As the authors of this article argue, those involved in offshore bank accounts and investments must be particularly careful to avoid mistakes in order to avoid falling foul of the UK revenue authorities. They explain the state of play, and the steps that people should consider.

The following article comes from Haysmacintyre, the chartered accountancy firm. The authors are Danielle Ford and Riocard Hoye, senior manager. The editors are pleased to share this content; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com

The stakes have never been higher for those with an interest in offshore bank accounts and investments who make a mistake; HMRC holds more information than ever before and has access to penalties with serious bite.

HMRC’s nudge letter campaign is going nowhere
HMRC continues to widen its nudge letter campaign with new communications sent to individuals with offshore assets, income or gains. Nudge letters are HMRC's mass communications sent to taxpayers which it has identified concerning a specific tax risk. It is part of HMRC’s ‘one to many’ strategy – the letters are a cost-effective way for HMRC to communicate with many taxpayers at once compared with traditional methods such as an enquiry.

HMRC's nudge letters remind taxpayers of their legal obligation to review their tax affairs and correct errors or omissions. It is HMRC's way of nudging taxpayers who they believe have paid insufficient tax, without opening formal enquires.

Nudge letters account for billions of pounds of HMRC revenue. In its 2022/23 annual report and accounts, HMRC reported that £5.3 billion was attributed to “upstream operational yield,” a category which contains nudge campaigns and educational projects. As HMRC is generating these levels of revenue by expending a relatively low level of resource, it is clear that the “nudge” approach is here to stay.

What is offshore income or gains? 
Offshore income or gains can arise from a multitude of sources within territories outside of the UK, including interest from overseas accounts, dividends from overseas companies, rental income from overseas properties, and wages or benefits earned. 

The default position for UK taxpayers, unless claimed otherwise, is the “arising basis” of taxation. This means that all worldwide income and gains must be reported to HMRC, even if this has already been reported in the foreign jurisdiction and/or had tax withheld at source.

Traditionally, HMRC had limited visibility in relation to offshore matters, meaning that offshore structures and bank accounts were often used to avoid tax. Now, under the Common Reporting Standard (CRS), financial institutions from around the world must report to HMRC details of UK resident individual’s income and gains.

This means that HMRC is in possession of more information than ever before, which is increasing in detail and accuracy. It is because of this huge volume of information that HMRC holds that nudge letters are necessary; HMRC would not have the resource to open full enquiries into even half of the taxpayers it identifies as a tax risk.

Implications of a nudge letter 
A nudge letter is not a statutory enquiry, however we advise taxpayers to thoroughly review their tax affairs to consider whether a disclosure to HMRC is necessary. Nudge letters might be a form of mass communication, but they are not generated randomly – they are target-specific, meaning that HMRC holds information which highlights offshore income or gains that do not appear in UK filings. That said, we have seen HMRC issuing letters to taxpayers where the information has already been reported.

Regardless of whether a disclosure is required or not, it is best practice to respond to HMRC within the deadline stated – usually 30 days. If this is not possible, calling HMRC to agree an extension to the deadline is recommended. 

It is not advisable to sign and return the certificate of tax position, because there is no statutory obligation to do so. However, a potentially false declaration in the document could have very serious ramifications. A response to a nudge letter is recommended, with the wisest course of action seeking professional advice upon receipt of a nudge letter, especially where a disclosure is required. This is due to the complexity involved, as any disclosure will need to encompass all relevant tax years, disclosing the tax, late payment interest and appropriate penalty for the type of error involved. 

We have recently seen HMRC start to follow up on nudge letters which have been ignored with much stronger communications. These communications request significant amounts of information within a 30-day deadline and refer to the powers HMRC has available, much like an enquiry letter.

Enquiries
In addition to nudge letters, HMRC continues to target offshore non-compliance with full enquiries, as part of their “no safe havens” policy, to investigate onshore matters. HMRC routinely risk reviews tax returns using its CONNECT analysis software and due to the high quality of information HMRC possesses, the chances of receiving an enquiry have never been higher. 

Should you receive an enquiry notice, seeking experienced professional advice is strongly recommended, particularly as, in the most egregious cases, HMRC can seek criminal prosecution. An enquiry can be long running; your professional advisor can guide you through the process and negotiate the most favourable settlement for you with their knowledge of HMRC’s powers and procedures, including penalties.

Penalties
HMRC’s offshore penalties are incredibly complex, with a number of different regimes which may apply depending on the tax years involved and the jurisdiction the income or gain relates to.

Offshore penalties are another tool in HMRC’s toolbox, designed to be a huge deterrent to those who may seek to use overseas investments and institutions to avoid paying UK tax. HMRC’s most severe offshore penalties are the Requirement To Correct (RTC) regime, where the penalty levied can be up to 200 per cent of the tax. Additionally, a penalty of up to an additional 50 per cent can be applied in cases where overseas assets have been moved to avoid detection.

With stakes this high, it is clear why due care must be taken to protect your position. The best way to do this is to regularly review your tax affairs and, if any irregularities are discovered, make a disclosure at the earliest possible opportunity.

Disclosures and penalties: why you should act first
If you receive a letter from HMRC, any matters disclosed to or uncovered by HMRC will broadly be considered ‘prompted’ by the action of HMRC sending the nudge letter.

If you have found an error in your return or an omission, there are clear advantages for disclosing this before you receive a nudge letter or HMRC opens an enquiry. Such a disclosure would be considered “unprompted,” and this allows access to the lowest possible penalty ranges, in some cases starting at 0 per cent. 

In addition, a disclosure at the earliest possible opportunity would allow the maximum mitigation to penalty ranges.

The importance of professional advice
With HMRC’s focus on tackling undisclosed offshore income and gains, and the level of information it now receives, HMRC is contacting more taxpayers than ever before, who are left to navigate the minefield of HMRC’s powers and penalties.

Seeking professional advice is key should you receive a communication from HMRC, in order to guide you through the process and obtain the best possible outcome. Preferably, you should not wait for HMRC to contact you. Taking the right advice in respect of your tax affairs, especially if this involves offshore matters, can ensure your filings are complete and correct, and can inform you of any regulatory changes to ensure that you remain compliant going forward and away from HMRC’s intensifying attentions.