Income or assets overseas – client notification obligations
The deadline has now passed but we have kept this article on our website just in case! If you give advice about tax, or are a financial institution, you should already have sent a letter to clients who have income or assets overseas.
- Financial institutions and advisers frequently know more than HMRC about whether clients have, or are likely to have, assets and income overseas. According to HMRC, those industries should be making their clients aware of their obligations in respect of reporting their UK taxable income.
- The International Exchange of Information Manual refers to “Specified Financial Institutions” and “Specified Relevant Persons” and the obligation which may apply to send out a notification to clients about certain tax matters.
- Notification was required between 30 September 2016 and 31 August 2017.
- Failure to identify and notify the relevant account holders or clients can result in a penalty of £3,000.
Clients need to be given this letter
On 30 September 2016, HMRC posted the following message on its website:
“If you give advice about tax, or are a financial institution, you may need to send this letter to clients who have income or assets overseas, including financial accounts.
This article will explore the implications for advisers and clients.
The background to this is that changes were made on 30 September 2016 to the International Tax Compliance Regulations 2015 (SI 2015/878) that created an obligation on certain types of business to tell their clients:
- That HMRC will soon be getting data on overseas financial accounts
- That there are opportunities to come forward about your overseas tax affairs, if you need to
- About what could happen to those who don’t come forward
In many cases, financial institutions and advisers historically know more than HMRC about whether clients have, or are likely to have, assets and income overseas. According to HMRC, those industries should be making their clients aware of their obligations in respect of reporting their UK taxable income. In many cases this is already happening, but the regulations ensure that it happens in a consistent way across the board.
HMRC states: “This could be any client you give advice or services to about their offshore:
- self-employment income
- employment income
- profit from selling assets abroad”
For advisers therefore, clients with offshore bonds immediately spring to mind.
To consider these rules further, we need to consider the International Exchange of Information Manual which contains the relevant details.
The International Exchange of Information Manual refers to “Specified Financial Institutions” and “Specified Relevant Persons” and the obligation, which may apply to send out a notification to clients about certain tax matters.
“Relevant Persons” are professional businesses that offer financial or legal advice or services. The obligation targets Specified Relevant Persons, which are those businesses within that wider definition who give advice or services in respect of financial accounts outside the UK or sources of taxable income outside the UK, or who have referred a client to a connected person outside the UK for advice or services. It is not clear whether all businesses which provide advice on financial accounts are ‘caught’ or only those which provide tax advice. We will endeavour to obtain clarity. A Relevant Person is therefore the business, and can be an individual, a company, a partnership, or similar entity.
The obligation applies to those providing advice or services relating to any of the following that are situated in, or arise from, a participating jurisdiction or the USA:
- A financial account
- A source of relevant foreign income
- A source of employment income
- An asset, as defined by section 21 of the Taxation of Chargeable Gains Act 1992
In broad terms, this covers sources of self-employment, employment, savings and investment income, and miscellaneous income from participating jurisdictions or the USA.
The definition of a “financial account” includes “cash value insurance contracts”. It is explained in the International Exchange of Information Manual that this is an investment product that has an element of life insurance attached to it. The life insurance element is often small compared to the investment element of the contract. The explanation goes on to confirm that it is an insurance contract where the policyholder is entitled to receive payment on surrender or termination of the contract. An investment bond fits squarely within this description. The manual also states that a capital redemption bond (with no life cover) will also be a cash value insurance contract.
For information, financial institutions will cover banks, building societies, insurers, fund managers, wealth managers, many investment entities and similar businesses. Obligations on financial institutions are already in place under existing Regulations. Specified Financial Institutions are those that are not ‘Non-Reporting Financial Institutions’.
Individual clients affected
The notification should be sent to current clients as at 30 September 2016 who are individuals (that is, natural persons rather than legal ones), or more specifically where the advice or services are in respect of an individual client’s own tax affairs, rather than for an entity’s tax affairs. Specified clients will be tax resident in the UK in either or both of the tax years 2015/16 or 2016/17.
Given that notification will be sent after 30 September 2016, then there is the possibility of the list changing in that interim period. The rules require retention of records of account holders and clients as at that date, as these are the ones who will require the notification.
An adviser may have clients for whom regular services are not provided, but still consider there to be an ongoing relationship and some clients for whom engagement is on a one-off or similar basis. The rules allow advisers to exclude clients whom, on 30 September 2016, they do not reasonably expect to provide further advice or services to.
Specific or general notification and requirements
The manual refers to the fact that, there may be a specific approach whereby the sender identifies relevant people who should receive the notification, and a general approach where the sender identifies a group likely to benefit from the notification.
HMRC would prefer the specific approach to be taken where possible, as this is more targeted and more in keeping with the intention of the policy. HMRC do, however, accept that in many cases the business will not have the necessary records in an appropriate, accessible form to identify the individuals for the specific approach, so the general approach is included as an option.
The notification must consist of:
- A document under HMRC branding providing information and links to guidance
- A covering letter from the business sending the notification, with certain set wording
The wording and format of the HMRC-branded document is set out in the regulations, and a copy of it can be accessed via the link in the introduction to this article.
The letter should be in a paper form, and can be sent by post or delivered by hand. There is an option of sending by email where there is confidence this will be read. Where communication with the client is not normally carried out by email then a letter will be required.
The cover letter should be in the form of a letter from the business under its branding, and if appropriate should be in the same format as normal correspondence with the customer. It should include the name of the customer and be addressed to them. There are certain phrases that must be included, but otherwise the business is free to decide the content of the covering letter. These phrases are dealt with in The International Tax Compliance (Client Notification) Regulations 2016 document.
Timescale and penalty
The notification should have been issued between 30 September 2016 and 31 August 2017.
Failure to identify and notify the relevant account holders or clients can result in a penalty of £3,000. This is a flat rate penalty, and not charged per client not notified. HMRC will look at the systems and processes in place to ensure that notifications have been sent to the correct clients. Where it is clear that little or no effort has been made, the penalty is likely to be due.
Where the Specified Relevant Person has taken all reasonable steps to put in place processes to identify the right clients and to send them a notification, then it is unlikely a penalty will be charged, even where some clients are missed out or extra ones included. Each case will be considered on its own merits.
The flowchart from HMRC will help establish who is a Relevant Person. If not, then the obligation to notify will not apply. For those who are Relevant Persons, then the next step is to consider whether you are a Specified Relevant Person, and therefore within the rules.
Am I a Specified Relevant Person?
The flowchart will help establish who is a Specified Relevant Person. If you are not, then the obligation to notify will not apply to you.
For those advisers affected, this is an issue that should have been addressed in advance of the 31 August 2017 notification deadline.
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