Financial Matters

With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com

Mistake or Not?

Our language is littered with sayings about mistakes. On the one hand there’s Einstein with “a person who never made a mistake never tried anything new.” Whereas at the other extreme, “there’s nothing wrong with making mistakes. What’s wrong is letting a mistake stay a mistake, without putting in effort to make it right.” These are all equally valid and provide hours of reflection but let’s look at a mistake in the context of personal taxes and an individual’s failure to notify HMRC or the late notification of income tax liability. The importance of taxpayers making mistakes in a failure to notify HMRC of taxable income continues to drive HMRC to reduce their tax loss. This has been seen recently with the resurgence of HMRC’s attention to taxpayers who they believe or suspect have failed to notify them of taxable income and gains from overseas. This follows from the closure on 30th September 2018 of the Worldwide Disclosure Facility and the dawn of the new penalties under Requirement to Correct from 1st October 2018. In summary, HMRC granted taxpayers an opportunity with any worldwide earnings and gain to make a declaration by 30th September 2018. Thereafter, HMRC may levy penalties up to 300% of the unpaid income tax. In short, it can be an expensive mistake for the taxpayer who has mistakenly failed to declare to HMRC any overseas income or gains. Whilst it may be easy to assert that how can one forget? Or how does this arise? Let’s consider a recent case. UK tax resident Cleopatra who was responsible for her mother’s probate on her death overseas had opened an estate account to handle the mother’s estate in 2013. Following the successful conclusion of the matter, several years later Cleopatra changed the account into a personal account, in her sole name. Such behaviour consists of no behaviour to avoid UK taxes, or does it? Fast forward January 2021 and Cleopatra receives a letter from HMRC Worldwide Disclosure Service. Why? HMRC had been notified by the overseas tax authorities of Cleopatra’s account and her receipt of interest for several years. On checking her Self-Assessment account, HMRC found no declaration of the overseas income being declared. HMRC have immediately identified a person who has failed to make a declaration of their overseas earnings. Or have they? How many taxpayers may be or are in this position, because as a UK taxpayer, are you fully aware that your worldwide income and gains are subject to declaration and liable to UK income tax, irrespective of whether the money arrives in the UK or not? A large number of taxpayers are and maybe unaware of the UK tax system let alone how it handles overseas income and gains, if they have any such luxuries. Whilst HMRC, may have in place a robust piece of legislation to address tax evasion, which nobody can doubt is required, the real concern is how many ordinary taxpayers may be making that mistake that may lead to HMRC’s reclassification of them. Taxpayers like Cleopatra, who are behaving without any regard or awareness to UK income tax rules can easily and do readily find themselves making these mistakes. All too often, through no fault of their own. Given HMRC’s eagerness to tackle global tax evasion some may think they are starting with the low lying fruits and ignoring the real fruit tree or fruit basket. Irrespective of your thoughts, taxpayers are reminded to be mindful of their overseas behaviour as they may be oblivious to walking into unforeseen income tax problems. Whilst, our Cleopatra, was able to address her mistake. The real question is, how many other taxpayers await that unexpected letter from HMRC Worldwide Disclosure or its other disclosure teams for the failure to notify.