Following the introduction of various automatic exchange of information (AEOI) agreements, financial institutions have been required to report to their local tax authorities certain financial information in respect of customers, shareholders and settlors/beneficiaries of trusts.
HM Revenue & Customs (HMRC) has also invested heavily in its new analysis software called Connect, which has the capacity to mine data from various sources. The new system will have the capability to cross reference the information reported under AEOI agreements with the information reported in self-assessment tax returns.
Since March 2017 HMRC has also been issuing certain taxpayers who have offshore interests with requests to complete certificates of tax position. We set out below what taxpayers should consider if they receive such a request.
What should I do if I receive a Certificate of Tax Position?
Don’t panic. The receipt of this correspondence does not necessarily mean that you have submitted an incorrect tax return. However, you should check to ensure that you have fully declared your offshore income and capital gains before responding to the letter.
In any event, we would recommend that you contact your usual tax adviser for additional support following the receipt of a certificate.
Why might I receive this correspondence?
HMRC issues these certificates where it has received information to indicate that a taxpayer has foreign sources of income or capital gains.
In most cases, the information received by HMRC will not give the full picture (for example where taxpayers use the remittance basis). HMRC therefore puts the onus on the taxpayer to confirm or clarify the position.
My overseas tax affairs are up-to-date, so should I complete the certificate?
There is no obligation on a taxpayer to complete the certificate, and doing so may not be advisable.
When submitting a tax return, taxpayers are required to declare that the information provided is “correct and complete to the best of my knowledge and belief”, whereas the declaration taxpayers are being asked to make on these certificates states:
“My tax affairs do not need updating. I do not have any additional tax to pay. I have declared all of my offshore income, assets and gains which are taxable in the UK.”
This is a stronger statement and the form does not provide for additional explanations to be given. We therefore suggest that where you are confident that your tax affairs are in order, a letter confirming this is submitted to HMRC, rather than a completed certificate.
How long do I have to submit a certificate or respond HMRC?
The certificate does not have a specified time limit; however, if HMRC does not receive a timely response it may take further action.
What should I do if my tax affairs are not up-to-date?
Again, don’t panic. If you have excluded any foreign source income or capital gains, professional advice should be sought as soon as possible on how best to resolve the matter.
It is possible that a voluntary disclosure and offer to HMRC may be required in accordance with the Worldwide Disclosure Facility.
What will happen if I do not respond to HMRC’s letter?
HMRC has confirmed that it will follow up in cases where taxpayers do not respond to these letters. The Chartered Institute of Taxation has stated that not responding to these requests may involve HMRC issuing a further letter, followed by a further risk assessment. If you refuse to reply to a letter, HMRC could open a formal enquiry.
We would therefore recommend that all recipients do respond to HMRC.
What penalties can be imposed?
The UK government has previously provided various partial amnesties to facilitate the disclosure of taxpayers’ historic income or capital gains. It is now taking a stronger stance where taxpayers have not previously made a disclosure, with the introduction of so-called ‘Failure to Correct’ legislation. Penalties under Failure to Correct vary substantially, but the maximum penalty is severe: 200% of the tax lability, as well as a potential asset-based penalty.