In recent months HMRC has issued a flurry of Requirement to Correct (RTC) letters urging individuals to disclose their worldwide income and gains and ultimately aims to recover unpaid tax. But what do these letters mean?
Our world is becoming ever smaller and interconnected.
Whether it be a 10am Skype call to Australia, contacting a long-lost friend over Facebook or (my personal favourite) ordering ill-fitting, ill-advised clothes from China from the comfort of your sofa, life is more fast-paced and immediate than ever.
Sartorial mishaps aside, the world of taxation is not excluded from technological development.
As a matter of fact, international tax transparency has dramatically increased via the formation of the Organisation for Economic Co-Operation and Development Common Reporting Standard (CRS).
The CRS established the sharing of income and gains on an international basis. So far, approximately 100 countries have co-opted into the scheme and as a member of this organisation the UK tax authorities have more visibility than ever into individual tax affairs.
What Does This Mean For Me?
Many individuals living and working in the United Kingdom can be forgiven for believing their tax responsibilities are restricted to income and gains generated within the UK.
Unfortunately, as is often the case with UK tax law, this is not the case.
Most UK resident individuals are liable to UK tax on their worldwide income and gains which they have a responsibility to report via their self-assessed tax returns.
For those of us who have:
- Rental properties abroad;
- Investments in reporting funds (otherwise known as qualifying offshore funds); or
- Overseas business interests
There is likely to be UK tax payable on these activities and you may have recently received a letter from HMRC asking you to disclose this information.
These letters have been issued as part of a Requirement to Correct (RTC) initiative, which entitles HMRC to not only delve into unpaid tax liabilities up to twenty years ago but charge large penalties and interest.
The original RTC legislation required individuals to declare their unpaid tax by 30 September 2018 which was chosen as the final date for corrections as this was the date by which members of the CRS exchanged data on financial accounts.
Originally the penalties associated with the RTC regime were in line with the normal self-assessment penalty regime and rules.
However, disclosures made after the deadline are much, much higher with a minimum penalty of 100% of the undisclosed tax liability with a maximum rate of 200% charged where the error was deliberate and concealed.
If you encounter the worldwide disclosure regime via direct contact from HMRC then your disclosure will automatically incur a minimum penalty of 150% as it will be viewed as “prompted”.
You have 90 days from the date of the letter to declare your intention to notify, if your tax affairs are complex or your records are poor it is worthwhile delaying this notification as long as possible.
We advise you do not sign HMRC’s letter as it enables them to prosecute if you do not pay the relevant tax, or if you genuinely thought you had nothing to disclose and it later transpires that you do/did.
The Next Steps
Needless to say receiving a letter from HMRC is a stressful matter but our Tax Advisory Team at Robson Laidler are here to help.
- The first step is to notify HMRC that you intend to make a disclosure. You have three months from this date to gather the relevant documentation and calculate the corresponding UK tax liability.
- Take note of Disclosure Reference Number (DRN) and Disclosure Payment Number (DPN) as these are unique to you.
- Calculate the UK tax liability per year. It is important to consult professional advice on this measure as the tax rules are complicated and you must consider the personal allowances, tax bands and tax rates applicable for each year of assessment. Otherwise you are at risk of under or over-stating the tax liability.
- Apply the correct penalty rate. Please note higher penalties are charged for disclosures which date further back than the year ended 5 April 2017.
- Calculate interest in terms of the number of days of late payment.
- Finally, make the disclosure and pay the relevant liability on the same date….
- ….which will hopefully result in a letter of acceptance from HMRC.
As you can see, the Worldwide Disclosure rules are highly complex and professional advice should be sought to minimise your exposure to tax and penalties as far as possible.