Magnifying spy glass

HMRC’s hard line on UK taxpayers seeking to correct their overseas affairs

Hayley Ives, Director, Tax Resolutions
11/04/2022
Magnifying spy glass

There is much opinion in the press surrounding Rishi Sunak’s wife’s decision to pay tax on a remittance basis. We in the tax profession are of course aware this is a perfectly legitimate basis upon which to pay tax for UK resident non-doms. There was a significant overhaul to the remittance basis rules from April 2008, which saw the introduction of charges of at least £30,000 per year to claim the remittance basis alongside losses of personal allowances to make this option less appealing. Furthermore, since 2017, long term residents who have been living in the UK for at least 15 of the previous 20 tax years become ‘deemed domiciled’ for Income Tax, Capital Gains Tax and Inheritance Tax purposes, meaning they their worldwide assets are taxable in the same way as UK domiciled individuals.

What perhaps is more controversial is the various powers HMRC now has to collect tax in relation to offshore matters. These apply to UK nationals and non-doms alike. For example, there is now a 12-year assessment window for individuals with overseas assets who have innocently underpaid tax on these sources, whereas the assessment window in respect of UK sources is much reduced at only 4 years. This means HMRC can seek tax for three times as many years simply due to the source being overseas.

A further huge sting comes from HMRC’s ability to charge Failure to Correct (FTC) penalties. These apply to underpaid tax connected to offshore matters and range between a minimum of 100% and up to 200% of the underpaid tax. Moreover, they apply regardless of behaviour, meaning it doesn’t matter if there was a genuine mistake down to human error or, at the other extreme, deliberately hiding monies overseas; everybody in this position is on the hook for a penalty of 100% to 200%. When compared with penalties for tax fraud connected to onshore matters (between 20% and 100% of the lost tax) and, unsurprisingly, no penalty for human errors, this goes beyond punitive.

It is possible to reduce FTC penalties on the grounds there is a reasonable excuse for failing to correct the tax position before a strict deadline that expired some years ago on 30 September 2018. None of the clients we have helped to disclose historic inaccuracies were aware such a requirement existed. HMRC made claims that the requirement would be widely publicised in advance, but in reality, this did not happen. Furthermore, the majority of these individuals were not aware a tax issue existed in the first place until much later when HMRC wrote to them asking about their offshore investments. Our experience is that arguing against FTC penalties for these reasons meets strong resistance from HMRC, which grinds taxpayers down and may discourage many from taking legitimate claims to the tax tribunal.

The rules in respect of tax on foreign assets are complicated, as recognised by HMRC, for example in the 2021 document “Helping taxpayers get offshore tax right”, which includes the statement that: “The complexity of offshore tax means mistakes can be made and the wide range of guidance can be difficult to navigate, particularly for those without a working knowledge of tax.” HMRC’s propensity to seek disproportionate FTC penalties is at odds with its own view that the tax system is not straightforward.

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For more information on the issues raised in this article or to discuss your individual circumstances get in touch with Hayley Ives or your usual Crowe contact.

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Simon Warne
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Kent