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

The taxation of non-UK domiciled individuals underwent dramatic change in the Finance Acts of 2007 and 2017. Another overhaul is on the horizon, with uncertainty about the details until the Government holds a Budget following the election and draft legislation is then issued.

It is easy to lose track amongst all the hype, but one thing is simple: those with overseas assets should routinely seek advice about their UK tax obligations to demonstrate they are taking reasonable care; mistakes are easy to make, but HMRC is rarely sympathetic.

What data does HMRC receive about overseas assets?

HMRC receives annual information from overseas jurisdictions under the Common Reporting Standard (CRS) concerning offshore financial assets such as bank accounts and investment portfolios held by UK resident individuals.

This information is routinely checked against the information disclosed by the individual, for example on his or her tax return. If there are discrepancies, HMRC will be in touch to question the perceived inaccuracy or omission.

This is unfortunate because if tax has in fact been underpaid, penalties for prompted disclosures are automatically higher than those for voluntary disclosures.

How many years?

HMRC now has extended time limits for assessing UK tax in relation to offshore assets. This rule applies to UK nationals and non-doms alike.

Matters are “kept open” for up to 12 years for those with overseas assets who have innocently or carelessly underpaid tax in the UK on these sources. The assessment window in respect of innocently or carelessly underpaying tax on UK sources with no offshore element is much reduced at only four or six years respectively.

This means HMRC can seek tax for up to three times as many years, simply due to the income, assets or other source being overseas, which is arguably excessive.

It might be possible to argue the defence to the extended time limit for offshore matters applies; this is a highly technical and nuanced area often misunderstood by HMRC and advisors alike hence specialist advice is recommended.

What are the penalties?

HMRC also has the ability to charge sizeable Failure to Correct (FTC) penalties for some years.

FTC penalties apply to underpaid tax connected to offshore matters or transfers and range between a minimum of 100% and up to 200% of the underpaid tax.

Moreover, FTC penalties apply regardless of behaviour, meaning it does not matter if there was merely a genuine mistake down to human error, the FTC penalty can still be assessed, whereas there would be no penalty at all if the error related to income or an asset in the UK. This is an absurd result, particularly when compared with penalties for tax fraud / evasion, which would be between 20% and 100% if connected to UK assets.

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. It seems most of the UK population were unaware such a requirement existed, despite HMRC claims that it would be widely publicised in advance. The reality in our experience is that taxpayers were not aware of the requirement and only become aware of a potential tax problem when HMRC writes to them asking about their offshore investments which HMRC knows about as a result of the CRS data received.

Our experience is that arguing against FTC penalties meets strong resistance from HMRC and a robust stance may be needed; specialist advice should be taken for the best chance of success.

How we can help

Our specialists are expert in the detail, nuances and quirks in these rules as well as in the case law on reasonable excuse which is varied and complex, something which even HMRC recognised in the 2021 document “Helping taxpayers get offshore tax right”, which said, “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.”

We can advise on your tax obligations, how to correct errors or omissions with HMRC, always seeking to reduce your exposure to the number of years in question and to penalties as much as is realistically possible. 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.