The introduction of the US Foreign Account Tax Compliance Act (FATCA) in 2015 marked a turning point for reporting obligations. Since the introduction of FATCA, reporting obligations have materially and rapidly increased:
- 2016 saw the introduction of the requirement for UK companies and limited liability partnerships to keep a register of People with Significant Control (the PSC Register)
- in 2017 the UK Trusts Register was introduced, the PSC Register was publicly available through Companies House and the first reporting by "early adopters" commenced under the Common Reporting Standard (CRS)
- in 2018, the "fast followers" also commenced reporting under the CRS and September was the deadline for disclosure under the Requirement to Correct legislation
- we are already looking ahead to 2020 when the EU directive on mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements (commonly referred to as DAC 6) will be implemented by Member States, including in the UK, notwithstanding Brexit, and will widen disclosure requirements for arrangements within certain "hallmarks" which have an EU cross-border element; as well as the UK Trusts Register becoming accessible by persons with a "legitimate interest" under the fifth anti-money laundering directive
- in 2021, the new register of beneficial ownership of overseas entities owning UK real property is also expected to go live.
In parallel, via its "Connect" system, HMRC has also increased access to public records such as those held by other government bodies (eg the DVLA and Land Registry), as well as not-so-public records such as email and social media exchanges (under the so-called "snoopers charter").
An acknowledged purpose of the increase in disclosure obligations on taxpayers and access to other information is so that HMRC can cross-check information being reported with other data, so as to identify inconsistencies and potential misreporting. However, it appears that more information does not necessarily mean HMRC has a better understanding, or that such information is being used to confirm that which has been self-reported. It simply means that HMRC has become increasingly front-footed with taxpayers in a number of respects:
CRS and offshore income or gains
HMRC is now in the practice of issuing (what have been referred to as) "nudge" letters to taxpayers. These are non-specific, usually inform the recipient that HMRC has "received information which shows you may have received overseas income or gains which is taxable in the UK" and remind the recipient of their obligation to inform HMRC of their UK tax liabilities arising from offshore income or gains.
Controversially, a "Certificate of Tax Position" is also included with a nudge letter, to be completed by the taxpayer and returned to HMRC, without the recipient being told what information HMRC is referring to, or has been made aware of, or if HMRC considers that there has been misreporting, or if tax is due.
In addition to the expectation that the taxpayer complete the certificate without the benefit of understanding the context in which the request has been issued, the certificate itself gives cause for concern. Options for certification being given to a taxpayer are:
- "I need to bring my tax affairs up to date. I will declare all of my UK tax irregularities using HMRC's Worldwide Disclosure Facility."
- "My tax affairs do not need updating. I do not have any additional tax to pay. I have declared all of my offshore income, assets and gains which are taxable in the UK."
Such binary options are not comprehensive, and the declaration required if a taxpayer does consider their reporting to be up to date goes far beyond the confirmation required when submitting a self-assessment or other return, being "I confirm that the information I have given is correct and complete to the best of my knowledge and belief."
Another cause for concern is the potential for taxpayers to worsen their position by completing the certificate. The certificate includes a warning to the taxpayer that "choosing to make a false statement or complete a false certificate is a criminal offence that can result in investigation and prosecution".
While this is also true of statements made in tax returns, as mentioned above, the standard required is best knowledge and belief, not a categorical statement that a taxpayer does not have any additional tax to pay and their affairs do not need updating. The certificate, therefore, is tantamount to an invitation to leave oneself open to criminal sanction in the event of error or oversight.
Lastly, there is no statutory authority at present for HMRC to require such certification, so whether a taxpayer completes and returns the certificate is entirely voluntary. However, the tone of the nudge letter and stated deadline for return gives the impression that doing so is mandatory.
In this context, when dealing with CRS reporting and responding to nudge letters, our suggested "best practice" is as follows:
- The initial batch of nudge letters appear to have been generated from HMRC's Connect system detecting inconsistencies either between data sets, or between data received and prior reporting. Ensuring that all reporting is consistent will help to reduce the risk of a red flag being raised inadvertently. Trustees and corporate service providers should keep records of the categorisation of, and reporting for, all relevant entities for CRS. It may also be beneficial for trustees to contact financial institutions to confirm what has already been reported (eg in respect of bank accounts) and as well as notifying beneficiaries so that beneficiaries can ensure that self-reporting is consistent.
- Trustees, corporate service providers and beneficiaries should carefully consider how to respond to nudge letters, including whether to complete the requested Certificate of Tax Position. In many cases, it may be preferable to respond to HMRC by separate letter, which allows a detailed explanation to be provided and may pre-empt further enquiries. In any case, it is recommended that professional legal advice is taken on the most appropriate method of response.
We have seen a number of clients with offshore income and gains receive these nudge letters, but who may have legitimate reasons not to have paid UK tax on such funds. For example, a UK resident non-domiciled individual, who claims the remittance basis of taxation, will not usually need to pay UK tax on offshore income or gains which he or she does not remit to the UK. However, the fact that the individual has offshore income or gains, may itself trigger a nudge letter.
Follower notices
Where a tax avoidance scheme has been identified and successfully litigated by HMRC, it is HMRC's practice to issue "follower notices" to taxpayers who have participated in the same or a very similar tax avoidance scheme. A follower notice will usually accompany an accelerated payment notice, which together will inform the taxpayer that they are required to settle the tax in dispute and if they do not do so by a specified deadline, they may be liable for a further penalty of up to 50% of the tax in dispute.
Part 4 of the Finance Act 2014 (FA2014) sets out strict criteria for the issuance of a follower notice, one of which is that HMRC is of the opinion that there is a judicial ruling relevant to the chosen arrangements (the chosen arrangements being a particular tax advantage resulting from particular tax arrangements).
A recent case, Haworth v HMRC, sought to challenge the validity of a follower notice and accelerated payment notice on the basis that the judicial ruling in Smallwood (and others) v HMRC did not contain any "principles" or "reasoning" of general application relevant to the specific arrangements in question.
The follower notice and accelerated payment notice were held to have been validly issued in Haworth on the basis that Smallwood did contain "reasoning applicable in other cases." However, significantly, the facts in Haworth were similar to Smallwood, but not the same, and the case is illustrative of HMRC's willingness to issue follower notices in circumstances where facts are broadly similar, but not squarely on the same facts as successfully litigated cases. We are aware of a number of follower notices which have been issued on the basis of the judicial ruling in Smallwood which bear fairly limited resemblance to the facts of the case or the judgment.
Trustees (as well as beneficiaries and settlors) are encouraged to take a robust stance in considering whether follower notices and accelerated payment notices have been validly issued. While Haworth confirms that principles and reasoning from similar cases can be applicable, where the facts differ it is worth taking advice as to whether HMRC are in fact acting within the scope of Part 4 FA2014 or not. In our experience, it is not uncommon for there to be circumstances where HMRC has issued invalid notices (eg if procedural conditions have not been met). We would recommend advice is always taken on whether a notice can be challenged and, if not, more generally on the appropriate manner of corresponding with HMRC.
Where avoidance schemes have been identified, trustees should exercise caution before agreeing to replace an outgoing trustee of structures which are similar or taking on new structures. Trustees should also have regard to the "enabler provisions" in Schedule 20 of the Finance Act 2016 as well as the financial and reputational risk if the trustee is found to have enabled another person to carry out offshore tax evasion or other non-compliance.
Domicile
Trustees are familiar with the importance of keeping accurate and fulsome historic records and evidence of a settlor's domicile. The conscientious maintenance of such records and evidence is becoming increasingly important as HMRC becomes more aggressive in challenging the domicile of settlors of "protected" settlements following the April 2017 tax reforms for non-domiciled individuals, as well as excluded property settlements for inheritance tax purposes. In the case of the latter, the risk for trustees is particularly acute, as the primary liability for inheritance tax will fall on the trustee if the domicile of a settlor cannot be defended.
We reiterate our recommendation to trustees to keep detailed and evidence-based records of settlors' domiciles, and to compile such records in advance of new trusts being established. The review of domicile records should also form a key part of the diligence undertaken before a trustee agrees to be appointed as in respect of an existing structure, and we recommend regular "domicile reviews" where a settlor is resident in the UK.
If you have any queries on any of the matters raised in this article, please do not hesitate to contact a member of the Taylor Wessing Private Client team.
