Requirement for tax advisers to send notification letters to clients
Susan Cattell sets out the actions tax advisers need to take.
Changes to the International Tax Compliance Regulations 2015 (SI 2015/878) have created an obligation on financial institutions and relevant persons (including tax advisers) to inform their clients:
- that HMRC will soon be getting data on overseas financial accounts;
- that there are opportunities to come forward to make disclosures about overseas affairs;
- of the possible consequences for those who don’t come forward.
Under the Common Reporting Standard tax authorities around the world will be sharing data on financial accounts and will be using that data to check that taxable income has been properly reported.The reasoning behind the new notification requirement is that HMRC believes financial institutions and advisers know more than HMRC about whether clients have, or are likely to have, assets and income overseas.It therefore wants to ensure that they make clients aware of their obligations to report income in a consistent way.
HMRC held informal consultations about the obligation and the draft guidance and draft notification letters.ICAS took part in the consultations and raised numerous concerns about the obligation.As a result of feedback on the notification letters the wording was improved.
This article identifies key aspects of the obligations but for the details it is important for advisers to refer to the client notification landing page on GOV.UK which includes links to HMRC’s detailed guidance.
Who needs to send notification letters to clients?
Specified financial institutions, such as banks, building societies, insurers and fund managers (not covered further in this article) and ‘specified relevant persons’ (SRPs).SRPs include:
- Tax agents and advisers
- Financial advisers
There is a limited exclusion for SRPs in certain circumstances where services are provided solely in preparation of a tax return and various conditions are met.
Clients who must be notified
The notification letter only needs to be sent to clients who are UK tax residents in either the:
- 2015 to 2016 tax year; or
- 2016 to 2017 tax year.
SRPs can choose how to identify the clients they need to notify.They can opt for:
- The specific approach – identify individual clients they have provided with offshore advice, or referred overseas for this (i.e. the advice, products or services do not have to have been provided directly to the client); or
- The general approach – identify all clients they have provided with advice or services for their personal tax affairs (between 1 October 2015 and 30 September 2016).
SRPs only need to use one of these approaches and if they don’t find any clients to notify they do not need to do anything else.
How to send notification letters
SRPs must send the notification letter together with a covering letter (or email).These must be sent to clients by:
- Email – if this is the way the adviser usually communicates with clients and reasonably believes they will read it.
For SRPs the wording for the covering letter (or which must be included in the covering email) reads:
‘From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency.This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.
If you have already declared all your past and present income or gains to HMRC, including from overseas, you do not need to worry.But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.’
The notification letter
The letter highlights to clients that HMRC will be getting new financial information from over 100 jurisdictions about its ‘customers’, including details of overseas accounts, structures, trusts and investments.
One of the points ICAS raised with HMRC during the consultation process was that some individuals may not have realised that they needed to disclose offshore income – perhaps because they inherited assets overseas or because they took advice a long time ago but their circumstances or tax legislation have since changed.These inadvertent evaders need to understand that the letter is relevant to them; they would be unlikely to respond to a letter which concentrated solely on offshore tax evasion, as they would not recognise themselves as evaders.
The final version of the notification letter attempts to address this by placing emphasis on checking that tax affairs are up to date and it mentions changes in personal circumstances and inherited assets.
The letter points taxpayers who need to bring their affairs up to date to HMRC’s online disclosure facility and suggests anyone who is unsure should talk to a tax adviser.It also outlines the possible consequences of failing to pay the correct tax on offshore assets.
The notification letters must be sent to any qualifying clients by 31 August 2017.
SRPs who do not identify relevant clients and send them the letter could be charged a one-off penalty of £3,000.
Websites relevant to the client notification obligation:
- Client notification landing page.
- Guidance for recipients of the client notification:
- Guide to sending the client notification letter:
- Full guidance on the client notification in the HMRC manual.
- The regulations.
- Worldwide Disclosure Facility landing page.