HMRC receives vast amounts of information from a variety of sources every year. These may be domestically sourced, such as UK banks and financial institutions; employers; and other government departments, but increasingly information is reaching HMRC from overseas.
Most double taxation agreements (‘DTA’s) will include an article dealing with mutual cooperation and exchange of information, but these are limited in scope and usually confined to information on specified taxpayers.
UK-Swiss cooperation agreement
The UK-Swiss tax cooperation agreement was a ground-breaking measure that came into effect from 1 January 2013. The agreement primarily affected UK resident individuals with financial assets in Switzerland, but extended to assets held by trusts, foundations and companies where a beneficial owner was UK resident.
This was the first agreement of its kind and not only increased the flow of information to HMRC, but also included provisions to enable UK resident taxpayers regularise their historical tax positions if non-compliant and bring their UK tax affairs up to date. Modified rules applied for non-UK domiciled individuals.
The agreement was terminated on 1 January 2017 because both the UK and Switzerland signed up to the Common Reporting Standard (‘CRS’).
International agreements
There are a number of international agreements that result in HMRC receiving wholesale data about UK resident persons with overseas financial assets:
- Automatic Exchange of Information (‘AEOI’) agreements made between the UK and other countries allow the exchange of information between tax authorities to help stop tax evasion. The information includes details about financial accounts, balances, receipts and investments and, as the name suggests, does not have to be requested.
The two main regimes are:
- US Foreign Account Tax Compliance Act (‘FATCA’), which requires UK financial institutions to report to HMRC on US customers that hold accounts with them, which is then passed onto the US Internal Revenue Service (‘IRS’).
- Common Reporting Standard (‘CRS’), which is the Organisation for Economic Cooperation and Development (‘OECD’) standard for automatic exchange of financial account information between signatories.
Use of “nudge letters”
When presented with significant volumes of data, HMRC’s general approach is to send a standard message from its Risk and Intelligence Service unit to large numbers of taxpayers identified as having a higher risk of non-compliance.
Originally these ‘nudge letters’ threatened prosecution and all manner of detriments if the recipient had been delinquent. Subsequent campaigns toned down the rhetoric, but the letters remain formally worded and ask the taxpayer to review their circumstances and consider whether a disclosure should be made. If all is in order, the taxpayer is invited to complete of a Certificate of Tax Position confirming there is nothing further to report.
Historically, campaigns have covered areas such as overseas assets and remittance basis claims. We understand that for a forthcoming campaign HMRC has identified non-UK resident companies which own or have previously owned UK real estate (particularly residential property) and may not have met their UK tax obligations. This could mean, among other things, failure to:
- File Annual Tax on Enveloped Dwellings (‘ATED’) Returns even where no tax is due;
- Declare ATED related capital gains;
- Declare UK rental income (i.e. non-resident landlords); and
- File non-resident capital gains tax (‘NRCGT’) returns where the property has been sold or transferred.
What are HMRC sending?
- Letters to non-UK resident companies which own UK property and need to disclose rental income or file ATED Returns. HMRC will also consider UK anti-avoidance legislation that may apply to the structure and UK resident beneficiaries; and
- Letters to non-UK resident companies that appear to have disposed of UK residential property between 6 April 2015 and 5 April 2019 and have not filed a NRCGT Return.
What should you do if you receive such a letter?
First, and foremost, do not panic. These letters should be handled appropriately, and in most cases responded to with the benefit of professional tax advice. It is our strong recommendation that taxpayers should not sign any Certificate of Tax Position, as they have no legal basis and do not provide any additional protection – indeed, in some circumstances they can exacerbate penalties if it subsequently transpires errors have been made.
How can we help?
If an individual or corporate entity is in receipt of a nudge letter it is possible they have incorrectly declared their tax position. Therefore, it is vital these positions are thoroughly reviewed before responding and ideally before HMRC raises a formal enquiry that could lead to significantly higher penalties. Alternatively, where a nudge letter has not been received, we are able to assist clients who have undisclosed offshore assets and structures with a view to taking a pro-active approach and to regularising their tax position with HMRC. In many situations this approach can be used to mitigate a prolonged and stressful HMRC enquiry.
We are able to advise individuals and companies and can assist with tax compliance, advisory and tax dispute matters.