It is tempting to think that being fully tax compliant outside the UK in relation to non-UK assets or interests absolves an individual (or a trustee or corporate entity) from any obligation to report to HMRC, the UK taxing authority. However, that is unfortunately not necessarily the case, and HMRC will ensure that UK taxpayers are, sooner or later, being made aware if they have fallen foul of UK tax compliance, and indeed UK tax rules.
The Financial Times has reported that in the tax year to April 2023 HMRC has upped their distribution of the so-called 'nudge letters' by a third compared to the previous year, to the tune of some 23,936 letters having been sent to unwary UK taxpayers to encourage them to regularise their UK tax position in respect of foreign UK assets, of which crucially HMRC appears to be already aware. This effort has been carried out in conjunction with an increase of direct requests to foreign tax authorities with respect to the affairs of UK tax residents, again significantly up as against the previous year.
There are innumerable scenarios where an offshore issue can arise. This article looks at the position for individuals, and in particular UK resident but non domiciled individuals.
The UK tax system
It is worth remembering that in the UK tax system, the default position is that even if a UK resident taxpayer is fully tax compliant overseas on their foreign assets, such assets, and the income and gains arising from them, will nonetheless be fully within scope of the UK tax net and taxed on an arising basis, albeit subject to the applicable double tax treaty claims. As things stand (but possibly subject to significant reform in future following the next General Election) for a defined period of years a UK resident non-domiciled individual (an 'RND') can claim the 'remittance basis of taxation' so that they are taxed in the UK only on the offshore income and gains that they remit to the UK (in addition to their UK-source income and gains).
The remittance basis has to be claimed (ie generally in an individual's self-assessment tax return, filed on 31 January following the end of the UK tax year). If not claimed, the default position applies. This means that individuals can find themselves facing years of past non-compliance if they have not fully disclosed their offshore income and gains on their UK tax returns, or if they have failed to take into account accidental remittances or generally, other UK non-tax compliance.
As is often the case for individuals arriving in the UK, an initial intention to stay temporarily can easily evolve into something longer term. An individual can quickly find themselves UK resident under the Statutory Residence Test (see our previous article here2), whilst still maintaining financial and personal links, and often even tax residence abroad. In such circumstances, an individual may not even realise that they have become UK tax resident (this is particularly the case for example for highly mobile individuals, students, spouses or partners) and therefore taking tax advice on their UK tax obligations may be the last thing on their mind, especially if the move to the UK has been incremental rather than a pre-planned move.
Whilst those who have taken advice prior to arriving in the UK and intend to benefit from the remittance basis of taxation should have segregated accounts for offshore income and gains, with clean capital generated prior to UK residence to fund UK living expenses, those without pre-arrival planning advice are far more likely to have unknowingly remitted post-arrival foreign income and gains to the UK, for example using funds held in offshore bank accounts in the UK or paying off credit card bills for goods and services provided in the UK using foreign income and gains. The result is that highly complex rules must be applied in respect of how income tax is charged to the funds remitted to the UK by the remittance basis user. Even if an individual is not, or will not be, a remittance basis user, it will still be necessary to understand how to report their foreign affairs on their UK tax return.
Oops, I may be non-compliant – what's next?
Where a UK tax resident individual has not previously considered their UK tax position, it may be more likely that they have unwittingly fallen into some hidden traps, such as believing that being fully tax compliant in their country of origin is sufficient to cover all tax compliance, including that expected by HMRC. At times, even if taxpayers have asked themselves the question on what should be reported on their UK tax returns vis-à-vis their foreign asset, they may have reached wrong conclusions in relation to some foreign legal constructions and their interpretation under UK tax laws. This is the case for example when Continental usufruct arrangements are involved, or foreign companies that are considered transparent and akin to partnerships in their jurisdiction, are not in the UK, or vice versa.
Individuals who realise, once correctly advised, that they may have reported their UK tax affairs incorrectly, may be able to regularise their position via HMRC's Worldwide Disclosure Facility (the 'WDF'). The WDF is a system of voluntary disclosure aimed at regularising past tax non-compliance. When an offshore issue relevant for UK tax purposes is not declared and it is discovered later on by HMRC, the taxpayer will face an investigation and will have to pay the undeclared tax with a penalty (up to double the tax owed). Prosecution can also be started. Acting promptly and disclosing voluntarily is therefore strongly recommended.
In order to approach the WDF strategy correctly, it will be crucial to forensically review worldwide income and gains for every prior year of UK tax residence and identify, in the case of RNDs, whether any remittance to the UK has been made in those years, to determine whether it may be possible, if beneficial, to make a retrospective remittance basis claim. There are time limits on making such a claim, and the ability to make one is not available in every case. The taxpayer will need to be prepared to involve their foreign tax advisors, and to dive deep into their spending and investing behaviours for the relevant tax years.
Additionally, for RNDs with interests in (or a 'relevant person' to an RND with an interest in) a closely owned company, such as a family company, the income and gains generated within the company may also need to be considered in the context of the taxpayer's remittances to the UK. A closely owned company will be treated as a 'relevant person' to the RND and thus any remittance by the relevant person is treated as a remittance by the RND. A spouse or civil partner and a minor child or grandchild are all treated as a relevant person to the taxpayer.
On a separate but related note, an RND who make strategic decisions for non-UK corporate entities should take care that the central management and control of the corporate is not inadvertently brought into the UK tax net, effectively immigrating the corporate entity, which may itself then be required to make a separate disclosure on the WDF. It is in fact important to note that the WDF is also relevant for corporates, trustees and even non-UK residents.
Conclusion
Once the offshore analysis has been carried out and a past UK tax obligation is identified, the taxpayer must calculate the tax due, associated penalty and interest, and disclose fully and accurately to HMRC as soon as possible. Partial or inaccurate disclosure can result in criminal sanctions. Voluntary disclosure will generally reduce the penalty rate applicable because the taxpayer is taking a proactive approach to resolve their non-compliant tax affairs. However, if HMRC has to notify the taxpayer about the unpaid or omitted offshore tax, the penalty rate will likely be higher, since the taxpayer must now react to HMRC's enquiry. Acting promptly and seeking advice as soon as possible is therefore key to rectifying the position in the most efficient manner possible.
References
1 Money insert, 23 September 2023
2 Am I UK resident? The statutory residence test explained, 2 February 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
