HMRC issues a new round of nudge letters
17 November 2020
HMRC has issued a new round of nudge letters to clients and their advisors, as they continue to actively seek compliance with offshore matters and to prompt disclosures. Unlike the previous round of HMRC letters (see our August 2020 update) the November 2020 letters do not include a certificate for the recipient to sign to confirm that they have made a full disclosure. Instead, they are intended to ensure that 2019/20 UK tax returns are completed correctly. This follows other similar letters that have been issued recently dealing with UK focused matters which also look to increase awareness about new rules and highlight areas that are often reported incorrectly.
Two of the November 2020 letters will be of particular interest to Swiss based individuals and Swiss advisors: one is targeted at individuals who are deemed to be domiciled in the UK; the other is for individuals who are likely to claim non-UK residence under the Statutory Residence Test (SRT). The following links are to the relevant pages of the Chartered Institute of Tax website, which contain copies of the pro-forma letters that are being sent out:
- Deemed domicile – There are two versions of this letter – one that deals with the 2019/20 UK tax return, and the other which comments on the need to review the 2017/18 and 2018/19 UK tax returns. The latter is particularly important because of the higher penalties that can be charged for incorrectly reporting offshore matters, and other potential issues such as strict liability offences.
In both letters, HMRC outline the deemed domicile rules that came in from April 2017 and the need to report all your worldwide income and capital gains once you become deemed domiciled in the UK. They also cover rebasing for capital gains tax and how an individual’s deemed domicile might affect an offshore trust.
- Statutory Residence Test – This letter comments on the need to consider the SRT and the main areas that will impact on it (i.e. working in the UK, spending days in the UK, and having ties to the UK). It includes a reminder about the importance of keeping accurate records to support the determination of residence status under the SRT.
Additionally HMRC is issuing nudge letters for outstanding 2017/18 tax returns. If they are not filed now then HMRC warns it will determine the person’s tax position. Anyone who is yet to file for that tax year faces late filing penalties of up to 100% of the tax due (which can increase if there are offshore items on the return) under the late filing penalty regime, as the returns are already well over 12 months late. We may see such penalties being categorised as ‘deliberate’ in the absence of a reasonable excuse and this brings the potential for the person to be publicly named and placed in the Managing Serious Defaulters programme. Please let us know if you have any concerns about whether someone may be in this position.
Update on exceptional circumstances in the Statutory Resident Test
In our May edition (see link here) we commented on the impact of COVID-19 on the SRT and set out some of scenarios that HMRC would accept as ‘exceptional circumstances’. Where a day spent in the UK is covered by exceptional circumstances it does not count towards the number of days spent in the UK for some (but not all) of the tests under SRT. The maximum number of days that can be covered by this concession is 60.
HMRC recently published a Q&A which goes into more detail about cases of exceptional circumstances. The main highlights from this new guidance are:
- The statement from the Foreign and Commonwealth Office on 17 March that advised against all but essential travel for British nationals is an example of official government advice not to travel from the UK and would be an exceptional circumstance whilst in force.
- To claim exceptional circumstances due to the closure of international borders, it must be shown that every effort was made to leave the UK once the restrictions were lifted.
- If you self-isolate in line with government advice, the period of self-isolation is covered by exceptional circumstances.
- Any day spent working in the UK for more than 3 hours will count as a UK workday, regardless of exceptional circumstances. Furthermore, any income earned from working in the UK will be considered UK earnings, again regardless of exceptional circumstances (this is particularly relevant for Overseas Workday Relief and the remittance basis of taxation).
- Even if your employer has asked you to come back to the UK, the days spent in the UK could cause you to have a significant break from your overseas work or have sufficient UK workdays to jeopardise a claim to be non-UK resident under the full time work abroad provisions.
- If you come to the UK to support a vulnerable family member who was impacted by COVID-19, you will need to demonstrate why it was necessary to come to, and remain, in the UK in order to claim that it is an exceptional circumstance.
- Children in full-time education will not be treated differently due to school closures, as the expectation is that their education will continue in a different environment.
HMRC also comment on the fact that if an individual becomes UK resident it may impact on the residence of a trust of which they are a trustee. It may also impact on an individual’s deemed domicile status.
However, in line with previous guidance, it is not expected that travel restrictions due to COVID-19 should necessarily result in a change to a company’s tax residence or cause there to be a UK permanent establishment. A temporary change in location due to travel restrictions should also not impact on an individual’s treaty residence, as this is a separate matter from UK tax residence and the SRT.