Open consultation

Simplifying the Taxation of Offshore Interest

Published 30 October 2024

Summary

Subject of this consultation

Individuals are taxed on investment income, including interest, arising in a tax year. Where the investment income is from a non-UK investment the individual will often receive details on a calendar year basis. HMRC also receives details on a calendar year basis under international exchange of information agreements. The mismatch between the UK tax year and the calendar year reporting causes issues for both HMRC and taxpayers.

The number of taxpayers affected by this is likely to increase with the reform to the treatment of non-domiciles (non-dom reform) in the UK tax system and removal of the remittance basis. These changes are likely to increase the number of taxpayers required to report non-UK investment income to HMRC via self-assessment.

Scope of this consultation

The government is seeking views on how the taxation of offshore investment income can be simplified to help reduce administrative burdens for taxpayers and improve the efficiency and focus of HMRC’s compliance work.

Who should read this

HMRC would like to hear from taxpayers, agents, representative bodies, professional bodies, businesses, education institutions and other interested parties.

Duration

The consultation will run for 12 weeks from 30 October 2024 to 22 January 2025.

Lead official

The lead official is Iain Mottram of HM Revenue and Customs (HMRC).

How to respond or enquire about this consultation

Please email responses to consult.nosafehavens@hmrc.gov.uk.

Additional ways to be involved

HMRC welcome meetings with interested parties to discuss the issues and proposals set out in this paper. Please contact consult.nosafehavens@hmrc.gov.uk to discuss.

After the consultation

All responses will be reviewed, and HMRC plan on publishing a response document. Subject to comments received HMRC may carry out formal consultation on measures that are identified and subsequently begin development of new legislation to implement proposals.

Getting to this stage

The government’s published Plan to Close the Tax Gap explains that HMRC will relentlessly pursue the money that is owed, with a plan to make sure people pay the right tax in the first place, and that directly tackles tax avoidance and evasion. This consultation will build on the previous Helping taxpayers get offshore tax right discussion document, published in 2021.The discussion document explored how HMRC can help taxpayers get their offshore tax right first time, including considerations on what may cause taxpayers to make common errors, and offered initial ideas on how HMRC might address those issues.

During discussions at workshops, as well as in many of the written responses, ideas were presented on what HMRC might do to support taxpayers with their offshore tax obligations. Following the publication of these responses, HMRC began development and assessment of the ideas, considering the government’s offshore non-compliance strategy.

Previous engagement

A stakeholder forum launched as a result of the previous discussion document has been consulted on the proposals.

1. Introduction

Offshore definitions

HMRC define ‘offshore income’ as income that comes from a jurisdiction outside the United Kingdom. It includes, but is not limited to:

• interest from overseas bank or building society accounts
• dividends and interest from overseas companies
• rent from overseas properties

‘Offshore tax’ is tax payable to the UK Exchequer from income, gains or transfers arising from activities or assets situated in, or moved to, a territory outside the UK.

‘Assisting offshore tax compliance’ means helping taxpayers who have activities or assets situated outside the UK get their tax right.

‘Arising’ includes amounts received and credited to an account. It has a wider meaning than this (see the SAIM2400 – Interest: taxation of interest: the tax charge in the HMRC internal manual) but in the vast majority of cases, the amount arising will be the amount credited to the account involved in the relevant period (see examples at SAIM2440 – Interest: taxation of interest: when interest arises in the HMRC internal manual).

‘Pre-population’ refers to the automatic input of existing data into returns, allowing customers to see, and correct, if necessary, the information that HMRC holds on their overseas liabilities.

1.1. This consultation on Simplifying the Taxation of Overseas Interest seeks views on options that will help to recover more tax revenues by reducing error and avoidance as well as improving the experience for taxpayers. It aims to help close the tax gap in line with the government’s ambition.

1.2. HMRC’s strategy is to promote tax compliance and prevent non-compliance, while responding strongly to deliberate non-compliance. The best way to tackle non-compliance is to prevent it happening in the first place, while cracking down on the minority who intentionally break the rules. Therefore, HMRC currently:

• promote good compliance by designing it into HMRC systems and processes, enabling customers to get their affairs right from the outset
• prevent non-compliance by using the data HMRC receive to spot mistakes before the return is final, preventing fraudulent claims, personalising online services and automating calculations
• respond to non-compliance by identifying and targeting the areas of greatest risk and using tough measures to tackle those who deliberately try to cheat the system

1.3. In recent years, consultations have been published to explore how HMRC can build on this work. This includes the Helping taxpayers get offshore tax right discussion document which highlighted using data to assist with compliance. The call for evidence on The tax administration framework: supporting a 21st century tax system sought views on how the tax administration framework could be updated and simplified to provide a better experience for individuals and organisations. These consultations have provided useful insight into how taxpayers interact with HMRC and will inform this exercise.

1.4. Feedback to this new consultation will inform future work on proposals to simplify the taxation of offshore interest. This consultation is an opportunity for early engagement in the development of these proposals including one option proposed by taxpayers in response to the Helping taxpayers get offshore tax right discussion document.

2. Background to the timing mismatch

2.1. The 2021 discussion document Helping taxpayers get offshore tax right predominantly focused on the assisting compliance strand of the strategy.

2.2. The discussion document explored how HMRC can help taxpayers get their offshore tax right first time, including considering what may cause taxpayers to make common errors, and offered initial ideas on how we might address those issues. HMRC committed to explore innovative measures to assist compliance and consider ways to make tax easier to pay. Where HMRC intervened, it would use an approach that is appropriate and proportionate to the tax at risk and the taxpayers’ behaviour.

2.3. A key approach for delivering the plan to close the tax gap is using data to assist with compliance. Data can be used to create prompts on Self-Assessment tax returns, which reduces opportunities to make mistakes, or data can be shared directly with taxpayers early in the self-assessment process to prevent non-compliance before it happens.

2.4. Currently, individuals are taxed on their investment income arising in a UK tax year (ending 5 April). However, for investment income from offshore sources, there is a timing mismatch between the UK tax year and the calendar year which is the period for which most taxpayers and HMRC get income details. This is because many countries use the calendar year as their tax year and information shared between tax authorities under international arrangements for automatic exchange of information (AEOI), such as the Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) is often (but not always) to a 31 December year end.

Challenges with the existing system

2.5. The government is aware that the mismatch currently creates burdens for taxpayers and prevents HMRC from using data in the most effective way. Taxpayers usually get offshore bank information based on a calendar year, which they then must apportion to UK tax years for their UK tax return. The tax packs or interest certificates containing this information are often received around January each year. This means for the latter part of the UK tax year (from 1 January to 5 April), the information taxpayers need to complete the UK tax return may only arrive days before or even after the return is due, meaning estimates are often needed.

2.6. The mismatch makes it difficult for HMRC to identify whether the taxpayer has accurately declared the income. Because the data is provided for a calendar year, HMRC does not usually know which tax year the income relates to as income for the period 1 January to 5 April would fall in a different tax year to income for the period from 6 April to 31 December. Therefore, taxpayers are more likely to incur costs dealing with HMRC queries which start because of the mismatch but ultimately result in no adjustments or amendments.

2.7. If HMRC could resolve the mismatch, it would open possibilities for future ‘upstream interactions’ (interactions that take place before any error has occurred, to help taxpayers get their tax right) such as the pre-population of returns and coding out liabilities.

2.8. Pre-population would allow customers to see, and correct if necessary, the information that HMRC holds on their overseas income. This would encourage disclosures and reduce errors in the Self-Assessment return. Under the current system pre-population is not possible as HMRC does not know which tax year the income relates to. In addition, CRS data for the calendar year 2023 (including the period between 1 January and 5 April 2023) for example, will arrive in HMRC by 30 September 2024, 8 months after the return is due.

2.9. Coding out refers to altering PAYE tax codes to collect small amounts of tax, with a taxpayer’s consent, reducing the need to submit a self-assessment return. Once again, this is not currently possible as HMRC would not know which tax year the income relates to, solving the mismatch in dates could make this feasible.

2.10. HMRC is interested in ideas which might help to reconcile international data with UK tax years and deliver a simplified process for taxpayers.

Focus on Bank Interest

2.11. While the same problems are true of all information provided via AEOI, offshore interest is one of the main areas that causes issues for taxpayers when filing tax returns and paying the correct amount of tax. This can be seen by the large number of disclosures of unpaid tax HMRC receives which are due to the incorrect treatment of offshore interest.

2.12. The disclosures received concerning offshore interest are often high in volume, but low in monetary value. If coding out liabilities becomes available in the future these smaller amounts could be taken into account within the taxpayer’s tax code, where the taxpayer is within the PAYE system. This would reduce the scope for errors and the need for disclosures. On the other hand, low volume, high value cases would most likely need more one to one compliance activity.

Question 1: Do you agree with the issues caused by the mismatch as set out above?

Question 2: Are there any other issues this mismatch causes?

Question 3: How would you mitigate these issues?

Question 4: Which changes could be prioritised to drive improvements in the taxpayer experience?

Question 5: Is it right to focus on offshore interest only at this stage or should all offshore investment income be considered at the same time?

3. Aligning the taxation of offshore interest with the calendar year

3.1. Responses to the discussion document ‘Helping taxpayers get offshore tax right’ included the suggestion to change the UK tax year to match the calendar year. This idea was explored in the 2021 Office of Tax Simplification report The UK Tax Year End Date: Exploring the potential for change. The report concluded ‘The costs of change are significant, both in terms of the financial cost and the opportunity cost.’ In response, the previous government stated that changing the tax year would not be taken forward.

3.2. However, when it comes to offshore interest it has been suggested that it may be helpful to change the rules so that individuals are taxable on the offshore interest arising in the year ended 31 December that ends in the tax year. So, for example, for the tax year ending 5 April 2023 the individual would be taxed on offshore interest arising in the year ending 31 December 2022.

Advantages of change

3.3. The advantage of making this change is that the issues mentioned in the ‘Challenges with the existing system’ section above will be reduced and there may be the opportunity to carry out further work to support taxpayers in the future:

• taxpayers will have the information they need from their financial institution in good time to make a return without estimates
• HMRC will be in a better position to check the tax return with the information supplied to HMRC via AEOI
• the taxpayer is therefore less likely to be contacted by HMRC in situations where the return is correct
• HMRC may be able to code out low value liabilities, removing the taxpayer from the self-assessment process for some people with simpler tax affairs
• HMRC may be able to prepopulate returns in the future with the aim of helping taxpayers and reducing errors in returns
• this issue is likely to affect more taxpayers in the future due to the removal of the remittance basis. It is estimated that the total number of non-UK domiciled individuals in the self-assessment system will increase to approximately 80,000. This is covered in more detail below

Issues to be considered as part of any change

3.4. The first issue is defining the scope. As discussed above HMRC’s preference would be to focus on offshore interest in the first instance and a clear definition of ‘offshore interest’ would be needed.

3.5. If the legislation changes to require taxpayers to return a year to 31 December figure of offshore interest in their self-assessment return, there will have to be a transitional year. One option would be to have a tax year of transition in which the interest to be taxed is that arising in the period from 6 April to 31 December in that tax year. Following the year of transition, the new basis would apply and tax the interest arising in the calendar year that ends in the tax year.

• Year 1: 6 April to 5 April
• Year 2 (transition year): 6 April to 31 December
• Year 3: 1 January to 31 December

3.6. Not every foreign jurisdiction has a 31 December tax year end. For example, South Africa (31 March) and New Zealand (28/29 February) have different year ends. The way any change affects taxpayers with accounts in such jurisdictions will have to be considered.

3.7. Another issue to consider is whether any change should be mandatory or optional. To be as simple as possible, a change would have to be mandatory. An optional change would add complexity and may give opportunities for taxpayers to move from one method to another to postpone tax or attempt to avoid it altogether.

3.8. The interaction with other tax rules, including anti-avoidance rules, would need to be considered along with any scope for taxpayers to avoid tax by taking advantage of the different rules for UK and offshore interest.

Interaction with other policy

3.9. The government is aware that interaction with other policies would need proper consideration.

3.10. An example of this is changes to self- assessment for trades and professions carried on by the self-employed and partnerships which brings the basis of taxation of profits into line with the tax year end from 2023 to 2024, replacing the old system where self-assessment was based on profits of the accounting period ending within the tax year. This is known as Basis Period Reform. The measure set out in this paper relates to investment income rather than the trades and professions income Basis Period Reform relates to, however care would be needed to make sure the differences are explained clearly.

3.11. Making Tax Digital (MTD). Depending on whether changes to the return are needed, there may be an impact on MTD, although the idea would be to change the calculation used to provide a figure in a box, rather than to make changes to the return itself. Guidance on how to fill in the Income Tax Self-Assessment foreign income pages would have to be updated.

Question 6: Do you think the idea of aligning taxation of offshore interest to a calendar year has merit?

Question 7: Do you agree the issues identified with this solution are the right ones?

Question 8: Are there other issues that have not been covered?

Question 9: How would you deal with the transitional year?

Question 10: Do you receive tax information from your Financial Institute on a calendar basis?

Question 11: How often is tax deducted at source on payments of offshore interest?

Question 12: Should the proposed solution be mandatory if it did go ahead?

Question 13: Do you think this measure could cause issues for financial Institutions, agents and taxpayers when considered alongside basis period reform?

4. Reporting requirements for individuals with offshore income

4.1. The government recognises that with the removal of remittance basis there is going to be an increased number of individuals with offshore income who will be required to report this income on a Self-Assessment return. This could result in increased administrative burdens and costs for both taxpayers and HMRC.

4.2. In addition to seeking views on complications caused by timing mismatches the government is also seeking views on how the broader reporting requirements for offshore income can be simplified to help reduce burdens.

Question 14: Do you have any ideas on how reporting requirements can be further simplified for individuals with offshore income?

Question 15: Are there any other challenges you have with reporting requirements for offshore income?

5. Assessment of impacts

Summary of impacts

Year	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
Exchequer impact (£m)	+/-	+/-	tbc	tbc	tbc	tbc

Exchequer Impact Assessment

This measure is a consultation only. Any future benefits would depend on finding a workable solution through this consultation.

Impacts	Comment
Economic impact	This measure is not expected to have significant economic impacts.
Impact on individuals, households and families	This consultation discusses the current issues caused by the mismatch in data received to the calendar year and our own UK tax year as well as reporting requirements for individuals with offshore income. It asks for solutions on how best to tackle current issues in these areas. The measure therefore has no direct impact on individuals at present. Any future impacts on individuals will be fully examined and detailed. The measure is not expected to impact on family formation, stability, or breakdown.
Equalities impacts	This measure has no impact on groups sharing protected characteristics. The government will, however, consider any issues raised as part of any future proposals resulting from this consultation.
Impact on businesses and Civil Society Organisations	This consultation discusses the current issues caused by the mismatch in data received to the calendar year and our own UK tax year as well as reporting requirements for individuals with offshore income. It does not propose specific changes at this time. This measure therefore has no direct impact on businesses or civil society organisations at present. Any future impacts on businesses or civil society organisations will be fully examined and detailed.
Impact on HMRC or other public sector delivery organisations	There are no delivery impacts for HMRC, or other public sector delivery organisations linked with this consultation. Any future impacts on HMRC will be fully examined and detailed.
Other impacts	Not applicable

6. Summary of consultation questions

Question 1: Do you agree with the issues caused by the mismatch as set out above?

Question 2: Are there any other issues this mismatch causes?

Question 3: How would you mitigate these issues?

Question 4: Which changes could be prioritised to drive improvements in the taxpayer experience?

Question 5: Is it right to focus on offshore interest only at this stage or should all offshore investment income be considered at the same time?

Question 6: Do you think the idea of aligning taxation of offshore interest to a calendar year has merit?

Question 7: Do you agree the issues identified with this solution are the right ones?

Question 8: Are there other issues that have not been covered?

Question 9: How would you deal with the transitional year?

Question 10: Do you receive tax information from your Financial Institute on a calendar basis?

Question 11: How often is tax deducted at source on payments of offshore interest?

Question 12: Should the proposed solution be mandatory if it did go ahead?

Question 13: Do you think this measure could cause issues for financial Institutions, agents and taxpayers when considered alongside basis period reform?

Question 14: Do you have any ideas on how reporting requirements can be further simplified for individuals with offshore income?

Question 15: Are there any other challenges you have with reporting requirements for offshore income?

7. The consultation process

This consultation is being conducted in line with the Tax Consultation Framework. There are 5 stages to tax policy development:

Stage 1: Setting out objectives and identifying options.

Stage 2: Determining the best option and developing a framework for implementation including detailed policy design.

Stage 3: Drafting legislation to effect the proposed change.

Stage 4: Implementing and monitoring the change.

Stage 5: Reviewing and evaluating the change.

This consultation is taking place during stage 1 of the process. The purpose of the consultation is to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

How to respond

A summary of the questions in this consultation is included at chapter 6.

Responses should be sent by 22 January 2025, by email to consult.nosafehavens@hmrc.gov.uk.

Please do not send responses to the Call for Evidence Coordinator.

Paper copies of this document or copies in Welsh and alternative formats (large print, audio and Braille) may be obtained free of charge from the above address.

When responding please say if you are a business, individual or representative body. In the case of representative bodies please provide information on the number and nature of people you represent.

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HMRC is committed to protecting the privacy and security of your personal information. This privacy notice describes how we collect and use personal information about you in accordance with data protection law, including the UK GDPR and the Data Protection Act (DPA) 2018.

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the DPA 2018, UK GDPR and the Environmental Information Regulations 2004.

If you want the information that you provide to be treated as confidential, please be aware that, under the Freedom of Information Act 2000, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Revenue and Customs.

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HMRC
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Consultation principles

This call for evidence is being run in accordance with the government’s Consultation Principles.

The Consultation Principles are available on the Cabinet Office website.

If you have any comments or complaints about the consultation process, please contact the Consultation Coordinator.

Please do not send responses to the consultation to this link.