UK Tax Agency’s “Nudge Letters” Reach Offshore Income

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The U.S. passed the Foreign Account Tax Compliance Act requiring non-U.S. banks (amongst others) to report the details of all account holders that are U.S. citizens in 2010. Since then, the U.K. and more recently the Organisation for Economic Co-operation and Development (“OECD”) have jumped on the bandwagon such that financial institutions in most countries around the world are now obliged to report the details of foreign account holders to the person’s home revenue authority under the Common Reporting Standard (“CRS”).

Data Overload

Unsurprisingly, this has resulted in HM Revenue & Customs (“HMRC”) receiving an enormous amount of data from overseas tax authorities, especially those where traditionally, and despite those jurisdictions doing their utmost to shed the “tax haven” label, people who have wanted to keep HMRC in the dark regarding their finances.

HMRC is able to match this data to its records to see if it is worth their while issuing one of their “nudge” letters asking people to consider if they have made a full declaration of their income. These letters are not new. In my career with HMRC (or the Inland Revenue as it was then) I was issuing such letters when I had information that a person had not declared all their income. The letters were deliberately kept vague to encourage full disclosure, the idea being that if the (non)-taxpayer didn’t know what you already knew, he may tell you about income you knew nothing about (as happened to me).

It is, therefore, not at all surprising that after issuing letters to second home owners to see if, rather than a personal holiday home, they have a rental property, HMRC have turned their attention to people who have offshore bank deposits. If nothing else, HMRC and their international counterparts (not to mention all the banks) have spent a lot of money on this system so they have to do something with the information!

Of course, HMRC is well aware that not everyone who has a bank account in one of the Crown Dependencies is there for tax reasons. Part of my investigation training was to acknowledge that people have many commercial and personal reasons to use non-U.K. bank accounts and not simply jump to conclusions. For example, using offshore banks to hide money ahead of divorce was not an uncommon explanation, although one might argue that this is equally amoral to tax evasion.

When to Take Action

In effect, HMRC is letting individuals know that HMRC know they have an offshore bank account. If the money was, say, a legacy from Great Aunt Hilda, the bank account is used for the un-let holiday villa or the income has already been declared, then there is no need to take any action.

However, if the money in the bank account comes from undeclared income, or payments following false expense invoices, taxpayers have the chance to come clean before HMRC come knocking.

Of course, HMRC may not knock on the door as they have so many to visit, but if they do darken the doorstep their position will be that the person had fair warning and no doubt the penalties charged will reflect that.

With the added levels for failing to make a disclosure prior to September 30, 2018, the penalties could be at least 150 percent of the tax due, potentially 10 percent of any asset related to the income and the individual’s name up in lights as a deliberate defaulter, the cost of not coming forward is punitive.

What makes the current crop of letters relating to offshore bank accounts different to earlier nudge letters is that if the recipient’s tax affairs are up to date, rather than filing the letter in the grey circular filing cabinet in the corner of the room and basking in warm feeling of everything being above board, they are being asked to sign a “certificate of tax position.” This title has no doubt been carefully selected, as where irregularities are found in an enquiry and penalties charged, HMRC ask for a certificate of full disclosure. However, HMRC’s internal guidance makes clear (see Enquiry Manual at EM3811), these certificates should not be requested if there has been no wrongdoing.

Both certificates are a declaration by the taxpayer that they have told HMRC about everything and there is nothing that hasn’t been disclosed. They also warn that making false statements can result in prosecution. HMRC takes certificates of full disclosure very seriously. Anecdotal evidence is that Lester Piggott signed at least one of these prior to his conviction for tax evasion.

Planning Points

HMRC’s position will no doubt be, “well if everything is declared and up to date, where is the harm in you signing to say that is the case?” The recipient may be wondering if they don’t sign then it will be a trigger for HMRC to come knocking! Plus, even sending any acknowledgment of the letter may be taken as a de facto acceptance of the message within it.

However, I would suggest that a polite acknowledgment of the letter to HMRC, containing a reminder that a declaration has already been made on any relevant tax returns may be suitable middle ground. If you list Russian roulette as your favourite hobby you could ask HMRC why they are apparently not complying with their own guidance at EM3811. I would, though, recommend both finding a new hobby, and leaving that sentence out of any letter.

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