Declaring your hand with offshore income and disclosures

HMRC problems and how to deal with them
If you have any income arising outside the UK that you have not already declared in the UK, it is likely that your foreign income needs to be declared and taxed here in the UK. Where you have already paid tax abroad on that income, in most instances, the tax already paid will be available to offset against the UK tax you will need to pay. You may also have a residence or domicile issue affecting your tax position, so it is worth seeking some professional advice and reassurance on that front.

After various disclosure opportunities over the years, HMRC is still actively chasing individuals who have not declared all of their worldwide income and gains in the UK. Here we cover some of the common problems, how to avoid them and how to rectify past errors.

What is offshore or foreign income?
From HMRC’s perspective, offshore or foreign income is anything from outside England, Scotland, Wales and Northern Ireland. The Channel Islands and the Isle of Man are classed as foreign for the purposes of UK tax.

Offshore income includes:

• wages, if you work abroad
• foreign investment income, for example dividends and savings interest
• rental income on overseas property
• income from pensions held overseas

In addition, if a gain has been made on the sale of an offshore asset, like a property or shares, that gain will usually be taxable in the UK for someone who is resident here.

Do I need to pay tax on offshore or foreign income?
If you are resident in the UK, and have income arising elsewhere in the world, it is likely that you will need to declare it in the UK, even if it has been taxed in the country where it has arisen.

There are some special rules for ‘non domiciled’ individuals, i.e. those who are resident in the UK, but not domiciled here – typically because they were born elsewhere in the world. For those individuals, the remittance basis can be used. The rules around that are complex and raise their own issues, so it is best to seek advice from an expert in this area.

If you are not UK resident, you will not have to pay UK tax on any non-UK income. However, you should always check that you are aware of and abide by the tax rules of the country where you are resident.

For the purposes of most of this article, we are considering those who are either domiciled in the UK as well as being resident, or who have been in the UK for more than 15 years and who are now deemed as domiciled here. We also cover a few points to note on non-domiciled individuals towards the end of the article.

What information does HMRC receive about offshore or foreign income?
If you are a UK tax resident and you hold a bank account in another country, then it is likely that HMRC will receive financial information about you. This will include details about account balances and sums paid to accounts (for example, interest and dividends, or from the sale of investments).

HMRC communicates and shares data with financial institutions and overseas tax authorities using the Automatic Exchange of Information.

What does HMRC do with information from other countries?
Where the information HMRC receives doesn’t match the income declared on an individual’s self-assessment return, HMRC sends ‘nudge’ letters or opens enquiries.

What is a ‘nudge’ letter?
Where HMRC has information that suggests that an individual’s self-assessment does not include income that HMRC believes should have been declared, in addition to opening enquiries, HMRC often sends ‘nudge’ letters asking people to check that everything has been properly declared.

In the past, as well as nudge letters in relation to offshore income, HMRC has sent nudge letters about other areas of taxable income, for example property that is rented out, or income that has been made through online or digital sales platforms like eBay and Amazon.

What is an example of offshore or foreign income being taxable in the UK?
There are all sorts of ways that this can occur, but we will consider three basic scenarios that we have seen variations of over the years.

Firstly, let’s consider someone with a holiday home in France. It is likely that they will also have a French bank account into which money is transferred to pay local bills. If the property is never rented, HMRC may still see that an individual has a French bank account and, if the balance is increasing, HMRC may ask questions. If the property is not rented out, there should be no UK tax issue in relation to the property, although it would be prudent to seek advice on local property related taxes.

However, if that property is rented out, the income should always be reported in the UK. We have had several cases over the years where local taxes were being paid on a foreign holiday rental, but individuals had no idea that there was a UK reporting obligation. Sometimes this set of circumstances arises where children have inherited a parent’s property and have ‘accidentally’ become a foreign property owner. If local taxes are due and paid, usually they will be credited against any UK income tax liability that might arise. If the property is later sold, then capital gains tax may well be payable in the UK also.

For our second example, let’s consider an individual with a foreign managed portfolio of investments or shares. This can happen for several reasons. Again, we have seen children inherit their parent’s foreign investments and not really understand what that means in the UK. In some instances we have also helped UK nationals who spent several years working outside of the UK and managed to save whilst they were away. On their return to the UK, they may still have considerable savings left abroad.

If the savings or investments abroad are earning interest, dividends, or potentially capital gains, then these should be reported in the UK. As before, usually any tax paid where the investment is held will be credited against any tax due in the UK, so there should not usually be ‘double taxation’.

As a final example, let’s consider someone who is self-employed in the UK and who also trades abroad, perhaps selling goods online, or providing consulting services to foreign clients.
As a UK resident, all income from employment or self-employment is taxable in the UK. This is the case even where the income earned abroad is deposited to a foreign bank account and not remitted to the UK.

Once again, if local taxes have been paid, they should usually be credited against any UK income tax liability. In this type of scenario, it is also very important to keep track of and consider VAT, both in the UK and abroad.

What other issues might arise with offshore or foreign income?
There are occasionally issues with individuals firmly believing that they are not resident in the UK, but who are incorrect in that assumption. Residency is a complex area and, if you are not sure whether you are a UK resident, we’d suggest you seek professional advice.

As well as instances of people not being aware of a UK tax liability, there are of course instances where individuals hide income offshore to deliberately avoid UK income tax knowing full well that tax should have been paid.

What should I do if I have received offshore or foreign income?
If you do have any income arising outside the UK that you have not declared in the UK, for whatever reason, it is worth getting advice on whether it should have been. For offshore income, HMRC has some extended time limits for recovery of unpaid tax, so it is worth checking, rather than have a large and unwelcome charge for tax, interest and penalties. If it turns out that you should have paid tax in the UK, that can be dealt with, and it is much better to make an ‘unprompted’ disclosure to HMRC as the penalties will be lower.

What will happen if I have not declared my offshore or foreign income to HMRC?
If you discover that you should have been reporting foreign income in the UK but have not, don’t panic, you can put things right. You can make a disclosure to HMRC, whether or not HMRC has contacted you already.

Individuals can disclose their foreign income under the ‘worldwide disclosure facility’. We have helped many clients to do this and have significant expertise in this area.

If you don’t make a disclosure, HMRC may open an enquiry into your tax affairs. We can also help with this if it should happen.

How do I disclose my offshore or foreign income to HMRC?
Individuals can disclose their foreign income under the ‘worldwide disclosure facility’. The income and tax is quantified, usually with the help of an advisor like inTAX and the final figures are sent to HMRC, along with payment. If the matter is technically complex, a covering report can often be helpful, so that HMRC can understand the numbers.

Should I get professional help before making a disclosure?
Unless it is a very simple matter, it is advisable to get professional help. There are complex issues to consider, such as the number of years to be disclosed, dealing with double taxation agreements and also whether any penalties will apply and what rate they should be. It is important that the disclosure covers everything that it should do, but not things that are out of time. Finally, it is clearly beneficial to ensure that any tax credits are used where they are available.

What if I have been deliberately hiding income?
If the mistake was not a genuine mistake, but deliberate behaviour aimed at hiding income, then it may be more appropriate to make a disclosure under the Contractual Disclosure Facility (CDF) or Code of Practice 9 (COP9). This can offer an assurance that you will not be criminally investigated for the irregularities in your tax affairs. HMRC issues COP9 in cases where it suspects tax fraud. However, an individual can request to make a voluntary disclosure under COP9 where HMRC has not already made contact. Making an unprompted disclosure to HMRC will usually result in lower penalties.

Some more details on COP9 can be found on our website HERE.

Do non-domiciled individuals pay tax in the UK?
If an individual is resident, but non-domiciled in the UK, they may be able to access the ‘remittance basis’ in the UK. This can mean that income earned abroad is not taxable in the UK if it is not sent here. However, the rules are complex and have changed over the years, and after a number of years in the UK the ‘remittance basis charge’ will apply which is significant.
If you think you are non-domiciled, you have income arising abroad and you believe that the remittance basis applies to you, unless you have had professional advice on this point fairly recently, we would suggest that this is reviewed properly on your behalf.

Conclusion
If you are resident in the UK and have income arising outside the UK, then, unless the remittance basis applies, it is likely that foreign income needs to be declared and taxed here. In most instances, if you have paid tax abroad on that income, the tax already paid will be available to offset against the tax you need to pay in the UK.
Residence and domiciled rules can be complex. If you think you have a residence or domicile issue affecting your tax position, but you have never had proper advice, it is worth seeking some advice and reassurance on that front.

If you realise that there has been an issue, it can be fixed. HMRC has disclosure facilities available and with the help of an advisor, the process is usually not too painful. Making an ‘unprompted’ disclosure almost always results in lower penalties than if HMRC discovers the problem first.

If you have questions on disclosures or tax issues and disputes, you can get in touch with our friendly and experienced team on: 0203 675 8122 or email joe.mcdermott@intaxltd.com