An individual who receives such a letter may be well aware that their circumstances mean that not all offshore income or gains arising to them is taxable.
Perhaps the most straightforward example of this is where a non-UK domiciled but UK resident person does not return overseas income in the UK because he or she has elected to be taxed on the remittance basis, and no taxable remittances have occurred.
Such a person would be expected to tick box 23 of the Residence, Remittance Basis etc. section of their return to indicate their non-UK domiciled status. Then, an explanation of why their domicile is relevant to their income tax or capital gains tax liability should be included at box 40 (for example, the transfer of clean capital to the UK is not a taxable remittance).
In our previous article, we discussed whether a taxpayer may choose to respond in letter form rather than by ticking one of the boxes provided. It might be appropriate to send a letter explaining the remittance position. To reinforce this, it might be helpful to amend the 2017/8 return now if the boxes have not been ticked, and to refer to this in the letter. When HMRC decide whether to enquire into the 2017/8 return before the end of the window on 31st January 2020, a clear explanation supported by a return may prevent an enquiry.
It is also sensible to confirm that, where it is due, the remittance basis charge has actually been paid for the relevant tax years, and if not paid, to pay it promptly, although interest on late paid tax would then be due.
Is it clear to HMRC why anti-avoidance legislation has not been applied?
Conversely, an individual may be aware that offshore income or gains arising to a trust or company could be taxable on them, despite the income not arising to them, as a consequence of the application of anti-avoidance legislation. If they have received a nudge letter, it may be because reports have been made to HMRC in relation to such offshore trusts and companies, linked to their name. The statement that they are asked to sign to in the reply to the nudge letter is broader than just confirming that they have disclosed their own taxable offshore income, it requires them to say “My tax affairs do not need updating. I do not have any additional tax to pay”.
Taxpayers may then want to ensure that their returns do not omit any tax due as a consequence of these provisions, and that they have provided information to HMRC to pre-empt any enquiries in this area as a follow up to the nudge letter.
We have helped a number of clients, many with complex tax structures, to correspond with trustees and financial institutions alike, so as to obtain clarity on what information they have provided / or will have to provide, in accordance with their legal obligations. Third parties have, in our experience, been very willing to cooperate with us, on behalf of clients.
Armed with full information regarding what has been disclosed (for example under the Common Reporting Standard), we have then been able to review our clients’ tax returns to ensure that what should have been declared has been. It is worth noting that, in our experience, determining whether offshore entities have received income or have realised gains can require some detective work. Also information obtained by HMRC under an information exchange agreement, is presented by reference to calendar years rather than by fiscal years. Accordingly, it is necessary to check the two tax returns that are covered by the calendar year in question.
The Transfer of Assets Abroad rules are a longstanding piece of anti-avoidance legislation introduced to prevent UK residents using foreign transfers to mitigate their UK tax liabilities. This applies by taxing an individual on income of an offshore company or trust. Since such an arrangement could be purely commercial, a “motive defence” can be used to dis-apply such an income tax charge for the transferor where the transaction has been undertaken for genuine commercial reasons and was not for the avoidance of UK tax. Similar provisions exist for capital gains.
So an individual with a “motive defence” would not be required to treat such income as taxable on their return. There is a box on the tax return which requires the taxpayer to enter the amount of income for which he is claiming the defence. There is no statutory obligation to complete this box, and taxpayers may have chosen not to.
Given HMRC’s current approach, taxpayers may decide that it is worth explicitly claiming the defence so that it is clear why certain offshore income and gains are not shown on their returns. It may, for example, be worth amending the 2017/8 return to complete this box and to give information on which income, of companies etc, the defence is claimed. So again, on a review of the 2017/8 return at the end of the enquiry window, an amended return and a clear explanation may prevent an unnecessary enquiry.
However, in our experience, HMRC will normally open an enquiry where this entry is made on a return. If the motive defence is to be claimed, the position should be fully reviewed to ensure that any challenge can be robustly defended. For example, if the taxpayer has agreed with HMRC in the past that the motive defence is available in respect of a particular entity, it would be necessary to check that there have been no subsequent “associated operations” which have caused the protection to be lost.
For a taxpayer with more complex affairs, considerable care should be taken to review returns if a nudge letter is received. In our previous article, we outlined the points to consider before signing the “certificate of tax position”, and the warnings are more significant here. If the conclusion is that there are no omissions from the returns, it may still be worthwhile to amend the 2017/8 return to provide supporting information to HMRC. If there is any doubt about whether the “motive defence” is applicable, the position should be carefully reviewed. If there are omissions, then care is needed to ensure that all irregularities are dealt with in the disclosure.
HMRC has written to me advising that it has information about my receipt of overseas income or gains on which I should have paid UK tax – what should I do?
In this, the first of two related articles, we consider the issue of so-called “nudge letters” by HMRC challenging the accuracy of UK tax returns,having received information regarding overseas income or gains which have not been declared. In this article address taxpayers’ rights and what you or your clients should do if you receive such a challenge. In our second article, we consider what steps can be taken to reduce the risk of receiving nudge letters.
International information exchange
It might be a cliché but the world really is becoming a smaller place, certainly in the context of international information exchange agreements. Whether via FATCA (United States Foreign Account Compliance Act), the reciprocal agreements with Gibraltar, Jersey, Guernsey and the Isle of Man or, more recently, through the OECD’s Common Reporting Standard (“CRS”), HMRC receives more information about UK residents’ overseas assets than ever before.
The automatic annual exchange of financial information puts at HMRC’s disposal details of the holders of overseas bank accounts and investments. This extends not only to the names of individual investors but also companies together with accounts under the management of trustees. Combined with advances in data management, HMRC has never before been so readily in a position to check the accuracy of UK tax returns against actual receipts of overseas income and gains.
Taking CRS as an example, over 100 tax jurisdictions are currently committed to adopt the agreement. Of those, in 2018, the first-year information was actually exchanged, HMRC received data from over 70 countries. Having identified apparent disparities, this has led to the issue of nudge letters by HMRC as it looks to understand why overseas income and gains have not been declared in the UK.
What do the nudge letters ask taxpayers to do?
The most recent letters we have seen use standard wording and are issued by HMRC’s Risk and Intelligence Service Offshore. They remind the recipient that it is their responsibility to declare UK tax liabilities to HMRC wherever in the world they arise.
The letters also advise recipients that they should take professional advice even if they have done so previously because changes in tax laws or personal circumstances could mean that previous advice is now out of date.
Generally, recipients of such letters have 30 days to respond to HMRC and are required to complete a certificate of tax position. In so doing, a taxpayer is to confirm either:
A recipient of a nudge letter is best advised to check his or her tax position very carefully. It should be noted that, whilst HMRC’s letters advise taxpayers that it is aware that foreign income / gains may have been received, that does not mean UK tax returns are necessarily incorrect. There are a number of reasons why that might be so, including the fact that information received by HMRC could have been compiled on a calendar year rather than a fiscal year basis. This means that they do not know which tax year a disclosure relates to.
Why ticking a box may not be the best response
HMRC cannot compel recipients to respond to nudge letters, let alone complete the certificate of tax position, and HMRC accept this. It is understood that false statements can result in criminal prosecution. It is noteworthy that, unlike a tax return, the certificate of tax position (and, therefore, the declarations made therein) apply to all tax years rather than a single year. Also, the certificate does not have a de minimis limit.
So where a taxpayer is content his or her tax affairs are in order and that no disclosure is required, it could be in their best interests to respond to HMRC in letter form rather than simply by ticking the “I do not have any additional tax to pay” box on the certificate. In such a response, the taxpayer would be advised to provide a clear explanation as to why their UK tax affairs are up to date. For example, they could point to where income and gains are returned. If they consider that disclosures may relate to income received by eg offshore companies and trusts which is not taxable on them, they could explain why. This could prevent further HMRC enquiries.
If it is determined that a disclosure is necessary, it should also be borne in mind that proceeding via WDF might not be the best course of action. Part of the function of the information exchange is to allow HMRC to identify taxpayers who have hidden undisclosed profits in offshore bank accounts, or offshore companies. Where tax irregularities emanate from deliberate behavior, it might be that HMRC’s Contractual Disclosure Facility is more appropriate so as to secure immunity from prosecution for the taxpayer. Clearly, much depends on the actual circumstances giving rise to the tax return inaccuracy.
Why ignoring the letter may not be sensible
HMRC has said that those who do not reply are likely to receive follow-up correspondence, possibly in the form of a formal enquiry. For the 2017/8 tax return, HMRC’s enquiry window runs until 31st January 2020. It is likely that someone in HMRC reviewing a return before this deadline will know if the taxpayer has failed to respond to a nudge letter and that may determine whether an enquiry is opened into that tax return.
Why ringing HMRC isn’t likely to help
We’ve seen it suggested that a recipient should just pick up the phone to HMRC and ask them what the letter is about. Firstly, anyone who’s tried to ring HMRC without a specific name and contact number will know how frustrating this is likely to be. But more importantly, it would go against the whole “nudge” philosophy for HMRC to tell a taxpayer what information they have; the nudge letters have been carefully crafted to encourage the maximum disclosure from taxpayers, and if this is of an omission that HMRC don’t actually know about, then the nudge letter has done its job well.
As the CRS (and other information sharing agreements) develop over the coming years, it is likely that HMRC will continue to challenge taxpayers regarding the accuracy of their UK tax returns by the issue of further waves of nudge letters.
Recipients should check their tax positions very carefully before responding to HMRC and take professional advice at the earliest opportunity, particularly where mistakes or omissions are identified. If you or your clients wish to discuss any matters that arise in this connection, please contact us.
There are press reports that HMRC has written to the main cryptocurrency exchanges including Coinbase and Etoro, asking for details of transactions by UK residents (the Daily Telegraph quotes a report on Coindesk).
HMRC has been active in collecting data and using this to challenge tax returns, including by the use of “nudge” letters. These are letters where HMRC indicates that they have information that an individual’s returns may not be complete, and ask them to tick a box to either confirm that they will now regularise their affairs by making a formal disclosure, or to make a declaration that all tax has been paid. HMRC have confirmed that they intend to follow up those who don’t reply to such letters.
Where an individual has made gains on cryptocurrency in the tax year to 5th April 2018, HMRC are able to make enquiries into the return up to the end of the “enquiry window”, which is 31st January 2020 at the latest. Bitcoin prices rose very sharply in late 2017, and so individuals who realised those gains could well receive a formal enquiry into their return. This would particularly be the case if they don’t reply to a nudge letter. An individual is able to make an online correction to their return for this year up until 31st January 2020. An individual who made a gain but didn’t receive a return has already missed the statutory deadline to inform HMRC (5th October 2018).
HMRC’s guidance sets out the position on the taxation of cryptocurrency; unless the individual reaches the high threshold of activity and organisation to be a trader, their profits would be taxable to capital gains tax at 20%. This assumes that the gain exceeds the annual exempt amount for the year, eg £11,300 for 2017/8.
The key point to note here though is that HMRC consider that there is a taxable disposal when an amount of cryptocurrency is converted into another currency or a token, not just when the cryptocurrency is converted into a “fiat” currency such as sterling. This means that the calculation of cryptocurrency gains is likely to be very complex, requiring the market value at the date of any exchanges made.
We have been able to undertake simpler calculations for clients in particular circumstances by showing that their overall gain in a tax year must be equal to the gain in sterling. In general, though, individuals would need to consider whether they have all the information to be able to compute the gains themselves, as it is likely to be expensive for a tax professional to do the detailed calculations.
Individuals who have realised a taxable gain in 2017/8 may have suffered a capital loss in an earlier tax year which they have not claimed. They are still within the time limits to make claims for losses in the tax years from 2015/6, which can then be offset against the taxable capital gain. It should be noted though that a capital loss in 2018/9 can’t be carried back to 2017/8.
Where tax is due, then HMRC will charge interest on late paid tax and may also seek penalties. Such penalties can be mitigated by putting things right before HMRC identify errors or omissions from a taxpayer’s return. If there is tax due for a tax year earlier than 2016/7, and if it is within the definition of “offshore matter” or “offshore transfer”, the penalty rates can be up to 200%.
For an individual who made cryptocurrency gains in the tax year to 5th April 2018, there are some key questions to consider.
a) Did I realise gains on a cryptocurrency in the year to 5th April 2018, even if this was still invested in another cryptocurrency?
b) Do I have the information to calculate the gains and do I understand how to do the calculation?
c) Can I amend my tax return for 2017/8 to pay tax due?
d) If tax is due for earlier years, how can I deal with this?
e) Do I want to calculate capital losses?
f) Do I want to wait for a nudge letter or do I want to sort this out now to minimise interest and, hopefully, penalties?
g) Is the amount at stake large enough for me to need professional tax advice?
Trident Tax would be happy to assist.
A recent Upper Tier Tribunal case serves as a reminder of the importance for the directors of non-UK companies to be able show that they have acted independently in the management of the company.
The Tribunal was asked to consider the tax residence status of Jersey SPV companies that had been used in tax planning arrangements. The tax planning relied on the Jersey companies not being tax resident in the UK. HMRC looked to defeat the planning by arguing that the companies were UK resident and enjoyed success at the First Tier Tribunal.
The decision was overturned by the Upper Tier Tribunal because it was insupportable in law based on the FTT’s findings of fact.
A company is resident in the place where it is centrally managed and controlled, which for these purposes means the decisions of significance or strategic importance; not the day-to-day running of a company. Where a company is managed and controlled by its board of directors it is resident where the board of directors reside.
The planning involved Jersey companies buying property from a UK holding company at overvalue. HMRC argued, and the First Tier Tribunal agreed, that the uncommercial nature of the transaction meant that the Jersey companies’ decisions to buy the properties must have been made by the parent company in the UK.
A similar argument was made in one of the leading cases on residence, Wood v Holden, in which the House of Lords decided against HMRC. In that case, their Lordships addressed the question of where decisions were made but resisted HMRC’s invitation to consider the quality of those decisions, noting that directors of companies make good and bad decisions all the time, but they remain the directors’ decisions.
What does this mean?
The technical position regarding company residence remains the same. The important point to note is that the directors of the Jersey companies were able to show that they had made the decisions to purchase the properties. HMRC were unable to convince the Tribunal that someone else, namely the UK parent company, had directed them to make that decision.
Consequently, in any challenge to the residence status of a non-UK company, the first line of defence must be, as a minimum, that directors of the company can show that they made the decisions of key strategic importance. In practical terms, this must involve the directors formally meeting, recording that meeting and preserving that record for future reference.
There is much more that can be done to reinforce the directors’ position by ensuring adequate briefing ahead of key decisions, collecting information relevant to the decision taken and recording the decision-making process.
We have helped a number of non-UK resident companies make their tax position more robust by advising on internal procedures, staff training, risk awareness and record keeping. Please contact us if you would like to learn more about the work we have been doing.