Lee Sharpe of TaxationWeb considers HM Revenue & Customs' 'New Disclosure Opportunity' for overseas assets and thinks better publicity is needed.

Introduction

New Disclosure Opportunity -  Perfect Timing?

HMRC is especially keen to publicise the 'New Disclosure Opportunity', and this could be because one of the criticisms of the first such disclosure opportunity, was that is was NOT so well publicised as perhaps it might have been. (Although HMRC may well disagree!).

In the arena of offshore tax evasion, HMRC has scored a couple of high-profile victories in the last couple of weeks, that have gained serious public attention: the first were the Historic Tax Agreements with Liechtenstein so that HMRC could get access to details of UK account holders there and, hard on the heels, the new Tax Tribunal ordered over 300 UK Banks to Disclose All Offshore Account Information to HMRC. Their investigative work in this area is continuing. It may not happen immediately, but in the long run, HMRC will most likely end up finding out about the vast majority of overseas accounts held by UK taxpayers. And more importantly, non-taxpayers. The New Disclosure Opportunity arrives with almost uncanny timing. Coincidence? I think not. If nothing else, HMRC is to be congratulated on its co-ordination. In the glare of all this well-managed publicity, however, it is easy to lose sight of one simple thing.

Not Everyone is Guilty..!

Owning a foreign bank account does not mean that you have evaded tax. The publicity surrounding offshore accounts tends to conjure up a caricature of 'the dastardly banker' or some similar nefarious type, stashing his or her bonuses in offshore accounts, never to be seen again. This may well be tax evasion, pure and simple. However, there are many perfectly legitimate reasons for holding accounts offshore. Businesses trading overseas frequently hold them to hedge against exchange rate fluctuations in, say, Euros or US Dollars. Also, individuals with overseas holiday homes will usually require a foreign bank account to deal with related household costs, etc. And, in this increasingly internationally-mobile world, there will be a significant number of UK taxpayers who came from overseas, and have maintained accounts or hold property in their home countries, or simply inherited one. The existence of an overseas bank account should not of itself indicate wrongdoing. And I am sure that HMRC is aware of the fact. But, there is an important caveat to this point.

...but Some People Might be 'Guilty' Without Realising!

Having established how one might quite innocently have come to hold an overseas account, or other property, we now also need to consider how easy it might be nevertheless to have engendered a UK tax liability. And this is important, because I suspect that there may be one or two 'nasty surprises' in here for some people.

1. Bank interest. It might be a relatively small amount, but it may have accumulated over many years. It may even have been taxed in the country in which the account is held. It may nevertheless be taxable in the UK. (I say 'may'. This depends on the residence, ordinary residence and domicile status of the account holder. And that could be a separate article in itself, so I will add no more than that).
2. Likewise, for instance, rental income on an overseas property. It might never occur to someone that their (say) French property, which they occasionally let out, is quite possibly taxable in the UK, as well as in France. Even if it did, he or she might assume that the costs would outweigh any income. But that doesnt' mean that it's not reportable in the UK. And not all of those costs may be allowable for tax purposes. It's important to highlight that it isn't just bank accounts that can be a problem.
3. Now let's think about the source of the funds. What if you inherited a Swiss bank account? What if you didn't 'salt away' undisclosed income, but your parents did? Regular readers of TaxationWeb's forum will know that this thorny problem has cropped up more than once before.  (For instance, see I have inherited a Swiss Bank Account ).
4. OK, rich parents are one person's dream and another's nightmare, but unfortunately quite rare. But there's another possible category of scenario, and this one's far more likely. What if you sold a house or other asset overseas, and then bought another one? Or took some funds from your Euros account and moved it onshore to your UK bank account? You've just converted one asset into another, possbily even paid tax overseas when doing so, so where's the problem? The problem is Capital Gains Tax. (CGT). The conversion of any asset, anywhere in the world, into another - even from one foreign currency into another foreign currency or Sterling - is almost without exception a chargeable event for the purposes of UK CGT. (Subject to Double Taxation Agreements, residence, domicile, etc.) And that will come as a complete surprise to many people. I know from experience that foreign currency being a chargeable asset for UK CGT would come as a shock for some accountants, let alone Joe Public. (Although it's important to add that people operating an overseas account to cover household expenses of a holiday home, or for personal/family expenditure should be OK for CGT, if not any interest earned - see HMRC's Capital Gains Manual  CG78315 - Currency: personal expenditure of individuals ).
5. Finally, let's say you've established that you do have some UK tax to pay, either straight Income Tax or CGT. And you decide to use some of your overseas funds to pay your UK tax bill. Don't. See 4. If you're not careful, you'll be writing more than one cheque, because you could owe UK CGT on the tax you've just paid!

Is All Publicity Good Publicity?

So, in summary, we're not doing anything wrong just because we have a foreign bank account, or an apartment in Spain. But it's very easy nonetheless to have ended up with a UK tax liability at some point, even if the source of the funds/property was entirely proper. Somewhat perversely, the New Disclosure Opportunity could quite possibly end up being welcome for a lot more people, who never realised that they actually had a UK tax liability in the first place! But only if they're told.

I have a real concern that HMRC is effectively being blinded by its own publicity, to a significant number of taxpayers who, entirely innocently, have something to disclose and will simply not know it. Or find out in time. And I am even more concerned about how they may be treated if and when their 'misdemeanour' comes to light, some time down the road after the New (and final) Disclosure Opportunity is a distant memory. Will an Inspector of Taxes be sympathetic after there have been two such opportunities? The new penalty regime which basically came into force earlier this year is favourably geared to innocent error and voluntary/full disclosure, which is heartening. But the New Disclosure Opportunity also says that penalties of 30% or higher are 'likely' for people who decide not to use it.  So, perhaps HMRC shouldn't just be publicising the New Disclosure Opportunity, and assuming that it's targeted at people who know full well that they've got a skeleton in the closet, or even in the Algarve, but perhaps they should also be countering the general perception that it's just foreign bank accounts rather than potentially foreign assets in general, and publicising the various reasons why there might be an unexpected tax liability as well.

What if there IS Something to Disclose? (And I know about it!)

If you've made it this far, and think that the New Disclosure Opportunity may apply to you, my advice is to seek professional counsel, soon. Frequently, there will be country-specific rules, for taxing income or gains in another country, which mean that it isn't taxable in the UK. There are also various reliefs in our domestic tax code that may apply. But, simply put, it's not HMRC's job to check and tell you: you are supposed to know and to claim relief or exemption accordingly. Or find someone who does, and will. Whether or not that, or the especially genteel Offshore Liechtenstein Disclosure Facility, or the fact that both Disclosure 'Opportunities' effectively discriminate against UK-based 'misdemeanours', is FAIR, is for another day. - Ed.

Article Added Saturday, 29 August 2009 | 1763 Hits

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