HMRC 'nudge' letters

Have you recently received a letter from HMRC asking about your overseas assets, income or gains? Below we provide guidance on how best to proceed in such cases.

Since the introduction of the Common Reporting Standard (CRS) automatic exchange of information in 2017, HMRC has access to more data than ever on overseas financial assets. Most countries – including most traditional “tax havens” – now share information with the UK under the provisions of the CRS and /or under the provisions of special bilateral arrangements in an effort to subdue tax evasion and minimise inadvertent non-compliance.

Under the CRS, HMRC receive detailed annual reports from participating countries with regard to your offshore assets and income/gains generated from these assets.  Information secretly provided bilaterally to HMRC by close partners like America’s IRS can be broader still and cover anything potentially relevant to your UK tax affairs.

HMRC have been actively issuing letters to UK taxpayers since 2017 encouraging them to check whether their offshore tax affairs are in order and requesting to formally confirm their position.

Typical format

The letters, often referred to as “nudge letters”, do not provide taxpayers with the information HMRC already have.  They merely state: “We have information which shows that you may have received overseas income or gains which is taxable in the UK.”

The letters request that recipients confirm that they have:

• additional tax liabilities to disclose and that they will register to make a disclosure via HMRC’s Worldwide Disclosure Facility (WDF)

or

• no additional liabilities to disclose by signing an enclosed declaration certificate.

A response is usually sought within 30 days.

There is no legal requirement to respond to the letters, to do so within 30 days nor to sign the certificate.  However, HMRC will follow up on the letters if they are left ignored and are ultimately likely to open an investigation.

The manner of response should be considered very carefully. It is advisable for the individual to seek professional guidance immediately before taking any action. Getting the strategy right first time is key to minimising the risk of an invasive HMRC investigation and minimising any potential liabilities – including mitigating any penalties.

Whilst there is no statutory requirement to comply with HMRC’s request to sign the certificate, signing it could have major repercussions if any liabilities have been overlooked and could lead HMRC to accuse the taxpayer – perhaps wrongly – of fraud by false representation.  For that reason we recommend full cooperation with HMRC in all circumstances but that the certificate should never be signed and that any response should be made through professional advisers.

Complicating factors

Sometimes it is not immediately clear cut either to taxpayers or to HMRC whether any offshore related tax liabilities actually exist.  This is particularly the case where taxpayers might not have been UK resident and/or UK domiciled for UK tax purposes.

Non-UK residents do not have to report their overseas income in the UK. Whereas UK residents are subject to tax in the UK on their worldwide income, subject also to the “non-dom” rules and related considerations such as what they remitted to the UK and whether they claimed the “remittance basis” of UK tax.

Quite a common misconception amongst taxpayers is that overseas income and gains are not reportable in the UK and many UK residents fall foul of the rules. Upon moving to the UK a thorough review should be carried out.  However, this is often overlooked.

UK tax residence is a complex area and often requires professional assistance. We have set out the details of the Statutory Residency Test in our article on the topic. Please note, where taxpayers are internationally mobile, then an in depth review is particularly advisable.

Penalties

In addition to the tax underpaid and late payment interest, penalties may also be applicable.  Penalties are levied as a percentage of the tax underpaid – known as the “potential lost revenue” (PLR) and can vary from nil to 200% or more depending on:

• the “behaviour” that gave rise to the inaccuracy or failure;
• how much the person helped to establish the correct amount of tax due as part of the disclosure or investigation;
• the circumstances which may have caused the failure or inaccuracy and whether there was a “reasonable excuse”;
• the overseas territory or territories involved;
• how long taxpayer has been non-compliant;
• whether a legal “requirement to correct” was missed in respect of any older liabilities due by 6 April 2017.

How we can help

No “nudge letter” should go ignored.

We have decades of collective experience in resolving all offshore related tax matters and will assist you in reviewing your tax affairs to confirm whether you have any outstanding tax liabilities to disclose.  In the event you do not, we will respond to HMRC on your behalf to explain that.  In the event that you do have liabilities, we will assist you in making a full voluntary disclosure to bring your tax affairs fully up to date and to mitigate your position and minimise the liabilities.

If you have received a letter and require support in understanding your requirements, or help in reporting, please contact our specialist team using the form below.