The tax gap is HMRC’s estimate of the difference between the amount of tax which should have been paid and what's actually paid. HMRC publishes the estimated tax gap on an annual basis. While HMRC estimates how the tax gap can be attributed to different populations of taxpayers, they state that accurately assessing the amount of tax that's incorrectly paid on offshore assets is challenging.
The Labour Party published a document in April 2024 entitled ‘Labour’s Plan to Close the Tax Gap’ which outlined several proposals for raising additional revenue by tackling the tax gap, pledging that the plans would raise £5 billion a year by the end of parliament.
The April 2024 document specifically addressed offshore non-compliance, highlighting that despite the previous pledges to begin publishing a tax gap on it, this hadn't yet been done. The document also addressed non-resident trusts as a “major issue with offshore tax”.
HMRC’s focus on offshore activities
Despite the increased political pressure, HMRC’s focus on offshore activities isn't new. Over the years, there have been various disclosure facilities available to taxpayers to disclose offshore irregularities to HMRC. Nonetheless, there was a marked shift in HMRC’s attitude towards offshore non-compliance with the introduction of the ‘Requirement to Correct’ legislation in 2017. The legislation required taxpayers to correct offshore non-compliance by 30 September 2018, or face higher penalties, increasing potential penalties from a maximum of 100% of the tax due to 200% in certain circumstances.
In 2019, further legislation was introduced to support HMRC with its efforts in tackling offshore non-compliance, extending the time HMRC has to collect historic tax where an offshore matter is involved, effectively allowing HMRC 12 years to go back in certain cases (compared to the four or six year time limits available to them prior to this change – ignoring for now the 20 years for deliberate behaviour). HMRC is today arguably more equipped than ever to engage its efforts in recouping tax from offshore non-compliance, with a plethora of data at its disposal in addition to the legislative changes.
Since 2017, HMRC has continued to receive information on financial accounts held by taxpayers from more than 100 countries participating in the exchange of information under the Common Reporting Standard (CRS). Most notably, we've seen HMRC use this data to send 'nudge' letters to taxpayers which explain that it has received information to suggest the taxpayer has failed to report their offshore income and gains in the UK.
For several years, HMRC has adopted the approach of issuing 'nudge' letters to taxpayers, a letter which essentially suggests that the recipient might have an irregularity in their tax affairs and puts the onus on them to review the position and confirm to HMRC whether the position is correct. Since this approach was introduced, the number of nudge campaigns has continued to rise. To date, these letters have mainly been sent to UK tax residents. However the introduction of HMRC’s nudge campaign targeted at non-UK resident entities owning UK property with a view to catching non-compliance with the Annual Tax on Envelope Dwellings regime and failure to report rental income, demonstrated HMRC’s first wide-spread use of this approach targeting non-UK tax residents. Given the number of nudge campaigns targeted at UK residents continues to increase, and HMRC’s increased focus on the offshore tax gap, we expect this to be the first of many nudge campaigns specifically targeted at non-UK tax residents. Care should be taken when responding to these nudge letters, as they enclose a certificate for the recipient to sign which contains a prosecution warning.
In addition to the CRS and various other sources of data available to HMRC (for example land registry and the Register of Overseas Entities), over the years data leaks have continued to be an additional source of information when it comes to tackling offshore non-compliance. For example, HMRC has been writing to taxpayers named in the Pandora Papers, a leak of almost 12 million documents in relation to offshore accounts and structures, again sending nudge letters asking them to come forward.
This wealth of data has continued to better inform HMRC’s Connect system, its tool for identifying risks of non-compliance and assisting HMRC in tackling offshore non-compliance.
What can a taxpayer do about offshore assets?
While HMRC is increasingly writing to taxpayers regarding offshore non-compliance, waiting until receiving a letter from HMRC isn't recommended. Where a taxpayer has concerns regarding their offshore assets, seeking tax advice is recommended. If any irregularities are discovered, a tax adviser can assist in making a disclosure to HMRC to regularise the position. Making a voluntary disclosure to HMRC has the added benefit of reducing the penalty HMRC is able to levy on any non-compliance.
Where a taxpayer does receive a letter from HMRC before a disclosure is made, specialist tax advice is again recommended from a professional who is experienced in handling HMRC disclosures and enquiries.
Where offshore trusts are in operation, there's an ever-growing scrutiny on professional trustees to observe good governance and best practice as part of their statutory duties, and broader health checks of these structures should be considered to ensure the structures are compliant with the changing UK tax landscape.
Given the increased focus on the offshore tax gap and the vast data at HMRC’s disposal, there's no indication that HMRC will be taking its foot off the gas in the near future. The Government’s intended injection of further funding by tackling the tax gap means we anticipate further activity in this space.
For more insight and guidance, contact Louisa Beciri.
