HM Revenue & Customs (HMRC) issued “nudge” letters to certain UK large taxpayers preparing 2018-2019 tax returns to encourage the taxpayers to verify whether excess reporting income and offshore income gains from their offshore fund investments are reported correctly.
HMRC also asked recipients of the nudge letters to consider returns already submitted for 2018-2019 and earlier years. The letters may have implications for investors in offshore investment funds that are unsure if offshore income gains and/or excess reporting income was declared correctly.
Why is HMRC sending the letters?
Taxpayers sometimes declare gains in offshore non-reporting funds as capital gains—rather than offshore income gains. Capital gains can attract an annual exemption and are taxed at a lower rate than offshore income gains. Thus, tax may be underpaid in such situations, sometimes by significant amounts. In addition, some financial institutions have been unable to calculate excess reporting income as part of the annual tax certificate; therefore, the income may not have been reported on the tax returns by those investors in offshore reporting funds who are unaware of the situation.
The annual tax packs provided to investors by private banks and wealth managers may not include all of the income that must be reported on the tax return, and may (or may not) make it clear that income is missing because it can be operationally difficult and costly to ascertain that information. There is no requirement for fund managers to provide this information directly to the individual investors—it must simply be made “publicly available.” The definition of “publicly available” is not strictly defined, and as a result, accumulated income reports can be time-consuming (and costly).
Possible actions to consider
When certificates are requested to be completed, HMRC does not require the taxpayer to confirm that the position is correct (unlike in previous campaigns, when certificates were requested to be completed).
If any correction is required for earlier years, however, an amendment and/or a disclosure would be appropriate.
There could also be “failure to correct” penalty implications (subject to having a reasonable excuse). In addition, HMRC may later undertake a separate investigation of the position since the investors have been targeted in the nudge letters.
Read a November 2019 report prepared by the KPMG member firm in the UK
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.