The fact a taxpayer has an offshore bank account or an offshore trust or offshore anything can raise or add to the concerns of HMRC. Not so much as “what is there to hide” but more the fact that its not so transparent compared to being on the mainland UK.
The Common Reporting Standard (CRS)
The wealth of information being provided to HMRC on an annual basis under CRS can provide HMRC with a good insight into a taxpayer’s offshore wealth. But often it simply provokes more questions than answers starting with:
- Why is there such a structure?
- Where did the initial seed corn come from?
- Why is there no income or gains being reported and taxed in the UK? etc. etc.
Checks on tax position
When HMRC does identify offshore wealth for the first time, HMRC can be akin to a startled rabbit in a car’s headlights – where are they going to go next. A check on tax position isn’t a tax investigation – in law that is. There is no tax legislation backing up HMRC’s position. A taxpayer could ignore such a letter – but don’t. A taxpayer could sign one of the Certificates enclosed with the letter – but don’t.
How to avoid a tax investigation
Firstly, declare all your income and gains. Secondly, make use of the “white space” on a tax return to explain any entry that may trigger the questions above. Thirdly, seek specialist advice before submitting a tax return to avoid a full blown tax investigation.
And if you don’t follow these steps … … …
Expect a full blown tax investigation. The cost will be higher both financially and emotionally.
A specialist can advise you what you need to disclose and how to disclose it fully on a tax return. I have had clients who have followed my advice and had a follow up letter from HMRC saying “case closed”. My work is done.
But isn’t HMRC just being nosey?
Possibly (its a human trait) but HMRC Inspectors have a job to do. Having offshore wealth is not illegal but evading tax is. I have no problem in HMRC asking questions – the problems can arise with the answer(s) being proposed by the taxpayer being too verbose and missing the point!
Taxpayers can be looking for discretion. That is why the structure is offshore. Not for any other reason.
So what should I do if HMRC contact me?
Firstly, don’t ignore the letter. Secondly seek specialist advice.
The answer may be quite simple. It may be that a concise explanation of an entry or transaction is all that it takes. Once a taxpayer understands how HMRC undertakes the care and management of the UK tax system, the answer becomes clear.