A taxpayer approached us through a mutual contact after receiving a letter from HMRC saying they were opening an enquiry into personal undisclosed overseas income.
The client’s own accountant was not familiar with HMRC enquiries into overseas income and suggested a specialist tax accountant (such as SME Strategies) be asked to assist. After an assessment of the issues, we accepted the engagement to deal with this enquiry by HMRC.
The first task was to try to identify why HMRC had reason to believe the client had any overseas income. The client holds a UK passport but his family come from a Middle Eastern country. The client though has all his business interests in the UK.
In the recent past, HMRC have been writing letters to individuals in the UK whom they have identified as being in receipt of income/gains from overseas investments or bank accounts. These enquiries have been set in train by information that HMRC is now getting from tax authorities overseas under Automatic Exchange of Information (AEOI) agreements. This gives HMRC information about UK residents with bank accounts and investments overseas.
The authority for this comes from The International Tax Enforcement (Disclosable Arrangements) Regulations 2020. They give HMRC much wider notification of income and gains of UK residents arising in overseas territories. This is part of a massive clampdown on tax evasion at an international level. International Tax Enforcement: disclosable arrangements – summary of responses (publishing.service.gov.uk)
It does mean though that a number of perfectly innocent taxpayers can come under HMRC’s scrutiny. In some overseas jurisdictions, documentation may not be easily available, the documentation may well not be in English. Many countries do not have as sophisticated a framework of financial and business law as we do in the UK.
No smoke without fire
It became apparent in this case that the client did have family interests in the Middle East. He was the account holder of overseas bank accounts which held substantial funds. To be fair to HMRC there was prima facie case for thinking that the client had unreported overseas interests that should have gone onto his UK tax return over several years.
HMRC penalties for non-disclosure can be severe. They can be up to 100% of unpaid tax for UK undeclared income/gains on a prompted disclosure. For undeclared overseas income/gains the penalty can be a whopping 200% of unpaid tax on a prompted disclosure.
Looking at the bank statements from the Middle East, if the income should have been assessed to tax (together with potentially severe penalties) the client was potentially facing an eye-watering tax bill. The client was understandably very alarmed.
But whose fire was it?
We at SME Strategies had to understand to what these overseas accounts related. Who had the beneficial entitlement to the income arising? It was fairly clear that the client had received no benefit himself from these substantial overseas bank accounts.
In these cases, understanding the story behind the transactions can be a very useful way of planning the best way forward. Careful and sensitive enquiry elucidated that the origin of much of the funds in the relevant overseas bank accounts was from the client’s father who sadly died at a young age following a tragedy. The funds were for the benefit of the client’s mother and disabled sister. We had to build a substantive case to HMRC to prove that whilst the client was the legal owner of the funds in question, he was not the beneficial owner. He was in fact a trustee and in regard to the holding of the assets his role was more akin to a custodian trustee as other members of the family managed the assets.
Understanding the cultural issues
Culturally, in some Middle Eastern communities, financial assets are not always held by women in the same equal way that we would expect here in the UK in the 2020s. In understanding behaviours of taxpayers, these cultural differences must be taken into account. Also, in the Middle East, trust law is not always as sophisticated as it is in the UK. Having experience in SME Strategies of working in the Middle East helped to guide our approach and understanding of the cultural issues.
This was not a straightforward matter and a lot was at stake. Tax law is fairly unforgiving and whilst blatant unfairness is not usually UK tax policy (but sadly is sometimes, such as with the removal of the Personal Allowance for income tax, the High Income Benefit Charge, or the intentional failure to uprate IHT thresholds), devastating unfair tax outcomes do happen which can be upheld at tax tribunals. We had to get this right for the client.
Underlying documents were produced which, when translated form Arabic into English, showed the existence of a quasi-trust. It was necessary to document for HMRC an audit trail demonstrating the source of funds, the use of the income arising for the benefit of the client’s mother and disabled sister, and the role of the client as quasi-custodian trustee in a jurisdiction with unsophisticated trust law.
HMRC then invited the client to complete a ‘Certificate of tax position’ form, which HMRC often asks the individual to complete and return whether they have additional tax liabilities to disclose or not. This certificate is an important legal disclosure, it is similar to but not completely identical to that on the self-assessment tax return. There are two important differences. Unlike the tax return:
- there is no legal obligation on the individual to complete the ‘Certificate of tax position’ and return it to HMRC; and
- the period covered by the ‘Certificate of tax position’ – and therefore the declarations – is not restricted to a particular tax year. It applies to all years.
Also, the certificate does not have a de minimis level.
In view of the serious consequences of making a false declaration (even unwittingly), it is sometimes preferable to advise the client to refuse to sign the ‘Certificate of tax position’. This is particularly the case if, after reviewing their tax affairs, the individual believes that their affairs are correct and up to date and they do not need to make a disclosure. This was the position in this case. The ‘Certificate of tax position’ was therefore not completed. Responding by a full letter however enabled us to give a full account of the unusual circumstances of this matter. Our full explanation was able to pre-empt further queries by HMRC.
HMRC, having considered the case with care and after a telephone conversation with us, they closed their enquiry and concluded that the client did not have personal undeclared overseas income. No tax was due from our client regarding the overseas income (nor the underlying overseas assets) that they had identified.
“David was recommended to me by a friend who has worked with David and knows David well as a forensic accountant but someone who thinks creatively ‘outside the box’. I had an enquiry from HMRC concerning undeclared overseas income and gains. These related to complex overseas interests, deeds and a family trust in the Middle East.
David was very thorough in gaining a full understanding of the history of how these interests had come about. I was surprised, and pleased, at how much he delved into the background in order to present a full response to HMRC. He prepared a detailed answer to HMRC which anticipated their further questions.
David was very easy to deal with and considerate to me and the anxiety I was feeling. I felt very comfortable from the outset in his professional hands and would certainly recommend him to anyone facing an HMRC enquiry. Getting the letter back from HMRC confirming they were happy with David’s response and that they had closed their enquiry was a fantastic day!”
BF, Business Owner, London