We have recently seen a marked increase in HMRC compliance activity. During the period of national coronavirus lockdown between March and May 2020, HMRC gave taxpayers the opportunity to pause ongoing enquiries and were not actively issuing new opening enquiry letters. Now those cases that were paused have been resumed and many new enquiry letters have been issued. One area where HMRC is focusing its attention is offshore.
HMRC has historically always been interested in the tax affairs of wealthy individuals, those with overseas aspects to their tax affairs and those who have disposed of significant assets. The complexity of the tax affairs of such taxpayers from HMRC’s perspective puts them at a higher risk of not declaring their correct tax liabilities.
As part of this focus, HMRC has issued various ‘nudge letters’ through a campaign targeting taxpayers with offshore investments. These nudge letters request taxpayers to sign a certificate and confirm either that there is an error on their tax return that requires disclosure, or that their tax position is complete and correct.
The latest nudge letter is an updated and more detailed version of those previously issued by HMRC and appears to be using information received from overseas tax jurisdictions under automatic exchange of information rules applying the Common Reporting Standard (CRS). The wording of the letter guides the recipient towards offshore investment portfolios as the source of concern, and requests them to complete and return a‘certificate of tax position’.
The letter implies there is a obligation to complete this certificate, for which there is in fact no legal requirement, and invites the recipient to sign a self-declaration. The self-declaration asks the taxpayer to confirm that the information they have given is correct and complete as well as acknowledging that “dishonestly making a false statement to evade paying tax is a criminal offence and...may be subject to investigation and prosecution”.
Should a taxpayer sign this self-declaration in good faith and it later transpires they have inadvertently underdeclared or omitted a taxable source for whatever reason, HMRC could use the statement to pursue a criminal investigation, or even treat the declaration as being deliberately incorrect, leaving the taxpayer open to a range of potential failure to correct penalties, with a maximum penalty of 200 per cent of the outstanding tax. Given the risks, careful consideration is needed before responding to this type of letter from HMRC.
HMRC’s brief pause in enquiry activity seems to have been lifted, and it is apparent that it is focusing on potential offshore issues where the liabilities and penalties could be far higher than similar liabilities onshore. It is therefore more important than ever that taxpayers ensure their offshore tax affairs are in order as HMRC makes use of the vast quantities of information it is now receiving from overseas jurisdictions.
It is always worth noting that any disclosure of errors made to HMRC before receiving communication from HMRC would result in lower penalties.