HMRC’s access to information on taxpayers’ assets, income, and gains, including overseas, is greater than ever due to international agreements and increased use of technology.
Facing constrained resources for formal enquiries, HMRC’s has expanded its use of “one-to-many” or “nudge” letters. Rather than open a formal enquiry, HMRC prompts large numbers of recipients to identify and correct omissions or errors themselves. Other letters prompt taxpayers to consider the entries that are required on forthcoming returns to ensure that they are complete and correct.
The targets of the latest nudge campaigns include two specific categories of individuals: those whom HMRC consider to be deemed domiciled and those who consider they are non-UK tax residents.
From 6 April 2017, non-UK domiciled individuals may be “deemed domiciled” if they have resided in the UK for 15 or more of the previous 20 tax years.
HMRC has sent letters to individuals who it believes may be deemed UK domiciled and, as such, required to include their worldwide income and gains on their self-assessment tax returns. There are two versions of the letter, one issued in advance of recipient’s filing their 2019/20 tax returns, the other nudging them to review their already submitted 2017/18 and 2018/19 tax returns.
Both versions outline the new deemed domicile rules that apply from 6 April 2017 including the potential implications of deemed domicile status for “protected trusts”, such as the requirement to pay tax on any UK source trust income as well as offshore income gains which are not considered protected foreign source income.
The tax implications of deemed domicile status are far-reaching and resolving the question may require detailed examination of the person’s tax residence status over previous years to determine whether the threshold of 15 years of UK residence is actually met.
Statutory residence test
UK residents (unless they are eligible for, and elect for, the remittance basis) are liable to tax on their worldwide income and gains. Tax residence is therefore fundamental to individuals’ liability to UK taxation. UK tax residence is determined by the statutory residence test (“SRT”).
HMRC’s letters remind recipients of the factors that impact their UK tax residence under the SRT including working in the UK, the number of days spent in the UK in the tax year, and the number of ties that the individual has to the UK, and the importance of the taxpayer retaining relevant records to support their self-assessed residence status for the year ended 5 April 2020.
While these letters prompt recipients to review their position prior to filing their 2019/20 tax return, it may be prudent for recipients who have filed their returns on the basis that they were non-UK resident in previous tax years, to review their position for those years too.
The end of the 2019/20 tax year corresponds to the coronavirus pandemic and any taxpayer who claims that any of the days that he or she spent in the UK were due to exceptional circumstances arising from the pandemic should take particular care to ensure that they retain evidence.
The SRT involves a detailed set of rules which are heavily fact-based and HMRC routinely asks for evidence of travel and other activity to determine whether or not a person is UK tax resident in particular years.
Responding to nudge letters
Taxpayers receiving a “nudge” letter should review their filed returns to confirm that their filed returns include all relevant income and gains.
In some cases, HMRC may send a “certificate of tax position” with the nudge letter asking the taxpayer to certify that his or her tax affairs are correct. We advise recipients against completing such a certificate without taking appropriate professional advice. There is no statutory requirement to complete such forms and they exclude important taxpayer safeguards. Rather than ignore the letter however, whether a certificate is provided or not, we recommend responding to HMRC by letter. If no response to the nudge letter is provided, there is a risk that HMRC might open an enquiry to check the taxpayer’s position.
If a review uncovers undisclosed income or gains, the taxpayer will need to consider his or her position carefully to understand the number of years that are open for HMRC to raise assessments and the best disclosure route. For omissions relating to the 2018/19 tax year, the individual may still be in time to amend his or her self-assessment tax return. Otherwise, the Digital Disclosure Service, and Worldwide Disclosure Facility may be suitable. However, where there have been deliberate omissions, the Contractual Disclosure Facility might be preferable to secure immunity from potential criminal prosecution.
For those letters which are educational, and issued in advance of a due tax return, particular care should be taken to ensure that the subject of the nudge letter is addressed and that the return is complete and correct.
Trident Tax has extensive experience of tax domicile, tax residence, HMRC investigations and voluntary disclosures. If you or your clients wish to discuss how to respond to a nudge letter, please contact us.