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UK: HMRC “nudge” letters, offshore investment funds

UK: HMRC “nudge” letters, offshore investment funds

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.


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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

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