In last month’s Budget, chancellor Rishi Sunak declared that the Treasury would raise an additional £4.7bn over five years by further combating tax evasion and avoidance.
Thousands of letters were sent at the end of February by HMRC, asking individuals suspected of not disclosing offshore assets to review their affairs.
This is sent along with a so-called certificate of tax position for completion.
This has left many wondering why they have received this letter and what they should do.
Given the covid-19 situation, HMRC are likely to extend deadlines for responses if you phone them in advance of the original deadline.
What is the background, and who is HMRC targeting?
These letters are linked to HMRC’s Requirement to Correct (RTC) campaign, which was a statutory obligation for taxpayers with overseas assets to correct any issues with their historic UK tax position.
Under RTC, taxpayers were legally obligated to take steps to correct their UK tax position by 30 September 2018.
Those who failed to do so face punitive financial penalties and other
The nudge letters are therefore being targeted towards individuals suspected of not adhering to the RTC.
We are now under the Failure to Correct (FTC) regime.
What is the failure to correct regime?
The core purpose of the FTC legislation is to penalise those who did not correct any error by the 30 September 2018 deadline.
The FTC regime includes a raft of new penalty charges: a tax geared
penalty of between 100 per cent and 200 per cent of the tax not corrected, a potential asset based penalty of up to 10 per cent of the value of the relevant asset, an additional asset move penalty if HMRC could show that assets or funds were moved to avoid the RTC.
Alongside penalties, there is a risk of naming and shaming where over £25,000 of tax is involved.
No penalty will be chargeable where the taxpayer has a reasonable excuse for failing to correct the position.
What is or isn’t a reasonable excuse is a subjective test and we expect to see future cases in the Tax Tribunal.
Are nudge letters HMRC’s main tactic?
This is a common tactic used, but people should not assume that these letters are simply speculative.
HMRC has a highly sophisticated computer-based system called Connect, which can identify individuals who hold assets in multiple jurisdictions.
While this system will catch some who have wilfully ignored HMRC’s rules, it can also flag individuals who might have overseas bank accounts with no tax irregularities such as money left in a bank account from working or studying abroad that earns no bank interest, and is therefore not causing any tax problems.
How would you advise people to respond?
Do not ignore the letter. If you have a simple and legitimate explanation, I would advise writing a letter to HMRC in response. This is instead of completing the certificate which is not a statutory obligation.
If you believe that you may have a problem with undeclared offshore income or gains, you should seek expert tax advice ahead of making a voluntary disclosure.
Dawn Register is a partner and head of tax dispute resolution at accountancy and business advisory firm BDO.