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Nudges could reduce offshore non-compliance and international tax debt

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Published: 21 Jun 2021 Update History

Better communication on taxpayer obligations coupled with prompts from HMRC could help to prevent offshore non-compliance and international tax debt, says ICAEW. There are also opportunities to improve existing systems and processes to make compliance easier.

In response to HMRC discussion papers on helping taxpayers get offshore tax right and preventing international tax debt, ICAEW has agreed that targeted use of nudges and prompts from HMRC could help to prevent non-compliance.

Getting offshore tax right

In ICAEW Rep 58/21, ICAEW argues that often non-compliance on offshore tax matters is due to individuals being unaware of their obligations and “genuine misunderstandings” in an area of law that is in need of simplification.

It states: “The tax rules surrounding this area are some of the most complicated in the UK tax code. The remittance basis, offshore trusts and the transfer of assets abroad rules, for example, are very difficult for agents to understand, let alone the individuals to which they apply.”

Alongside a lack of understanding, the faculty suggests that one of the key contributors to errors and inaccuracies in the reporting of overseas income is the UK having a different tax year to most countries around the world.

In most countries in the world the fiscal year follows the calendar year, whereas in the UK the tax year ends on 5 April. This means taxpayers will typically need to incorporate information from two different tax returns for each territory in which they generate income when preparing their UK tax return.

If the UK’s tax year followed the calendar year, a topic to be debated at this year’s Wyman Symposium on 13 July, this could resolve many filing errors. “Overall, this is an extremely long and laborious process for some taxpayers, which would be made much more straightforward if the tax year in the UK followed a calendar basis.”

ICAEW also argues that rather than imposing new compliance obligations on taxpayers, a more efficient way to improve compliance would be greater and more intelligent use of the data that HMRC already holds on income and gains received by UK taxpayers.

It highlights the example of when an overseas company disposes of a residential property in England or Wales. In such situations, there are implications for annual tax on enveloped dwellings (ATED), capital gains tax and stamp duty land tax. However, ICAEW-member feedback suggests that HMRC’s teams and systems looking after each of these taxes are not coordinated.

“More joined up systems would mean that HMRC could issue nudges or prompts to a taxpayer where one of these taxes became reportable in respect of the other two,” it states.

The discussion paper includes a proposal for the greater use of nudges and prompts, which ICAEW confirms it supports, provided these are issued on a timely basis and are tailored to the individual’s circumstances, rather than generic.

Preventing and collecting international tax

The faculty reiterates ICAEW’s support for the use of appropriate nudges and prompts in ICAEW Rep 59/21 which considers the prevention and collection of international tax debt.

Such reminders from HMRC could help to ensure taxpayers are aware of their obligations with regard to international tax, which ICAEW suggests is a contributing factor in tax debt.

The faculty suggests that HMRC should also consider running educational campaigns for non-UK individuals on some of the main ways in which UK tax liabilities arise and on the benefits of completing form P85 for tying up any outstanding tax matters when migrating from the UK.

Alongside improvements in communication with taxpayers, ICAEW argues that “significant improvements” could be made in the methods that non-UK nationals have available to register with HMRC and make UK tax payments.

This is particularly important where the individual concerned does not have a national insurance number (NINO). “If it became easier to register individuals as UK taxpayers with HMRC, including those without a NINO, then HMRC would find it easier to collect debts outstanding,” it states.

Other practical steps outlined by the faculty included extending the timeframe for appeals and to pay to 90 days from 30 days. Given international postage times, the ICAEW argues that a longer period is more appropriate. It also suggests that it would be helpful if appeals could be filed by email or some other electronic means.

The discussion paper highlights the task of reducing tax debt owed by high-net worth individuals, such as overseas sports people and entertainers. ICAEW concludes that the best way to combat such debt would be for HMRC’s foreign entertainers’ unit to work more closely with UK agents representing overseas performers.

It suggests that working with agents on upcoming work in the UK to agree tax liabilities, would help prevent taxpayers creating unexpected debt which they then have a resistance to paying.

Finally, ICAEW cautions that great care and consideration should be taken before introducing any form of conditionality as a way of preventing international tax debt. “All possible methods of cross-border tax collection should be exhausted first before applying any form of restrictions or conditions to individuals gaining access to UK markets or residence.”

Wyman Symposium – register for free

The Tax Faculty’s Wyman Symposium returns in 2021 as a digital event, enabling anyone to attend. This year’s panel, which includes Norah Collender, CAI; Jill Springbett, MGR Weston Kay; and Steve Wade, EY, will discuss moving the UK’s tax year end.

On 4 June, the Office for Tax Simplification confirmed that it had been asked to look into the implications of moving the end of the tax year from 5 April to 31 March or 31 December. At this event you’ll hear about the experience that Ireland went through in 2002 in changing its own tax year end, how such a change might affect an SME client tax practice and the impact on payroll.

The event will start at 12:30 on 13 July and is free to attend.

Register for your place now.

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