Ok so you are in receipt of a nudge letter from HMRC. Most recent nudge letters have been sent out in relation to the world wide disclosure facility:
“Dear Mr Taxpayer
Your overseas assets, income or gains
We have information that shows you may have received overseas income or gains that you may have to pay UK tax on. We have received this information through the UK’s tax information exchange agreements with other countries.
We want to help make sure you are paying the right UK tax on your overseas income and gains.
We have compared the information we have received with your tax record and tax return(s). We believe that you may not have paid the right amount of UK tax. There may be a reasonable explanation for this.
We are giving you the opportunity to review your tax affairs and to tell us about anything that you may need to put right. Some people with assets overseas have found that earlier tax advice is out of date after changes to their personal circumstances or to tax law.”
Nudge letters have also been sent out in relation to the Let Property Campaign, E-traders and those using tax avoidance schemes.
In receipt of a letter, you are likely to feel a little uneasy about whether you have a tax problem or not. You may be worried that you have a tax problem not only in the UK but also overseas.
What should I do if I have received a nudge letter?
It may be difficult but stay calm. Most tax problems can be sorted out so long as you are willing to proactively do so.
Should I contact HMRC?
We would not advise contacting HMRC if you have received a nudge letter relating to offshore assets, income or gains. The legislation applying to assets held abroad is amongst the most complicated there is. In addition to the law, consideration may need to be given to your personal circumstances including domicile and residency as well as the offshore assets, income gains and or structure.
Do HMRC know what offshore assets I have?
The information provided under intergovernmental agreements has become increasingly more detailed. The financial intermediary that knows what assets or beneficial entitlement you have, has passed some information on to their tax authorities who have in turn shared it with the UK tax authorities. This happens both ways i.e. the UK tax authorities pass information to overseas authorities also. Whilst information has increased, it does not necessarily mean the UK tax authorities know the precise assets you hold.
Can HMRC find out more about the offshore assets I have?
Yes. HMRC can approach tax authorities for additional information. However, HMRC also collect a lot of information from various sources and quite often an intuitive and experienced investigator can identify assets and ownership structures.
If I hold assets in a trust structure, can HMRC identify the assets then?
HMRC may be able to identify the assets by pooling together information. However, the intergovernmental exchanges won’t (yet) provide explicit information on assets.
How does a HMRC officer piece together the assets owned in offshore structures?
Most offshore structures were at some point set up to hold either trading entities or investment assets. If an offshore structure were to hold shares in an offshore company, which in turn holds shares in a UK company, the ownership could normally be clearly identified. Sometimes shares are held on behalf of other entities although accounts may include related party transactions, or the persons associated with different entities create a picture of how things are held.
HMRC have far greater information at their fingertips than a specialist investigation adviser. A specialist adviser is likely to be able to piece together a picture from publicly available information and therefore HMRC are likely to be able to piece together even more.
Should I move my offshore assets?
Moving your assets is unlikely to prevent HMRC looking at you. The majority of countries globally are exchanging information. Assets could be moved to one that is not exchanging information although if this is done, you will face significantly higher penalties and be at more risk of prosecution.
What penalties could I face?
The Failure to Correct regime started on 30 September 2018, with punitive penalties, including:
- A tax geared penalty (100% to 200%) of the tax not corrected.
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year;
- Potential “naming and shaming”; and,
- A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct.
Anyone who fails to correct their position despite knowing that they should do so may also face:
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year; and
- Potential “naming and shaming”
The penalty regime is complicated and mitigating penalties starts at the point communications open with HMRC. One of the reasons it is important to be represented is to ensure the lowest possible penalty in the circumstances can be achieved. Those not knowledgeable will inevitably end up with significantly higher penalties.
What is the likelihood of being prosecuted?
HMRC will generally investigate those with offshore assets to a standard for criminal prosecution. That does not mean they prosecute in all cases, although be aware of the Offshore Criminal Offence (see below). Most owners of offshore assets will not face prosecution if they embrace a full and complete disclosure (the Worldwide Disclosure Facility) with HMRC. Those who choose not to disclose, move assets or take other steps to make HMRC’s investigation difficult are at far greater risk.
HMRC do have increased targets for prosecution and it is therefore likely that over the next few years, more taxpayers will face prosecution. An easy way to increase prosecutions would be to invoke the Offshore Criminal Offence.
What is the Offshore Criminal Offence?
Sections 106B–106H were inserted into TMA 1970 by Section 166 of the Finance Act 2016, introducing the new criminal offences which apply for the purposes on income tax and capital gains tax only, where a person has failed to declare offshore income or gains in accordance with TMA (1970) Sections 7 and 8. The offence applies where the loss of tax meets the threshold amount. The offences do not prescribe the need to prove intent for failing to declare taxable offshore income and gains. All you need to have done is failed to include something on your tax return.
Is there a reasonable excuse that will prevent the Offshore Criminal Offence?
Reasonable excuse is not defined in the legislation. HMRC consider reasonable care to be a standard of care undertaken by a prudent reasonable person although also identifying the person’s ability and circumstances. HMRC’s ever useful guidance defines a reasonable excuse as “an unexpected or unusual event that is either unforeseeable or beyond the person’s control, and which prevents the person from complying with an obligation to notify when they would otherwise have done” and assess whether a taxpayer exercised “reasonable foresight and due diligence” that would be expected of a prudent taxpayer.
Many may suggest that they relied on an adviser and that constitutes reasonable excuse. HMRC will not normally accept reliance on a third party as a reasonable excuse unless he took reasonable care to avoid the failure.
If I am within the Offshore Criminal Offence, could it result in imprisonment?
A person guilty of an offence under section 106B, 106C or 106D TMA 1070 may face an unlimited fine and/or imprisonment not exceeding 51 weeks (six months in relation to an offence committed before section 281(5) Criminal Justice Act 2003). In Scotland or Northern Ireland, the fine must not exceed Level 5 on the standard scale and/or to imprisonment for a term not exceeding six months.
What should I do if I have something to disclose?
You should speak to a specialist tax adviser. If in relation to offshore, you should speak to an investigation specialist that is also an expert in the anti-avoidance legislation that could apply to offshore structures.
If advised to, you should make a full and complete disclosure.
What does a full and complete disclosure mean practically?
Your disclosure will depend on your specific circumstances although at worst it could mean:
- A review and analysis of personal and business transactions for up to the past twenty years.
- Analysing business accounts against primary records including bank transactions to identify irregularities.
- Analysing personal bank accounts to identify sources of deposits, certain expenditure, and connections with other persons and/or entities.
- Review of legal documents against any tax treatment adopted.
- Identifying technical tax representations to reduce the potential exposure.
- Identifying mitigating circumstances over the period of the disclosure to manage the exposure to penalties.
Some disclosures do not require all of the above and are much simpler. The circumstances for each person needs careful consideration to agree what needs to be disclosed.
The result of review work is a comprehensive disclosure document. How significant that report is will again dependned on the circumstances and complexities of a specific case. However, disclosure reports normally include summary of tax liabilities, personal history, business history, tax planning arrangements, scope of work undertaken, review analysis, technical representations and primary supporting evidence.
