For taxpayers who failed to ‘correct’ their position before the deadline, the penalties levied are based on not only the behaviour which lead to the failure, but also the jurisdiction to which the income/gains relate – the maximum being 200% of the potential lost revenue.
In order to encourage taxpayers to come forward, HMRC implemented the Worldwide Disclosure Facility (WDF).
All UK residents are subject to tax on their worldwide income and gains (non-UK domiciled individuals may claim the remittance basis) which should be notified to HMRC in their tax return. Where the income/gains have been subject to tax overseas, relief may be claimed either by reference to the provisions of the double-taxation agreement (DTA), or by deducting the overseas tax paid from the UK tax liability arising on that income/gain.
In December 2019 we were approached by Mrs A who had lived in overseas with her husband for many years and returned to the UK during their retirement. Mr A had been employed in Luxembourg as a UK government worker and during his time there held interest-bearing bank accounts which were not closed after departing the country.
They had also both spent time living and working in the US such that they had small share portfolios and were both entitled to, and in receipt of, US social security pensions. Both individuals had assumed that, as they were paying tax in the US, there could be no UK tax liability.
In March 2019 Mr A had received a letter from HMRC’s WDF team and, with the belief that their query related to his time working in Luxembourg, had entered into correspondence with HMRC setting out the details of Luxembourg employment and the monies still held there. HMRC were unable to provide advice on the tax treatment of that income and suggested a professional be engaged.
Under the UK-Luxembourg DTA interest income is taxable only where the individual is resident.
Under the UK-US DTA, dividends are taxable in both the country in which they arise and the country in which the individual is resident (subject to a maximum charge of 10%). Pensions are taxable only in the country in which the individual is resident.
Having identified the irregularity and explained the circumstances to Mr and Mrs A, the first step is to notify HMRC of the intention to disclose – this is now done using HMRC’s digital disclosure service. Thereafter HMRC will acknowledge the notification and issue a disclosure reference number and payment reference number. In the meantime, we were provided with primary records – in this case dividend certificates, bank statements, US tax returns and UK income information (P60s and state pension details) which allowed us to prepare the calculations.
Disclosures of offshore income/gains are more complicated than a UK disclosure due to the DTA, the requirement to convert currencies, and the fact that most overseas jurisdictions do not have tax years which align with the UK tax years.
Mr and Mrs A were both in their seventies, Mrs A had undergone two hip operations (2015 and 2018) and suffered arthritis and mobility issues, Mr A was her main carer during this time. Throughout his working life Mr A had been employed and Mrs A had been a housewife – neither could reasonably be expected to have a working knowledge of tax legislation, particularly given the complexities of offshore interactions. Whilst it can be argued that a layperson would assume that tax is payable only in the country in which income arises, HMRC are quite strict in applying their statement that ‘ignorance of the law’ is not a reasonable excuse.
We were able to successfully argue that the behaviour was ‘careless’ and that full penalty mitigation should apply – prompted disclosure for Mr A, and unprompted for Mrs A.
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