25 MARCH 2022
For many years now, HMRC has been involved in the sharing of certain taxpayer financial information between relevant tax jurisdictions under the common reporting standard (CRS).
This has provided HMRC with vast amounts of data on UK resident individuals’ overseas assets and financial accounts. In recent years we have seen HMRC use this data to target ‘nudge’ letters to those taxpayers known to hold overseas assets.
These nudge letters, which appear to be sent by HMRC without any meaningful check of the particular individual’s tax return, ask the taxpayer to complete a (non-statutory) certificate of tax position to confirm the overseas aspects of their UK tax affairs are correct and complete, or to come forward and make a disclosure under HMRC’s Worldwide Disclosure Facility.
Historically, HMRC has tended to take the view that encouraging those with overseas tax issues to come forward and make disclosure is a more cost-effective approach to tackling errors in reporting offshore income and gains than opening multiple investigations.
It should be noted there is no requirement to complete the certificate (our recommended approach is often for taxpayers not to do so) or even to respond to the letter. However, failing to deal with the letter quite clearly increases the risk of a formal HMRC enquiry.
This HMRC tactic of issuing nudge letters does not mean that it is not raising enquires into offshore matters based on the CRS data it receives, and going forward we are likely to see more enquiries raised by HMRC using CRS information as the bank of data it holds expands on an annual basis.
HMRC has invested heavily in both data analytics software, such as the ‘Connect’ system it introduced in 2010 and which has been said to have cost £100m, and HMRC specialists in its Risk and Intelligence Service (RIS) to fully utilise the data it receives. That data is acquired, not only from the CRS data exchanges, but also from more than 30 different information databases, such as bank accounts, credit agencies, online payment providers, foreign revenue authorities, property websites, flight sales and passenger information.
However, as with all information drawn from data analytics, its strength or weakness generally derives from the quality of the underlying raw data. For example, we have seen enquiries raised by HMRC querying the level of overseas investment income taxpayers have declared, only to discover that the CRS reports submitted had picked up the wrong figures for bank balances or interest payments. And just because an individual has two properties, one of which may be overseas, the absence of rental income in their return does not automatically mean rental income has been under-declared.
Whilst transcription errors are not common, there are instances where CRS reports are susceptible to misunderstanding by HMRC, especially when trustees report information in respect of settlors, discretionary beneficiaries, and protectors.
We understand, for example, that full accounts values should be attributed to UK resident settlors by trustees when preparing their CRS reports, even where they are excluded from benefiting from the trust. Similarly, a protector of a trust that is a reporting financial institution should always be treated as an account holder, regardless of whether they have any effective control over the trust.
In such instances, the trust assets will not impact the UK tax position of excluded settlors or protectors, but HMRC may well still raise enquiries based on the CRS data linking them to the trust accounts.
The moral of the story is that information sharing by overseas jurisdictions has never been more common, and HMRC access to data never more prevalent. As ever in tax, it is important that all potential sources of income are considered and appropriately disclosed. However, it should also be noted that data in the hands of HMRC is not always correct and the interpretation of that data not always accurate. As such, any contact or challenge from HMRC, whether it arises from a nudge letter or formal enquiry notice, must be carefully considered and responded to in the right manner.
For more information please get in touch with Justin Stevenson, or your usual RSM contact.