What ‘Certificates of Tax Position’ mean for business owners

In light of the launch of the Certificates of Tax Position tool, there has never been a more important time for entrepreneurs to be aware of the risk on any undeclared offshore income or gains.

We asked Mark Wilson, a Partner at Richard Nelson LLP and specialist in resolving tax investigations, to explain what entrepreneurs need to know about Certificates of Tax Position, and the steps to take.

Certificates of Tax Position is a tool developed by the Offshore Risk and Intelligence Service team within the Wealthy, Mid-Sized Business and Compliance Unit of HMRC. Since the beginning of 2019, the government have been sending out letters with the subject ‘Important: Your final opportunity to bring your worldwide tax affairs up to date.’

If you, or know someone in your business who has received a letter with the same heading, this implies that HMRC has information that the letter recipient is suspected of evading tax on undeclared foreign bank accounts and assets.

But how will this affect my business?

Though these letters might seem like they have been widely sent out to anyone for the government to gain information, those that have received the letters are a result of the Common Reporting Standard (CRS).

The CRS is an agreement that allows countries to automatically exchange information about non-residents’ bank accounts and other financial accounts offshore. This will include details about the accounts or products you have with banks such as the balance or value, and total amounts of interests or payments credited. By September 2018, over 100 jurisdictions became involved in making annual exchanges of information via the CRS – proving the scale of this international agreement.

The Certificates of Tax Position tool might be only investigating individuals with assumed tax irregularities, however, its’ implications to business (especially start-ups and SMEs) cannot be denied.

A tax investigation of an entrepreneur or senior member of the team can have many detrimental consequences for an up-and-coming start-up. Brand image, investment attractiveness and sale potential can all get damaged by an investigation, plus the time and stress involved is a huge distraction from driving the business forward.

Inaccurate or ill-advised responses by letter recipients are very likely to result in investigation – possibly criminal and then prosecution – which is far from ideal for any entrepreneur or business owner.

What can I do if I have received a letter?

After providing their full name, address, signing and dating it, letter recipients are given three options to declare.

It might be tempting for individuals to answer untruthfully and give a false declaration in hopes that it will make it go away. However, doing so can result in a criminal offence with a maximum penalty of 5 years. These are the three options, and what they entail:

1. I need to bring my tax affairs up to date. I will declare all my offshore money and assets which UK tax may be due using the Worldwide Disclosure Facility (WDF) via HMRC.

This option means that letter recipients have openly acknowledged that their tax affairs need to be updated. If one does not swiftly follow this by declaring the offshore gains through the WDF, then an investigation by HMRC is likely to ensue.

2. I do not have offshore income, assets or gains on which UK tax could be due.

By selecting this declaration, the letter recipient is stating that they do not have any of these – but they need to remember that HMRC will have some information to the contrary, and so will probably commence an investigation, and a false declaration can result in a criminal conviction.

3. I do not have any additional tax to pay and I have declared all of my offshore income and assets. My tax affairs do not need updating.

The third option translates to letter recipients stating that their tax affairs are in order. As above, this is an entirely sensible option to choose – as long as it is entirely correct. As a result, their position is likely to be audited to ensure that all of their offshore income and assets have been declared, and an investigation likely if HMRC are not entirely satisfied.

Can I just ignore it?

Despite all of this, those that receive a letter might assume that this is just a scaremongering tactic by the government and ignore it. However, ignoring the letter and failing to reply by the deadline will bring further action.

The Certificates of Tax Position letters that are being sent out are dated with a 30-day deadline for individuals to reply. So if individuals choose to ignore these letters, there is a potential that it could immediately draw attention to your situation and appear suspicious, even if you have not done anything wrong.

Conclusion

It is important to reiterate that if you (or somebody in your business) has received a Certificates of Tax Position letter from HMRC, that this is not just a campaign to receive more information from individuals on their offshore tax affairs.

Due to the growing complexity arising from CRS, the tax authorities are becoming increasingly aware of individuals’ offshore accounts and assets. This means that it is not a coincidence that the recipients of these letters have received them. The HMRC have sent letters to those that appear to have tax irregularities via the information shared worldwide by financial authorities.

If you have undeclared offshore income and assets, you run a huge risk if you do not make a disclosure using the Worldwide Disclosure Facility, as mentioned above. This is an online mechanism for anyone to disclose a UK tax liability relating to an offshore issue.

Any tax disclosure or investigation concerns, especially once flagged-up by HMRC will benefit from professional advice. Ideally, representation from an experienced, specialist tax investigation lawyer – to understand all the issues, their options, and avoid being backed into a corner by HMRC – especially if they have nothing to hide.

Your legal team will also stand between you and HMRC so you don’t have to deal with them, and resolve it by avoiding criminal action and minimising any tax and penalties involved.

Last updated: 18th February, 2021

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