Since the introduction of the common reporting standard, banks are at liberty to disclose holdings of account holders to worldwide tax authorities. Gone are the days where large sums could be placed in offshore tax havens to avoid scrutiny from the tax man.
With banks now obligated to hold and share details of depositors at any given time, non-disclosure of non-compliant tax holdings could lead to a lengthy and potentially costly investigation.
With this in mind, this article explores the 3 key reasons why now is a crucial time to voluntarily disclose your offshore income to avoid any unpleasant repercussions.
What is Voluntary Income Disclosure?
It is now widely known that HMRC’s systems collect data from banks and overseas tax authorities on personal holdings. This is to get a complete picture of your holdings in comparison with your tax paying history.
This is not to be seen as an automatic infallible process which doesn’t require your input. This misunderstanding may lead people into not declaring income. Other people may purposefully refuse to declare income. This is a problem for HMRC. From HMRC’s perspective there is little to tell the difference between the two. Both are in possession of non-tax compliant holdings.
A proactive approach clarifies this issue before HMRC inquiries further. This is voluntary disclosure. Knowing the benefits of voluntary disclosure is imperative. Becoming aware of the negatives when income disclosure isn’t given is important. Read further below to learn more.
The decision to present undisclosed assets you possess is important. It holds all the more value when HMRC has the ability to discover them. This is because of the Automatic Exchange of Information.
AEOI has increased HMRC’s power to investigate assets since 2017. AEOI are agreements made between the different countries’ tax authorities. They work in a combined effort to combat tax avoidance.
Should someone be in possession of finances outside of their countries tax authority HMRC will know. AEOI acts as an umbrella for detecting tax avoidance.
Offshore income from a yacht crew falls under this. Due to the nature of the sector seafarer tax is open to deductions. Ship-based workers need to declare income in the UK.
Afterwards should they meet the requirements deductions occur. HMRC investigations begin as aspect inquiries. These are for a more specific facet rather than the whole return.
Voluntary disclosure explains mismatches before the process begins. When discovered, mismatches are understood. Disclosing ensures they are not treated as deliberate attempts to hide assets.
Having disclosed your assets offers up protection. Evident in penalties of possessing non-tax compliant holdings not being opened.
Undisclosed assets open up a case for HMRC to investigate. Whether caused by careless omission or deliberate omission. Possessing non-tax compliant resources results in a penalty.
Penalties are expensive charges issued due to tax irregularities. The charge is based on how much tax you are liable to pay. This extends to a period of the past 22 years. The UK issues penalties of up to 100% of the unpaid tax.
Deliberate and documented failures to settle a history of tax charges more. This increases that penalty up to 200%.
Holding the asset offshore changes things. In an attempt to avoid UK tax the penalty further increases. This time the upper limit becomes 300%. The penalty should be reason enough to disclose assets. More egregious cases could warrant a criminal investigation on top of the penalty.
Proaction vs Reaction
Should HMRC investigate first you’ll wish you had disclosed earlier. The penalty charge ensures this. Making a full disclosure voluntarily is far better than HMRC taking action first.
Disclosed assets will receive a lower rate of penalty. Preemptively disclosing assets is highly rewarding. Penalties will now be capped at a rate of 100%. Should the asset be held offshore then the penalty is capped at 200%.
The process of disclosing is simple enough to complete alone. Disclosure comes with the option of receiving support from an experienced advisor.
With these options there is little reason to not disclose. Dealing with the inquiry early saves time and money. Not to mention the stress that would come with it.
Disclosing income to HMRC is a choice an individual will have to make. Taking into consideration what has been mentioned though the answer should be clear. HMRC has the legislative power with the help of AEOI to search for information.
This allows for them to collect information from more sources. Access to more information means they increase their chances. HMRC chances of finding undeclared income goes up. Alongside this is the increased likelihood of criminal investigation.
Acting preemptively by taking preventative measures will lead to a lower penalty being charged. Good rapport is built with HMRC. The investigation will not be as arduous. HMRC will not investigate as deep.
Had they come across the information themselves this would not be the case. The account owner’s input is key. Voluntary Disclosure is a course of action that offers a far less stressful situation. It brings your assets and the tax up to date, easing the uncertainty and anxiety of the future.