Many UK taxpayers in the last few months have surprisingly found in their mailbox a letter from HMRC about “Your Overseas Assets, Income or Gains” in which they were informed that HMRC has obtained information from overseas tax authorities about assets held by them in foreign jurisdictions on which they may have a UK tax liability.
Scope of this communication is to give the taxpayer the opportunity to review his or her tax position and confirm whether this is in order or if something needs to be rectified.
This stems from an initiative by the OECD (Organization for Economic Cooperation and Development) which since 2014 has set a single global standard for the automatic collection and transmission of financial and tax information for individuals and legal entities.
The initiative, known as the Common Reporting Standard or CRS and approved among others by finance ministers and governors of over 100 countries around the world (including many jurisdictions that until then were considered tax havens), consists of an intergovernmental model agreement which defines the common rules and procedures for the fulfilment of due diligence and communication obligations.
The main goal of the CRS is to prevent and combat tax evasion on a global level.
The immediate effect for a taxpayer resident in one country who earns income or holds current accounts in another jurisdiction that adopts the CRS is that such information will automatically be notified to the tax authorities of the country of habitual residence.
HMRC send these letters when a discrepancy between the data held about a taxpayer and the information sent in by foreign authorities emerges and there may be additional UK tax payable on overseas income or gains.
It is worth noting that tax on foreign income or gains is not always due in the UK. Thanks to the wide network of bilateral agreements for the avoidance of double taxation signed by the United Kingdom with over 100 countries, foreign income and gains subject to tax at source in a foreign country may be exempt from UK tax or unilateral credit relief may be available against tax payable in the UK.
The most common foreign income earned by UK residents is from overseas real estate but portfolio investments generating interest or gains and dividends from shares held in foreign companies are also very common.
Property income is usually taxed at source in the country where the property is located.
Because of this, taxpayers are often led to believe that it is only taxable in that country.
However, as the UK imposes taxes on a worldwide basis (meaning that, unless the taxpayer is a remittance basis user, residents are liable to tax on their worldwide income and gains regardless of the country from which they derive) all foreign income and gains, with some rare exceptions, must be declared on an individual’s UK tax return and any tax must be paid to HMRC.
The letters usually include a certificate of Tax Position that the taxpayer must sign to confirm that either his or her tax affairs are up to date or that they will bring them up to date using the worldwide disclosure facility, even though this is not the only disclosure method available.
A warning is made that making a false statement could result in criminal prosecution.
There is no legal obligation to respond to these letters but ignoring them is not advisable as silence could lead to the opening of an enquiry into a tax return or investigation by HMRC.
By using this alternative way to “assess” a taxpayer’s position HMRC give the opportunity to come forward and declare unreported income and gains with the advantage that potential penalties and interest are usually lower than those that an individual may be left facing further to an investigation.
In order to respond in the most appropriate way to these letters a compliance review on the individual’s tax position should be carried out and specialist advice should be sought.