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have done so previously because changes in tax laws or personal circumstances could mean that previous advice is now out of date.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:
- That their tax affairs are not up to date and that matters are to be regularised by the making of a separate disclosure via the Worldwide Disclosure Facility (“WDF”); or
- That their tax affairs are up to date, no additional tax is payable and all offshore income, assets and gains have been declared in the UK, as required.
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.