Consultation on simplifying the taxation of offshore interest
We outline HMRC proposals for simplifying the taxation of offshore interest.
Helping taxpayers with offshore tax
HMRC published a discussion document in 2021 exploring how it could help taxpayers to get their offshore tax right. This included consideration of the causes of common errors made by taxpayers and suggested some ideas for how HMRC could address these issues. Since the publication of the responses to the document, HMRC has been working to develop some of the ideas and has now issued a consultation on proposals to simplify the taxation of offshore interest.
Problems with the taxation of offshore income
In the UK, individuals are currently taxed on their investment income arising in a UK tax year (ending 5 April). However, where the investment income is from a non-UK investment the individual will often receive details of income for the calendar year. HMRC also generally receives details of income for the calendar year, through various international information sharing arrangements, such as the Common Reporting Standard (CRS) and the Foreign Account Tax Compliance Act (FATCA).
For taxpayers, this means that they will need to apportion the offshore income to UK tax years, when completing their UK return. For the period 1 January to 5 April, the information they need may only arrive shortly before (or even after) the return is due, so estimates may have to be used initially (and corrected later).
HMRC often finds it difficult to identify whether the taxpayer has accurately declared the income shown in the CRS or FATCA reports it receives, due to the mismatch. Taxpayers may then incur unnecessary costs dealing with HMRC queries, where all the income has been correctly disclosed. Without the problem of mismatches, HMRC might also be able to introduce new ways of helping taxpayers, for example, prepopulation of returns, or coding out of offshore income.
Offshore interest is a key problem area, as reflected in the large number of disclosures of unpaid tax received by HMRC that arise from the incorrect treatment of offshore interest. The current consultation therefore concentrates on interest, rather than other types of offshore income.
Proposals
The consultation asks for views on changing the rules so that individuals would be taxable on the offshore interest arising in the year ended 31 December, that ends in the tax year. For example, for the tax year ending 5 April 2023 the individual would be taxed on offshore interest arising in the year to 31 December 2022.
This change would address many of the problems associated with the taxation of offshore income outlined above and facilitate prepopulation by HMRC. However, there would be issues to be addressed, including:
- A definition of offshore interest.
- Arrangements for the transitional year that would be required to move from the old system to the new.
- Treatment of interest from jurisdictions that do not have a 31 December tax year end, for example South Africa (31 March) and New Zealand (28/29 February).
- Should the change be mandatory or optional?
- Interaction with other tax rules, including anti-avoidance provisions and scope for taxpayers to avoid tax by taking advantage of different rules for UK and offshore interest.
- Interaction with other policy, for example, basis period reform and Making Tax Digital.
The consultation seeks views on all these issues. ICAS will be submitting a response.
Let us know your views
If you have any feedback on any of the questions set out in the consultation, email tax@icas.com to share your views. We also welcome input from members on other tax consultations and calls for evidence or on HMRC service levels, systems, delays and other issues (which we raise with HMRC at regular stakeholder meetings).
