In this article, he outlines key details of the Certificate of Tax Position and how to proceed if you ever encounter one.
What is it?
Introduced in January 2019, Certificates of Tax Position are a proactive investigative tool introduced by HMRC to help it force disclosure and correction of tax irregularities on foreign bank accounts and assets.
They are not a general concern for UK taxpayers, but are being sent out to specific people alongside letters with the heading: Important: Your final opportunity to bring your worldwide tax affairs up to date.
The Risk and Intelligence Service, Offshore department is spearheading the initiative. It is a special project team within the HMRC’s Wealthy, Mid-Sized Business and Compliance Unit.
It’s fair to say that Certificates of Tax Position are both a ‘fishing’ exercise through which HMRC is hoping to dig up new information and a targeted activity based on real information that the organisation already holds, thanks to its links with worldwide financial institutions
If you receive a Certificate of Tax Position letter, it’s because HMRC has reason to suspect tax irregularities in your international financial affairs.
As it says in the letter, the certificate is your final chance to update your tax affairs. If you fail to do so – or if you misinform HMRC in response to the letter – civil and criminal investigations are likely to follow.
What options do I have if I receive the letter?
There are two main components to the Certificate of Tax Position letter: the deadline and a choice of three options.
The deadline is self-explanatory; there will almost certainly be consequences for missing it.
The three options are the part that it’s most important to understand. You must choose one before you sign and return the certificate.
The choices are as follows:
- I need to bring my tax affairs up to date. I will declare all my UK tax irregularities using HMRC’s Worldwide Disclosure Facility;
- I do not have offshore income, assets or gains on which UK tax may be due;
- My tax affairs do not need updating. I do not have any additional tax to pay. I have declared all my offshore income, assets and gains which are taxable in the UK.
The second and third options are straightforward but will have serious consequences if selected dishonestly. Remember, HMRC has only sent the letter because it believes that tax irregularities exist.
It is unlikely to take you at your word that your tax affairs are up-to-date and may open an investigation regardless.
If you have been honest this could be inconvenient but, ultimately, harmless. If, however, HMRC investigates and discovers evidence of dishonesty, any potential sanction is likely to be more severe than it might have been otherwise.
The first option is more complex and should be handled carefully.
Choosing it is almost always a de facto admission of tax irregularities, although resolving these irregularities swiftly through HMRC’s Worldwide Disclosure Facility should bring the matter to a close.
Any delay in a resolution is likely to cause HMRC to open a tax investigation, which could have serious consequences if it discovers any wrongdoing.
Of all the options, the factual scenario in option 1 is the one where you should almost certainly consult a tax investigation expert if you have not done so already; a misstep could lead to a criminal case.
What happens if I don’t respond?
Whatever the current state of your foreign accounts and assets, ignoring the Certificate of Tax Position letter is not a good option.
HMRC is almost certain to take a lack of response as an admission of guilt and investigate.
In this instance, ignoring the letter could be seen as a lack of compliance with the investigation or even dishonesty and will count against you as HMRC proceeds with its investigation and decides on sanctions.
What’s the best way to handle the certificate?
Be honest and choose the most appropriate option.
If there is any upside to receiving a Certificate of Tax Position it is that you will be fully aware of the situation that you or your client is in. You will know that HMRC has reason to suspect irregularities and you have the opportunity to bring the matter to a close without a formal investigation.
Every course of action following the receipt of such a letter will be strengthened by the advice of a tax investigation expert, but advice is particularly important if you are aware that you need to disclose irregularities.
It is imperative that you are able to do so in such a way that avoids the full extent of HMRC’s powers to investigate and impose sanctions.
This article was written for International Adviser by Mark Wilson, partner at law firm Richard Nelson. He is specialist in tax investigations and fraud.