Dear Reader
HMRC offshore nudge letters and Certificates of Tax Position
What should a taxpayer actually do when HMRC asks them to review overseas assets, income and gains?
A client recently sent me a letter from HMRC asking him to review his UK tax position in relation to overseas assets, income and capital gains and to confirm whether he had paid the correct amount of UK tax.
The letter enclosed a Certificate of Tax Position. Reading the correspondence as a taxpayer, one could easily form the impression that the expected course of action was to review the position, select one of the statements on the certificate, sign it and return it to HMRC.
His accountants took a different approach. They prepared a letter to HMRC rather than completing the certificate. That prompted me to look more closely at the history of these letters, HMRC’s own procedures and, in particular, the Chartered Institute of Taxation guidance on HMRC letters and Certificates of Tax Position concerning overseas assets, income and gains.
There are several useful practical lessons.
What is a nudge letter?
Nudge letter is an informal description. Within HMRC, this type of activity generally forms part of its One to Many compliance approach. HMRC describes this as using a common communication with a group of taxpayers to encourage them to review or improve their compliance.
An important procedural point is that HMRC’s own Compliance Handbook expressly says that a One to Many approach is not a compliance check.
That does not mean the letter should be ignored. It means that the taxpayer needs to understand what stage of the process HMRC has reached.
The modern offshore nudge-letter programme should be seen against the development of international tax transparency. FATCA and, particularly, the OECD Common Reporting Standard transformed the amount of information that tax authorities receive about financial accounts held outside a taxpayer’s home jurisdiction.
The UK’s Requirement to Correct legislation in 2017 was part of the same development. The deadline for correcting historic offshore non-compliance was deliberately fixed at 30 September 2018 because more than 100 jurisdictions were expected to exchange financial-account information under the Common Reporting Standard by then. HMRC stated that this information would significantly improve its ability to identify offshore non-compliance.
By June 2019 the CIOT had published specific guidance for advisers dealing with these offshore letters. Its guidance has subsequently been updated, most recently in September 2024. The CIOT confirms that HMRC continues to issue such letters where information received through international tax-information exchange arrangements gives it reason to believe that the correct amount of UK tax may not have been paid.
What information might HMRC actually have?
This is often the first question asked by a client.
The answer is potentially much broader than a copy of a foreign bank statement. HMRC can obtain or compare information from several different sources:
Automatic international exchange. Under the Common Reporting Standard and FATCA, HMRC can receive information concerning foreign bank, custody and investment accounts. This can include the account holder’s identity, tax identification number, account number, financial institution, year-end balance or value, interest, dividends, other investment income and, for certain accounts, gross disposal or redemption proceeds. Information can also identify controlling persons of entities and persons connected with certain trusts.
Other exchanges with foreign tax authorities. International exchange is not limited to automatic CRS reporting. HMRC’s own manual identifies three routes: automatic exchange, information specifically requested by HMRC from another jurisdiction, and information sent spontaneously by another tax authority because it considers the information relevant to the UK. Information obtained on request can extend to bank balances and transactions, foreign income, property, residence, directors and shareholders, company records, legal and beneficial ownership and tax paid abroad.
UK third-party information. HMRC has statutory powers to collect bulk information from UK data holders for risk assessment. Its own Compliance Handbook gives rental income reported by letting agents as one example. The legislation also covers information obtainable from merchant acquirers concerning card payments and from money service businesses concerning customer transactions and beneficial owners.
Newer reporting regimes. Since 2024, certain digital platforms have been required to collect and report information about sellers to HMRC. Depending on the activity, this may include amounts paid, transaction numbers, fees and commissions and, where available, bank-account details.
HMRC can then compare external information with tax returns and other information already available to it.
This is important because third-party information is not the same thing as a UK tax computation. A foreign institution may report an account balance or gross proceeds without determining whether there is a UK taxable gain. Overseas information is commonly prepared by calendar year whereas the UK individual tax year runs from 6 April to 5 April. The person reported as an account holder may not necessarily be the person ultimately taxable on every item. Different tax regimes, exemptions and historic rules may also explain an apparent discrepancy.
Therefore, a mismatch does not necessarily mean there has been an underpayment of tax.
Should the certificate be signed?
This is perhaps the most important practical point.
The CIOT guidance confirms that there is no legal obligation to complete and return HMRC’s Certificate of Tax Position. It also records that HMRC has confirmed that it will accept a response by letter instead.
There are good reasons for caution. Unlike a Self Assessment return, which relates to a specified tax year, the certificate is not restricted to one year. The CIOT notes that it applies across all years and contains no de minimis threshold.
For someone with straightforward affairs, signing the certificate after checking the position may be uncontroversial. For someone with several foreign accounts, investment portfolios, companies, trusts, historic residence changes or previous use of the remittance basis, a broader declaration deserves considerably more care.
A letter has an obvious advantage. It allows the taxpayer to explain why the return is correct and to limit the response to the actual issues under review.
What should a taxpayer do?
The first step should be investigation, not signature.
The adviser should identify the relevant years and reconstruct the overseas position sufficiently to understand what HMRC may be seeing. Foreign accounts and investments should be reconciled against the relevant UK returns. Residence, remittance-basis claims, foreign tax credits, capital gains and any other relevant exemptions or reliefs need to be considered.
If the review establishes that everything was correctly reported, the CIOT suggests that a written explanation to HMRC should be considered. Silence is generally not attractive because HMRC is likely to follow up where no response is received.
If more time is required, the taxpayer or adviser can contact HMRC and ask for a realistic extension rather than providing a premature answer.
If an error is found, the correct disclosure route depends on the circumstances. An in-time return may be amendable. For historic offshore liabilities, the Worldwide Disclosure Facility may be appropriate. However, the CIOT emphasises that HMRC cannot compel a taxpayer to use one particular disclosure mechanism. Where deliberate conduct may be involved, specialist advice should be obtained before deciding whether the Contractual Disclosure Facility under Code of Practice 9 is more appropriate.
There is also an important procedural boundary. Because a One to Many letter is not itself a formal compliance check, HMRC’s internal guidance states that if it wants taxpayers to provide additional records to demonstrate that their affairs are correct, it must either open a compliance check or make clear that the information is being requested voluntarily and that there is no obligation to provide it.
That is not an invitation to be uncooperative. It is a reason to respond proportionately.
The practical lesson
The experience with this client changed the way I look at these letters.
The certificate enclosed by HMRC can give the impression that the taxpayer has only a small number of predefined answers. That is not the position.
The correct response might be a signed certificate. It might be a detailed letter explaining why no additional tax arises. It might be a request for further information or for a copy of earlier HMRC correspondence. It might be an amendment to a tax return or a formal disclosure.
The essential point is that the response should follow the tax analysis, rather than the tax analysis being compressed into whichever box on the certificate appears least inappropriate.
With automatic exchange, domestic third-party reporting and increasingly sophisticated data matching, HMRC now has access to considerably more information about taxpayers’ financial affairs than it did even a decade ago. The significance of a nudge letter is therefore real, but it should not be overstated. It is a prompt to check the position, not a finding that tax has been evaded.
The best response is normally the same: understand what HMRC may know, establish the correct tax treatment, identify any genuine discrepancy, and then respond accurately without volunteering unrelated information.
For advisers faced with these letters, the CIOT guidance updated in September 2024 and HMRC’s Compliance Handbook guidance on One to Many interventions are particularly useful starting points.
With warm regards
Dmitry Zapol
Partner, international tax advisor, ADIT (Affiliate)
IFS Consultants, London
(www.ifsconsultants.com, dmitry@ifsconsultants.com)