15 March 2012
Press ReleasesIn recent years there have been a number of campaigns launched by HM Revenue Customs (HMRC) which have focused on particular trades and professions in an attempt to counter tax evasion. Recently a further campaign has been announced to counter tax evasion and under-declaration arising from the ownership of overseas property.
David Gaulke, Exchequer Secretary to the Treasury with responsibility for most areas of tax policy and ministerial oversight of HM Revenue & Customs, has made the Government’s determination to collect the right amount of tax quite clear. In spite of living in times of austerity money was announced last year to tackle tax evasion, part of which has been allocated to the overseas property initiative. According to David Gaulke, those who do not pay the correct amount of tax will have nowhere to hide. It is anticipated that this initiative will collect around £560m as a contribution to the £7bn of tax the Government hopes to raise by 2014/15 in tackling tax evasion. A team of 200 has been formed to carry out this work.
Who will be affected?
The subject of this initiative is those overseas property owners who are liable to the additional higher rate of tax of 50%. It is believed that a number of owners of overseas property will not have declared rents or capital gains arising from these properties. This might be because the owner was not aware that these are liable to UK tax or deliberately chose to evade UK tax. Either way HMRC is intent upon ensuring that any tax which is due is collected in full. For those in the first category, this will come as a surprise.
The basic rule is that an owner who is UK resident for tax purposes is liable to UK tax on both rental income and profits arising from the sale of such properties.
Different and complex rules potentially apply to owners who are resident in the UK but not domiciled here. Suffice it to say that prior to 2008 such income and gains might not have been taxed as they arose but only taxed when remitted to the UK. From 2008, however, such taxpayers might have to pay the remittance charge of £30,000 or £50,000 if they are to benefit from the same basis of taxation.
Finally, even if the property is owned by an offshore entity, such as a trust or a company, it is still possible that the income and gains are liable to UK tax due to the existence of special tax anti-avoidance rules.
What is HMRC looking for?
At this stage HMRC has not set out in detail the basis on which they believe taxpayers have not complied with their filing obligations but following the reference to ‘data mining’ technology there is clearly more than a mere suspicion of unpaid tax.
The main areas of concern are that
Owners are not paying tax on rental income they receive on such properties and Declared levels of income and capital gains are not sufficient to have funded either the acquisition or ongoing maintenance costs.
It is generally believed that in excess of 400,000 UK households own a property overseas and it is anticipated that this number will grow over the coming years, potentially quiet considerably, as property prices fall in some parts of continental Europe. HMRC might therefore have a considerable target both now and in the future at which to aim.
How are those under-declaring income and capital gains to be identified?
On the face of it, it is reassuring that HMRC do not appear to intend issuing speculative enquiries.
HMRC has stated, “Sophisticated mining techniques have been applied to publicly available information to identify individuals who own property abroad. HMRC risk assessment tools are then being used to highlight those people who do not appear able to afford the property legitimately, as well as those who do not appear to be declaring the correct income and gains from the property.”
Many people will not be familiar with data mining, but essentially it is technique which enables HMRC to allocate resources as effectively as possible between different areas of risk which they wish to audit. It involves the collection of data from relevant sources which is then analysed to construct models of behaviour and future behaviour. HMRC believes that by developing this approach of sophisticated statistical and data mining a far better return will be generated on the resources committed than, say, a random selection process or one based simply on industries perceived to be ‘high risk’. In addition to this the software will enable HMRC to understand current behaviour and carry out predictive modelling of forecast future possible behaviour.
There is however still a risk that the identification process will not just select those who have under-declared income and gains. For instance an owner might rent a property out but expenses might be sufficient to generate a loss so that no tax is payable. Such individuals might not have generated a profit and so might not have retained records and so they could have difficulty satisfying HMRC that no tax is payable.
In short it could be time-consuming and expensive to prove ones innocence.
What action should property owners take?
Those who are concerned that they might be affected should take professional advice as soon as possible to determine whether or not there is any undeclared income or gains. If there are then these should be quantified and notified to HMRC as soon as possible. This way if there is a penalty, the level of that penalty might be reduced for voluntary disclosure. Early payment of the tax should also be made to prevent further interest for late payment accruing.
The adviser will not only be able to minimise the tax and penalty payable, but also provide advice on how the property should be owned tax-efficiently for the future. This could include matters such as:
Looking to the future, it is essential that proper records are kept of the following:
Conclusion
Those owning property overseas should always be aware that foreign owned assets are not automatically outside the scope of the UK tax net just because they are situated outside the UK, and that they are more likely than ever to be on HMRC’s tax compliance radar. As such it is essential that proper records are maintained so that the true tax position can be readily established and evidenced if called upon to do so. This is the case even if there is ultimately no tax to pay because it will be that much easier for the owner to prove their ‘innocence’.
If any tax has been under-declared, on either rental income or capital gains, advice should be sought sooner rather than later so that matters are brought up to date with the minimum tax and penalty cost, and structured in the most tax-efficient way.
Stephen Barratt is a director in the Private Client team at accountants James Cowper Kreston. He can be reached by email: sbarratt@jamescowper.co.uk.
