The client notification regulations deadline approaches

Leontia Doran

By Leontia Doran

In this article, Leontia takes a look at the client notification requirement regulations which advisers need to address before 31 August 2017.

Is your practice ready for the client notification deadline? Read on………

Background

Have you assessed if your practice is exposed to the obligations imposed by the client notification regulations? The deadline to do so is just over two months away on 31 August 2017. Failure to comply with the regulations could mean a £3,000 penalty for your practice!

Overall, this legislation imposes obligations on certain advisers who provide “offshore advice or services” to specific clients, to send these clients an individually addressed covering letter from the adviser’s firm/business. This letter must include certain wording provided by HMRC and must be sent by 31 August 2017. The covering letter from the adviser must also enclose a HMRC branded letter.

This correspondence is intended to alert clients to the possibility of HMRC compliance intervention in the event of untaxed income/gains derived from offshore activity. The letter also provides the client with guidance on what action they may wish to take by directing them to the Worldwide Disclosure Facility guidance on GOV.UK.

Chartered Accountants Ireland was involved in the informal consultation process which followed the introduction of the legislation. The Institute’s aim was to minimise the pressure on members in practice from this obligation, where possible.

This article looks at key aspects of the Regulations as they may apply to accountants in practice only and does not examine the implications for Financial Services and Financial Institutions.

The regime at a glance

Who is caught?

“Specified Relevant Persons” who have provided “offshore advice or services” to any of their clients in the course of business in the year to 30 September 2016. This can include a Chartered Accountant where the definitions in the Regulations are satisfied. Financial Institutions can also be a Specified Relevant Person. Overseas businesses may also be caught.

What advice is covered?

“Offshore advice or services” is advice which relates to certain offshore sources of self-employment, employment, savings and investment income, and miscellaneous income. Offshore advice or services is not counted if the adviser only completes and submits a tax return that reflects the fact that the client has overseas income or assets.

Which offshore jurisdictions are caught?

Participating jurisdictions (https://www.gov.uk/hmrc-internal-manuals/international-exchange-of-information/ieim603050) and the USA.

What must be done and by when?

A notification letter must be sent by the Specified Relevant Person to the client to whom they provided the advice. The letter must be sent by 31 August 2017. The Regulations are very specific on the format of the letter and its enclosure. More information is provided on this later.

What are the sanctions for failure to comply?

A Specified Relevant Person who fails to notify their specified clients faces being charged a penalty of £3,000. If the 31 August 2017 deadline is not met, a £3,000 penalty may be due, subject to appeal. This is a flat rate penalty per Specified Relevant Person and is not charged per client not notified.

The International Tax Compliance (Client Notification) Regulations 2016

The Regulations came into force on 30 September 2016 and run to 12 pages. They amend the International Tax Compliance Regulations 2015 by requiring financial institutions and certain advisors to identify individuals to whom notifications, as outlined in the Regulations, must be sent on or before 31 August 2017. The Regulations were developed as the result of a late amendment to the Finance (No. 2) Act 2015 as the measure had not been announced at the Summer Budget 2015 or in previous budgets.

Who is a Specified Relevant Person?

The obligation in the Regulations requires Specified Relevant Persons to send out a notification to their clients about certain tax matters. The obligation applies, in broad terms, to professional businesses that offer advice or services in respect of financial accounts or assets outside the UK or in respect of sources of taxable income outside the UK.

A Relevant Person can be a business, and can be an individual, a company, a partnership, or similar entity. The primary, wider scope of Relevant Person is in section 222(4) of Finance Act 2013, and is either:

a person appointed to give advice about the tax affairs of another person (whether appointed directly or by another tax adviser of that person), or
any other person who in the course of business:
- gives advice to another person about that person’s financial or legal affairs, or
- provides other financial or legal services to another person.

This is then narrowed down by reference to whether the Relevant Person provides or has provided “offshore advice or services” to any of their clients in the course of business, and is therefore a “Specified Relevant Person”.

A relevant person will not be a Specified Relevant Person if they only complete and submit a tax return that reflects the fact that the client has overseas income or assets.

If the only advice or service of this kind that you or your practice provide is to fill in the boxes in the tax return reflecting overseas income or assets, by copying them from offshore bank accounts and P60s, then you are not within the obligation. The advice or services must be more substantial than just filling in a return.

There is also an exemption where the Relevant Person wholly advises its own employees or officers, or the employees or officers of a connected party. The guidance includes flowcharts to help identify whether you are included in either of the definitions.

What advice is covered?

The definition of offshore advice or services is in regulation 12A(4) of the International Tax Compliance Regulations 2015, as amended by the International Tax Compliance (Customer Notification) Regulations 2016. The definition is relevant in establishing whether a Relevant Person is a Specified Relevant Person.

The obligation will apply to any Relevant Person who, in the course of business, has provided advice or services in the year to 30 September 2016 relating to any of the following that are situated in, or arise from, a participating jurisdiction or the United States of America:

A financial account (within the meaning of the Common Reporting Standard);
A source of relevant foreign income, as defined by section 830 of the Income Tax (Trading and Other Income) Act 2005;
A source of employment income, as defined by section 7(2) of the Income Tax (Earnings and Pensions) Act 2003;
An asset, as defined by section 21 of the Taxation of Chargeable Gains Act 1992.

In broad terms, this covers sources of self-employment, employment, savings and investment income, and miscellaneous income from participating jurisdictions or the USA. It also covers advice or services relating to financial accounts, entities, and assets within the charge to Capital Gains Tax that are in participating jurisdictions or the USA.

Referring a client to a connected person outside the United Kingdom for the provision of any advice or services is treated as providing offshore advice or services to the client. Connected takes the meaning in section 1122 of the Corporation Tax Act 2010.

The referral may be for any advice or services relating to the individual’s personal tax affairs, not just those meeting the definition of offshore advice or services; the ‘offshore’ element is that the referral is to a party overseas. It does not matter whether the advice was actually provided by the connected party; it is the act of referral that counts.

The notification should be sent to current clients as at 30 September 2016 who are individuals (that is, natural persons rather than legal ones).

Which offshore jurisdictions are caught?

A ‘participating jurisdiction’ in this context is one that has agreed to adopt the OECD Common Reporting Standard and is on the list of participating jurisdictions that can be found in Schedule 1 to the International Tax Compliance Regulations 2015.

This list does not include the UK but includes Canada, France, Germany, Ireland, Hong Kong and the Russian Federation, amongst others. The USA is not a participating jurisdiction, but is expressly included in the client notification requirements.

What must be done and by when?

A notification letter must be sent by the Specified Relevant Person to the client to whom they provided the affected advice. The Regulations also note that it may be appropriate to translate the notification.

The letter must be sent by 31 August 2017 and must contain both:

a specific document under HMRC branding providing information and links to the relevant HMRC guidance; AND
a covering letter from the business of the Specified Relevant Person sending the notification (this must contain specific wording).

Links to both of the above are provided below.

The notification letter therefore highlights that there are opportunities for clients to voluntarily disclose information about their overseas tax affairs, if they need to, by providing a link to HMRC’s guidance on the Worldwide Disclosure Facility. However the HMRC insert does not highlight that the disclosure opportunity available under the Worldwide Disclosure Facility essentially only lasts until 30 September 2018.

HMRC are calling the Worldwide Disclosure Facility “the final chance to come forward” before they begin to use Common Reporting Standard data. A tougher approach to offshore non-compliance will also begin after 30 September 2018 when new sanctions under the Requirement to Correct legislation will be introduced. A disclosure is still possible after 30 September 2018 but on less favourable terms.

What about overseas businesses

Advisers who control similar businesses overseas that are controlled from the UK, are also required to take all steps reasonably open to them to ensure that individuals reasonably believed by the overseas business to have been resident in the UK during the relevant period and who have been provided with accounts in certain overseas jurisdictions or with offshore advice or services relating to personal tax matters are similarly notified by the deadline. Thus the legislation brings into scope subsidiaries (and branches) of UK controlled businesses.

What you can do now

Consider now if your practice and client base are affected by the requirement.

Under the Regulations, advisers are required to use either the “general approach” or the “specific approach” to identify individuals to whom the prescribed notifications described must be sent.

The general approach identifies individuals who were provided with advice or services relating to their personal tax affairs by the adviser in the relevant period.

This approach confirms therefore that HMRC have no objection to notifications being sent out to every client in the firm’s database if identifying specific individuals is too time-consuming or onerous.

The specific approach identifies individuals who, in that period, were provided with offshore advice or services relating to such tax matters or were referred by the adviser to a connected person outside the United Kingdom for the provision of such advice or services.

Both approaches exclude individuals the adviser reasonably believes were not (or will not be) resident in the United Kingdom in either or both of the tax years 2015–16 and 2016–17 or for whom, on 30 September 2016, the adviser has no reasonable expectation of advising further or providing more services.

The specific approach similarly excludes individuals for whom the adviser has prepared and delivered (or expects to do so) a personal tax return disclosing the effect of the advice or services provided.

An individual identified using the general approach may be similarly excluded if the adviser so chooses.