How can I prove I’ve complied with HMRC tax rules?

I am UK domiciled, but spend time in some other countries during the year, including Israel and France. HM Revenue & Customs is investigating my affairs and has enquired about some of my overseas assets. I am keen to prove that I have complied with its rules, but am unsure how I should communicate with HMRC and what options I have. Could you advise?

Richard Morley, partner in tax dispute resolution at accountancy and business advisory firm BDO, says that if you hold assets, particularly banking assets, in either France or Israel, it is likely that HMRC is aware of them.

UK resident and UK domiciled individuals are required to pay tax on all worldwide income and gains received each year, regardless of where they arose. In the first instance, your adviser, if you have one, should confirm whether your UK tax affairs are correct and up to date. If it is found that any overseas income or gains were overlooked on your UK tax returns, this should be disclosed to HMRC without delay.

Since September 2017, HMRC has obtained information from numerous overseas tax authorities on certain assets held by UK residents in foreign jurisdictions via the Common Reporting Standard (CRS) information exchange agreement. France, like the UK, was an “early adopter” and exchanged data under the CRS from September 2017, while Israel was a “second wave adopter” and reported information from September 2018.

Richard Morley, partner in tax dispute resolution at BDO © Handout

Even if you believe your UK tax affairs are correct, you should still co-operate with HMRC to help it close its investigation at the earliest opportunity. Responding to enquiries proactively with full explanations reduces the risk of HMRC taking further action and helps mitigate any penalties that may arise in the event of any irregularity.

You may be aware of recent publicity that HMRC suspended enquiry work owing to the Covid-19 outbreak. However, we understand this recent “pause” is being lifted for the most part and ongoing enquiries are resuming. That said, HMRC generally will not progress enquiries if you have been adversely impacted by Covid-19. However, any issues should be raised with HMRC in good time.

While HMRC primarily conducts enquiries by written correspondence, given the current climate and problems with accessing records it is worth clarifying with the HMRC inspector conducting the investigation whether a response should be submitted by email or another approved electronic communication method.

After reviewing the information provided to them, HMRC may request additional information from you or your adviser to understand the facts presented. Face-to-face meetings are still prohibited but virtual meetings with HMRC can easily be organised to try and bring matters to a conclusion.

Neela Chauhan, private client tax partner at accountancy firm UHY Hacker Young, says HMRC now collects, shares and analyses more taxpayer information than ever before. It can easily get data from tax authorities in France, Israel, or any one of more than 100 other countries. It runs that information through its Connect data mining tool, builds up a picture of an individual taxpayer’s worldwide affairs and finds where it believes it may be owed extra tax.

That means HMRC now takes as much of an interest in your overseas assets as your UK assets and the risks of getting it wrong are far greater than they were just a few years ago. You definitely shouldn’t be dealing with this alone — a tax adviser should be communicating with HMRC on your behalf to lower those risks. You can easily “talk yourself into trouble” if you try to do this by yourself.

A sensible first step is to check the statutory residency tests for the UK, France and Israel to determine in which of them you are resident for tax purposes. The answer could, in some situations, be all three. Then ensure you are making the declarations you need to make in each country.

Neela Chauhan, private client tax partner at UHY Hacker Young © Handout

Next, carefully read the letter from HMRC to understand what it is enquiring into. One possibility is that it is just making general enquiries about your overseas assets to confirm your affairs are in order, as it does as a matter of course for non-domiciled individuals. There are other possibilities though. You may previously have made errors on your tax return, you may run a business deemed “high risk”, or HMRC may have received third-party information that led to further enquiries.

You (or even better, your adviser) should ask HMRC questions to find out what it is really looking for. Once you know that, make sure your dialogue with HMRC is open and transparent. Agree deadlines for providing information and stick to them.

Another major concern should be checking whether you have inadvertently made transactions that are taxable in the UK. It is certainly possible to trigger a UK tax liability by accident. When you and your adviser review what triggered HMRC’s enquiry, don’t limit yourself to UK assets. Assets you hold in Israel, France or elsewhere could also be causing an issue in the UK. As you are domiciled in the UK, you are liable to tax in the UK on a worldwide basis.

Finally, if HMRC demands extra tax or penalties from you and you want to appeal, it is important to do this as quickly as possible. Miss deadlines and the process becomes far more difficult.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to [email protected]

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