ICAS responds to proposals for simplifying the taxation of offshore interest

Read why we broadly support proposals to permit the reporting of offshore interest on the calendar year basis, provided the scope is extended to cover other types of overseas investment income.

This consultation follows an earlier discussion document published in 2021: Helping taxpayers get offshore tax right. This explored how HMRC could help taxpayers get their offshore tax right. It considered what might be causing common errors and made some initial suggestions for addressing those issues. ICAS responded to the discussion document and supported some of the suggestions, particularly around HMRC sharing the overseas information it receives with agents and taxpayers.

The consultation looks in detail at an important problem area and proposes a possible solution. 

Challenges with the current system

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 source 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, pre-population 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.

Possible solution

The consultation set out proposals for 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.

ICAS response

ICAS discussed the consultation with HMRC at a stakeholder meeting and submitted a response.

We broadly support the proposals in the consultation to permit the reporting of overseas investment income on the calendar year basis, but we believe this would need to cover other types of income in addition to overseas interest. 

We understand that reports from wealth/investment managers, brokers and financial institutions to investors usually include interest, dividends and chargeable gains (or losses). If the rules are only amended to allow interest to be reported on a calendar year basis, this will limit the benefits for many taxpayers. It is also likely to be confusing for unrepresented taxpayers. It would be preferable to consider all types of offshore investment income typically reported together to investors.

There will need to be a transitional year if the new basis is implemented, and we agree with the approach proposed in the consultation. This is the simplest way to achieve the transition and would affect the minimum number of years. There are unlikely to be major changes or variations across this relatively short transitional period.

There would be scope for manipulation and abuse if individuals could switch between the new basis and the old basis from one year to the next. However, some taxpayers might prefer to continue to report using the current basis (ie reporting the income received in the UK tax year), particularly if the proposed new basis only applies to bank interest. This could be addressed by permitting an ‘opt in’ approach to the new basis. Taxpayers would be able to choose whether to opt in, but once they had chosen to do so, it would be irrevocable. 

Regardless of whether the proposals in the consultation are implemented, we would like HMRC to share more of the information it receives through international information sharing agreements with taxpayers and agents. We supported this when it was proposed in the 2021 discussion document and welcomed a subsequent pilot, where information was shared with nudge letters. Unhelpfully vague nudge letters only prompt calls to HMRC to request more information and increase costs for taxpayers (often in cases where the returns are correct, but HMRC has been unable to match the data accurately). 

Let us know your views

We respond to tax consultations and calls for evidence and attend meetings with HMRC at which service levels, delays and other issues you raise with us are discussed. We welcome input from members to inform our work; email us to share your insights and feedback.