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U.K.’s Tax Authority Nudges ‘Non-Doms’ to Improve Compliance

Nov. 19, 2021, 8:00 AM

As tax authorities around the world seek to plug gaps in public finance, compliance is high on the agenda. For the U.K.’s tax authority, HM Revenue & Customs (HMRC), an increasingly important tool in its armory is the so-called nudge letter.

Simply put, these letters aim to educate taxpayers, improve compliance behavior and highlight particular issues and common errors associated with their specific customer type or group, therefore encouraging (or indeed compelling) individuals to look at their tax affairs again and ensure they are compliant. In some cases, this may involve making a disclosure.

It is important to appreciate that the letters are driven by HMRC data analysis and so should not be underestimated or ignored. They can serve a useful purpose, particularly where individuals have complex affairs which may lead to errors or where rule changes have necessitated changes to tax planning.

Why Might a Non-Domiciled Individual Receive a ‘Nudge’ Letter?

HMRC has recently been sending out nudge letters to non-domiciled individuals (non-doms) where the information held by HMRC indicates that the non-dom has been resident in the U.K. for a period such that they should be paying the remittance basis charge (RBC).

The Chartered Institute of Taxation helpfully provides an example letter. The letter urges individuals to take action within 60 days of receiving it.

What is the Remittance Basis Charge?

Non-doms resident in the U.K. can claim to be taxed on the remittance basis. This restricts the non-doms’ U.K. tax liability to U.K. source income and gains and any non-U.K. income and gains that are remitted to the U.K. Non-U.K. income and gains retained abroad (in an offshore bank account, for example) would not be taxable in the U.K.

With some exceptions (notably those whose unremitted non-U.K. income and gains are less than 2,000 pounds per tax year), where individuals are long-term U.K. residents a charge (the RBC) applies in order for the non-dom to access the favorable remittance basis tax regime.

The RBC liability varies depending on the number of years the taxpayer has been a resident of the U.K. For example, those who have been resident in the U.K. for more than seven out of the previous nine tax years and whose non-remitted non-U.K. income exceeds 2,000 pounds ($2,700) must pay a charge of 30,000 pounds in any year in which they wish to access the remittance basis.

Those who have been a U.K. resident for more than 12 out of the previous 14 tax years must pay 60,000 pounds, and those who have been a U.K. resident for 15 or more out of the previous 20 tax years will be deemed U.K. domiciled for all tax purposes, i.e. the remittance basis will fall away.

In order to pay the RBC, it is necessary for the non-dom to nominate an amount of offshore income or gains that can be taxed at the relevant tax rate, up to the equivalent of the relevant charge.

What Common Errors Do the Nudge Letters Address?

Generally speaking, the remittance basis is claimed, and the RBC (where relevant) therefore arises, on a year-by-year basis through an individual’s self-assessment tax return. It is not therefore altogether surprising that some non-doms forget to pay the RBC and claim the remittance basis, unaware of the requirement to pay the charge. This is particularly the case where non-doms do not regularly keep in contact with their U.K. tax advisers.

It is not always straightforward to keep a record of the number of years of U.K. tax residency. Tax residency is a complex matter. For example, an individual may travel in and out of the U.K. multiple times during a tax year (“splitting” the tax year) not aware that they have met the threshold for paying the RBC, meaning the individual may not be aware they need to pay the charge.

It is important to recognize that whilst the nudge letters are focused on the RBC, they will also shine a spotlight on the non-dom’s wider U.K. tax affairs. It is therefore important to check that all matters linked to non-dom status are in order.

One example of a separate but common error is U.K. situs (i.e, the legal location of an asset) investments perhaps sitting within offshore investment portfolios. If the U.K. assets are held within an offshore fund and there have been no distributions, the assets might be alright for the purposes of the remittance basis rules, but if they are held within a personal investment portfolio they are simply U.K. source investments and any associated income or gains on disposal would be liable to U.K. tax.

Another example is HMRC’s recently published guidance about situs linked to crypto assets held personally. When the individual is resident in the U.K., the situs of their crypto assets will be the U.K.

The default risk position in cases where individuals fail to pay the RBC is that they will be taxed using the general arising basis on their worldwide income and gains, possibly resulting in a very significant tax bill. The nudge letters focus on the 2019–20 tax return, the filing date for which was Jan. 31, 2021.

It is important to appreciate that the self-assessment rules allow tax returns to be amended for up to 12 months after the filing due date without incurring penalties. The nudge letters therefore present an opportunity to amend the return, as the deadline for correction will likely be Jan. 31, 2022, or, possibly, in some cases, a few months later.

HMRC will also write to the agent if they know one is acting on the taxpayer’s behalf. As most non-doms will engage a tax adviser to file their return, there is a high chance that the agent will become aware of the letter.

Actions to Take if You Receive a Nudge Letter

As HMRC is able to make further investigations into an individual’s tax affairs and even implement financial penalties, it is important to seek professional advice upon receipt of a nudge letter.

If a tax adviser uncovers an issue with the amount of tax paid in the current year, it is also advisable to identify problems beyond that year, because a full disclosure of earlier compliance breaches to HMRC may help reduce any penalties that could later be incurred.

It is also important to determine whether such non-compliance was due to carelessness or deliberate behavior, in order to take the necessary actions to mitigate penalties.

Penalties

If it is determined that the compliance breach has occurred, HMRC will then consider how it came about, in order to determine whether any penalties should be imposed.

Penalties can be imposed where there has been a failure or error resulting from careless or deliberate behavior. No penalties will apply if any error results from taking reasonable care or if there was a reasonable excuse.

There is no statutory definition of “reasonable excuse” and HMRC says the phrase must be given its ordinary meaning and each case considered on the facts (see HMRC Compliance Handbook CH160200). HMRC guidelines list some examples of reasonable excuse, such as ignorance of the law, mental health issues, physical illness, bereavement and, in light of recent events, the Covid-19 pandemic.

The reasonable excuse, however, must be corrected at the earliest opportunity after the individual becomes aware of the failure.

HMRC can also reduce penalties by special reduction and have been required by the courts to consider this.

When it comes to deliberate behavior, the U.K. Supreme Court recently ruled that there must be an “intention to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, . . . recklessness as to whether it would do so” (see HMRC v Tooth [2021] UKSC 17 at para. [47]).

HMRC also differentiates between actions that were concealed and those that were not when seeking to impose associated penalties.

What if There are Historical Issues?

In the case of deliberate non-payment of the RBC or where unlawful remittances have taken place with the full knowledge of the individual, HMRC can mount a criminal investigation, as such non-compliance can amount to fraud.

In such cases, it is very important to realise that if an error (including failure to pay the RBC) is a result of deliberate behavior, HMRC could seek to open a criminal investigation with the aim of a prosecution. It is therefore necessary to act quickly with professional assistance.

Taxpayers may wish to seek the protection of Code of Practice 9 (COP9) which (if secured) ensures that any tax matters disclosed are protected from prosecution. In return, HMRC expects full disclosure and a thorough explanation of the reasons behind the non-compliance, alongside confirmation that matters arose from deliberate behavior.

Where there is careless behavior, an early disclosure using the Worldwide Disclosure Facility (WDF) might help address matters, reduce any potential penalties and might even extinguish a penalty or result in any penalty being suspended.

The WDF can also be used for cases of deliberate behavior, but it does not secure the protection from prosecution that COP9 provides.

Conclusion

In conclusion, it is clear that nudge letters are indeed aimed at giving non-doms a “nudge” in the right direction when it comes to addressing any anomalies in their tax affairs. It is also clear, however, that any failure to act upon receipt of the letters could have grave consequences for a non-dom.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Gary Ashford is a partner (non-lawyer) at Harbottle & Lewis, Vice-President of the Chartered Institute of Taxation and Vice-President of CFE Tax Advisers Europe.

The author may be contacted at: gary.ashford@harbottle.com