What to do if HMRC ask you about money held overseas
You may have recently received a letter saying that HMRC’s information indicates you currently have or previously had offshore income or gains and if you have additional tax to pay, to tell HMRC using the Worldwide Disclosure Facility. If this applies to you – read on.
In September 2016, HM Revenue & Customs (HMRC) launched the ‘Worldwide Disclosure Facility’ aimed at encouraging taxpayers to put their tax affairs right if they have not declared all of their UK tax liabilities that relate to offshore income or gains. Our previous article 'HMRC campaigns – do you have income and gains from overseas?' outlines this opportunity to bring your tax affairs up to date.
In 2017, HMRC started to receive new information about accounts, trusts and investments based outside the UK from more than 100 jurisdictions around the world. This means HMRC will be able to check you are paying the right amount of tax more easily. Typically, tax will be tax due on income or gains arising from the money or assets, which are commonly known as offshore income and gains.
There are a number of reasons why you may not have told HMRC about any offshore income or gains that you have, but if you have lived and worked in the UK for all or most of your life, UK tax is likely to be due on any such income or gains. However offshore tax matters can be complex and this will not always be the case.
In this article we look at a few of the considerations to help you understand if you have a problem – but the main thing to take away is that if you think there has been an irregularity in your tax affairs, you should get some expert help from a professional tax adviser. You should do this as soon as possible and certainly before you try and deal with any letter sent to you by HMRC.
Where to get help
If you need to consult a professional tax adviser, you can find one who specialises in expatriate or international personal tax matters by using the Chartered Institute of Taxation’s ‘find a technician’ tool or if you are on a low income, by getting in touch with one of the tax charities.
The tax charities, Tax Aid (for those aged under 60) and Tax Help for Older People (for those aged 60 and over) can provide free advice and assistance with Worldwide Disclosure Facility issues to individuals on incomes of £20,000 a year or less.
Below, we give more information on the following:
Does your offshore income relate to the 2016/17 tax year?
Does your offshore income, when added to any other income fall under the tax-free allowances?
Have you paid foreign tax?
Does the remittance basis apply to you?
Can the double tax treaties help?
Is your foreign income dividend income?
Have you been withdrawing amounts from an offshore bond?
How long do you have to go back?
Is this undeclared offshore income very small?
If your offshore income accrued in the year which ended 5 April 2017, you are not too late to complete and submit a tax return if you need to. You can find more information in our press release ‘Second chance for people who miss next week’s tax deadline’.
The personal allowance is a tax-free allowance that reduces the amount of income on which you pay tax. In 2016/17, it was £11,000. You can find a list of the personal allowances for earlier tax years on GOV.UK. (It is worth noting that for years up to and including 2015/16 the personal allowance could be higher for older people.)
There are other amounts that can increase the amount of income you can get tax free or reduce the amount of tax that you pay– e.g. for blind people or for married couples.
There is also a special starting rate (currently 0%) for savings income for those on low incomes, which includes income from overseas savings. From April 2016, you may be entitled to an additional tax free personal savings allowance of £1,000 or £500 depending on your income and a tax free £5,000 dividend allowance, both of which cover offshore income. You can find out more on our website at 'What tax rates apply to me'.
If you have income arising offshore it may well have been taxed in that overseas country. If that income is also taxable in the UK then in most cases, you should receive credit in the UK for the foreign tax paid (but not if you could, alternatively, reclaim some or all of the foreign tax).
Therefore, if you have correctly paid foreign tax on your offshore income at a rate that at least matches the UK rate that you would have paid on that income (typically 20% for most low-income taxpayers), this could reduce or even extinguish, the UK tax liability.
If you are resident, but ‘non-domiciled’, in the UK the amount of UK tax you have to pay on foreign income and gains may sometimes depend on whether or not you bring (‘remit’) money or goods into the UK. In particular you may be able to benefit from a special exemption, available to those who have unremitted foreign income or gains that are less than £2,000 in a tax year.
There is more information about the remittance basis in the migrants section of our website.
The UK has a network of agreements with other countries – one function of these agreements is to determine which country has the right to tax particular kinds of income or gains. These are known as ‘double taxation agreements’. If there is a double taxation agreement in force between the UK and the country that the income arises in, the agreement may provide for the overseas country to have primary taxing rights over the income.
For example, as a general rule, the pension/annuity articles of most tax treaties allow the country of residence to tax the pension or annuity under its domestic laws. In some cases, government pensions/annuities or social security payments are only taxable by the country making the payments – for example, German social security pensions are taxable only in Germany even if the pensioner is resident in the United Kingdom. You need to look at each treaty carefully.
There is a list of the UK's double taxation agreements on the GOV.UK website but they are complex documents, so you will probably need a tax adviser to help you understand how they may apply to you.
From the beginning of the 2008/09 tax year until the end of the 2015/16 tax year, there was usually a 10% notional tax credit available for a foreign dividend, as for a UK dividend, provided certain conditions were met (such as the shareholder had less than 10% of the shares of the foreign company). This eliminates any additional tax for basic rate taxpayers.
In 2016/17, there is the £5,000 dividend allowance (mentioned earlier) which can apply to foreign dividends.
It is possible to withdraw up to 5% of the total premiums paid into a bond each policy year for 20 years, without incurring an immediate liability to income tax. If the 5% allowance is not fully used in a given policy year, the unused allowance carries forward to the next policy year on a cumulative basis.
How long do you have to go back?
There are only so many years that HMRC can ask you to pay back-taxes for. You have to self-assess your behaviour to work out the number of years that apply to you (this will also help you to work out any penalty you have to pay if there are some taxes that you owe to HMRC).
So, for example, if you completed a tax return, but did not include the offshore income in it, the rules are basically as follows:
- If you took care to make sure your tax return was correct but still didn’t pay enough tax – the time limit is 4 years from the end of the tax year concerned (i.e. HMRC can ask you to pay tax going back to 2013/14).
- If you did not pay enough tax because you were careless, the time limit is 6 years (i.e. to 2011/12).
- If you deliberately misled HMRC about this income, HMRC can ask for this tax going back 20 years.
There are similar rules if you failed to notify HMRC of the need to complete a tax return to declare your offshore income or gains in the first place. You can find a useful table summarising HMRC’s assessing time limits in HMRC’s Compliance Manual on GOV.UK. You can also find information about the various behaviours, e.g. carelessness, in the manual. If you are in any doubt as to which category your behaviour best fits, you should seek some professional advice (we remind you how to do this as the end of this news piece).
Please note that if you are using HMRC’s online disclosure service to tell them about any taxes that you owe, then you will be asked to click a button next to the statement that best describes your situation to work out how many years you need to disclose. If you click on the button that says, ‘You have failed to notify HMRC of a tax liability but this was not deliberate and you don’t have a reasonable excuse’, then a form is presented that asks you for 20 years’ worth of information. We think this is an incorrect number of years, as the law seems to say that in these circumstances, years prior to 2009/10 cannot be assessed. We have asked HMRC to check the position and their form.
As a general principle if you think you have underpaid tax, then you should take steps to correct it. However, where there is an isolated error and the tax at stake is minimal, say up to £200, it will probably cost HMRC more to process than it is worth. In such cases, you should phone or write to HMRC to explain the position and to ask for their agreement that no further action is required:
Post: Individual and small business compliance, Campaigns and projects, BP301 Benton Park View, Longbenton, Newcastle, NE98 1ZZ
Tel: 0300 322 7012
HMRC are now getting tougher on individuals not paying the right amount of tax on their offshore money and assets. Not declaring offshore income or gains is a serious matter, but things might not be as bad as you think due to the various different rules that can apply depending on your circumstances (some of which we have looked at in this article). The main thing, if you think there has been an irregularity in your tax affairs, is to take action as soon as possible.
If you need to consult a professional tax adviser, you can find one who specialises in expatriate or international matters by using the Chartered Institute of Taxation’s ‘find a technician’ tool or if you are on a low income, by getting in touch with one of the tax charities.
Please remember that the information here is for general guidance purposes only and if there is any doubt whatsoever about your position, you should seek specific advice.