Pandora Papers – HMRC nudge letters on offshore income and gains

What are the Pandora Papers?

During 2021 and 2022, the International Consortium of Investigative Journalists released more than 11 million records from 14 offshore service providers. These providers specialise in incorporating companies, trusts, foundations, and other entities in low or no tax jurisdictions. This release was known as the Pandora Papers.

What is the CRS?

The CRS requires tax authorities to obtain information from their financial institutions regarding non-UK resident’s accounts, and automatically exchange that information with the respective jurisdiction the individual is resident. HMRC compares the data received under the CRS against submitted tax returns. This has led to HMRC issuing nudge letters where tax risks are suspected/identified, asking recipients review their affairs and any declarations to HMRC and consider making a disclosure under the Worldwide Disclosure Facility.

Over 100 countries have signed up to the CRS, meaning HMRC has and will continue to receive a wealth of financial information from across the world. 

What should you do?

Do not ignore HMRC’s letter. If you do, HMRC may open a formal enquiry into your tax position. This will increase the time and costs related to resolving the matter, and potentially increase the level of any penalties which HMRC may seek to charge. However, it’s important that you carefully consider your options before responding to any correspondence from HMRC. The UK tax treatment of offshore income and gains can be especially complex; so, it’s essential that you check the position with a suitably qualified professional adviser. 

Many UK taxpayers will have legitimate commercial reasons as to why non-UK entities have been set up and receiving a nudge letter does not necessarily mean there are tax irregularities or that a disclosure will be required. With our technical expertise and intricate knowledge of HMRC, we can assist by reviewing your tax position, determining whether any disclosure to HMRC is required and how best to respond to HMRC, all with the aim of minimising your exposure. 

How far can HMRC look back?

In almost all cases where there are liabilities relating to offshore matters, HMRC will have extended time limits in which to raise tax/penalty assessments. However, the tax years relevant to a disclosure are dependent on the underlying ‘behaviour’ that led to the error. The time limits are further extended in cases where HMRC views the errors as deliberate, as opposed to non-deliberate/careless behaviour.

As part of our work, we ensure that all necessary tax periods are reviewed, and further ensure that HMRC has the relevant information to understand why any errors occurred, including the underlying behaviour, helping mitigate any penalty charged, and expediting the process to a correct and fair settlement. 

Contractual Disclosure Facility (CDF)

Where errors have arisen from a taxpayer knowingly submitting incorrect, or failing to submit, tax returns, the CDF–Code of Practice 9 will most likely be required. Making a disclosure through the CDF means that HMRC will contractually agree not to commence a criminal tax investigation with a view to criminal prosecution in return for the making a full disclosure of all tax irregularities arising from deliberate behaviour. We are specialists in guiding our clients through the CDF process in the most time and cost-efficient manner, whilst minimising the burden upon our clients. 

Penalties

If you've received a nudge letter from HMRC, you may be alarmed that in certain situations penalties can be charged up to 200% of any tax due. However, we have a proven track record in mitigating any penalties due, making representations to secure the maximum legal reduction allowable, and in the appropriate circumstances, successfully arguing that any penalty that can be suspended, is suspended, and altogether not payable. 

How can we help?

Should you choose to get specialist advice from Buzzacott, we will:

• Conduct a review of your onshore/offshore tax affairs to identify any issues that need to be disclosed;
• Where appropriate, prepare and submit a disclosure that best protects you and minimises your exposure to unnecessary tax, interest and penalties;
• Where appropriate, deliver a letter of representations to explain your position to HMRC to bring your disclosure to a swift conclusion; and
• If needed, negotiate a time to pay arrangement that is affordable according to your needs and personal circumstances.