The intricacies of tax regulations can be overwhelming, and for many individuals, deciphering letters from HMRC (HM Revenue and Customs) can be a daunting task. In recent years, HMRC has employed a strategy known as “nudge letters” to encourage compliance with tax laws.
The letters very often can cause needless worrying due to the poor data HMRC use and their shotgun approach to sending out letters. That said, this is something you should always seek professional advice on.
Sucheta Thomas (Director at Tax Advisory Partnership) and Tahir Mahmood discuss the significance of these letters, their connection to international tax agreements, and how they intersect with wealth management strategies.
What do the tax authorities know?
The simple answer is everything!
Under Tax Information Exchange Agreements (TIEAs), Foreign Account Tax Compliance Act (FATCA), and Common Reporting Standards (CRS) most financial institutions are required to report information about account holders to tax authorities, facilitating the exchange of data between countries.
The agreements are international initiatives designed to combat tax evasion and promote transparency in financial transactions.
What is a “Nudge Letter”?
HMRC’s nudge letters, also known as ‘one-to-many’ letters, often arise from discrepancies identified through international information-sharing mechanisms.
Individuals with overseas assets or income may find themselves subject to scrutiny if the details submitted via their UK tax returns do not align with the information received through TIEAs, FATCA, or CRS.
I’ve received a nudge letter from HMRC, what should I do?
When faced with such letters, a proactive approach to resolution is essential. The first port of call is to speak to a tax advisor who is experienced in handling disclosures of foreign income and gains, as they will be able to guide you through the process. The discrepancies may arise from a straightforward issue, such as the information received being on a calendar year basis rather than the UK tax year basis of 6 April – 5 April, or you might be a remittance basis user. Where this is the case, your tax advisor can liaise with HMRC to resolve the issues, often without taxes or penalties being due.
If taxes are due, you will need to register to make a disclosure using the Worldwide Disclosure Facility (WDF). This requires careful consideration to ensure the disclosure is limited to the appropriate number of tax years required. In addition, your tax advisor should have good knowledge of UK and cross border tax issues, plus experience in assessing the right level of penalties to volunteer to HMRC as part of the disclosure.
Sometimes a nudge letter will include a declaration for the taxpayer to sign, stating that their tax affairs are complete and correct or that they intend to make a disclosure where they aren’t. Most tax advisors will advise their clients not to sign such a statement, preferring to engage in correspondence with HMRC rather than signing a statement that all matters are up to date, as this could cause problems later if even the slightest discrepancy is identified by HMRC.
Where do you see most of the nudge letters?
Individuals who are resident but not domiciled or deemed domiciled in the UK have the option to be taxed on a remittance basis, meaning they are taxed only on UK source income/gains and overseas income/gains brought into the country.
However, navigating the remittance basis can be challenging, and errors may trigger HMRC scrutiny. For example, one target of recent nudge letters has been where foreign tax credits (FTCs) have been incorrectly claimed in the wrong jurisdiction. Where the UK has primary taxing rights under the relevant Double Tax Treaty (DTT), FTCs cannot be claimed against the UK tax due. Instead a FTC should be claimed in the other jurisdiction for UK taxes paid or treaty relief claimed if the other country has no taxing right per the terms of the DTT in place.
Filing taxes correctly becomes crucial in this context. HMRC nudge letters may be triggered by discrepancies in reported income or gains, leading to investigations and potential penalties.
What is the Worldwide Disclosure Facility (WDF)?
The Worldwide Disclosure Facility (WDF) provides an avenue for individuals to disclose any undeclared overseas income and gains to HMRC. This voluntary disclosure mechanism allows individuals to rectify errors and omissions, potentially mitigating the more onerous impacts of HMRC nudge letters. Mistakes do happen and the submissions made under the WDF can result in tax affairs being brought up to date with minimal tax, interest, and penalties.
How does this affect the management of Client assets?
The underlying management of assets should not change. The complexity here is ensuring compliance with international reporting standards. This can be complicated when clients must abide by multiple tax jurisdictions (for example the US and UK).
Wealth managers must stay abreast of evolving regulations and proactively address any issues identified through HMRC nudge letters.
The Tax team at London & Capital produces an annual tax pack. A typical client has US citizenship and is resident in the UK, so would therefore require both a UK and US tax pack.
Takeaway
HMRC nudge letters are a testament to the increasing global cooperation in combating tax evasion. Wealth managers must stay vigilant, ensuring that their clients’ financial affairs align with international standards.
By navigating these complexities wealth managers and tax advisors play a crucial role in safeguarding their clients’ wealth and maintaining compliance with ever-evolving tax regulations.
