The tax year commences on 6 April and ends on the following 5 April in the United Kingdom.
The United Kingdom has a self-assessment (SA) tax system. As part of this system, the majority of UK taxpayers settle their tax liability entirely through tax withheld at source on earnings and savings and do not need to make any further declarations. However, around a third of taxpayers need to complete a tax return, which will be issued by HMRC each year. Married taxpayers and those in civil partnerships are independently taxed and responsible for their own affairs, and each files their own return.
Tax returns must be filed, and all outstanding tax paid, by 31 January following the end of the tax year. This filing deadline is brought forward to 31 October after the end of the tax year for individuals who are filing on paper (although the tax is still due by 31 January). The UK SA system is moving towards being fully online, and paper returns are now only accepted in limited circumstances.
HMRC have recently issued a number of consultation documents to consider ideas such as more timely tax payments and the use of third-party data.
The deadline for either a UK resident disposing of UK property not covered by CGT main residence relief or a non-UK resident notifying HMRC of a disposal of UK property or an interest in a property-rich company is 60 days after the completion of the sale. Penalties will be charged if this deadline is missed, even if no tax was due.
Payment of tax
Income tax is normally withheld at source from salaries under the PAYE system. PAYE for expatriates can be a complex area. In principle, the worldwide earnings for a UK resident employee should be subjected to PAYE, but there are a number of special schemes and reliefs that can be used to help deal with the issues this may cause. These schemes can allow PAYE to be operated on an estimated or, in some cases, an annual basis, limit PAYE to expected UK earnings, and, in some situations, to remove the obligation to operate PAYE at all. Further advice should be sought as penalties apply for the incorrect operation of PAYE.
Savings income from most other UK sources is received either gross or after basic rate tax has been deducted. Under the self-assessment regime, any tax not collected through withholding is paid by payments on account (see below) and the final balancing payment due on 31 January after the end of the tax year. CGT is due by 31 January following the tax year in which the gain arose, unless in respect of residential property where the deadline is 60 days from the completion date.
Individuals who do not pay at least 80% of their income tax liability at source are required to make tax payments on account for the year, based on the level of income in the previous tax year. Payments on account are due in two instalments, on 31 January during the tax year and on 31 July following the tax year. Any outstanding tax due is payable by the filing deadline of 31 January after the end of the tax year.
Employers are required to notify HMRC of total pay, benefits, and expenses paid or reimbursed, and the employee then makes a claim for allowable business expenses.
Automatic penalties are charged where returns are filed late and also where the tax is paid late, and interest is chargeable where tax is paid late. There is a penalty regime specifically intended to reduce the UK tax lost through offshore transactions and structures. The highest penalty is up to 200% of the undeclared tax, and, in certain circumstances, persons guilty of an offence can be subject to a fine or to imprisonment.
Tax audit process
HMRC is able to enquire into an individual's tax return and anything (including any claim or election) contained in it. HMRC must give notice that shows an intention to enquire into a tax return within 12 months of the return being filed (as long as the return has not been filed late). If the return has been delivered to HMRC after the filing date, an enquiry must be made by the ‘quarter day’ next following the first anniversary of the delivery date. 'Quarter days' are 31 January, 30 April, 31 July, and 31 October.
Where HMRC considers tax to have been lost, it will seek to recover that tax, and, in such cases, the normal time limits for making discovery assessments are extended where tax has been lost as a result of a taxpayer's (or their agent’s) deliberate or careless conduct (see Assessing time limits below for more information on normal time limits).
Assessing time limits
The normal time limit for making assessments is four years following the end of the tax year. This is termed a 'discovery' assessment. The time limit for making an assessment on a person in a case involving a loss of income tax brought about 'carelessly' by that person is six years following the end of the tax year. This is the position unless it is in respect of an 'offshore matter' or an 'offshore transfer', under which HMRC will have at least 12 years to enquire. The time limit for making an assessment on a person in a case involving a loss of income tax brought about deliberately by that person or where they failed to notify chargeability is 20 years following the end of the tax year.
Topics of focus by the UK tax authorities
HMRC look very carefully at a claim to be non-UK domiciled, especially if the individual has been resident in the United Kingdom for a number of years. Individuals must be able to demonstrate to HMRC, with strong evidence, the reasonably foreseeable circumstances in which they will leave the United Kingdom to be able to show they are non-UK domiciled.
The UK tax authorities have a 'spotlight' system that highlights the characteristics of tax planning that they ask taxpayers to be wary of and warn that they are likely to look into if implemented. Some of the characteristics include:
- artificial or contrived arrangements are involved
- it seems very complex given what you want to do
- there are guaranteed returns with apparently no risk
- there are secrecy or confidentiality agreements
- taxation of income is delayed or tax deductions accelerated
- offshore companies or trusts are involved for no sound commercial reason
- a tax haven or banking secrecy country is involved without any sound commercial reason
- tax exempt entities, such as pension funds, are involved inappropriately
- it involves money going in a circle back to where it started, and
- the scheme promoter lends the funding needed.
In addition, the tax authorities have identified specific tax planning schemes that are likely to be challenged.
The United Kingdom has a large number of targeted anti-avoidance rules, such as those dealing with 'disguised remuneration', 'personal service companies', and 'enveloped dwellings'. It has also introduced a general anti-abuse rule (GAAR).
General anti-abuse rule (GAAR)
The government published legislation in respect to the GAAR in the 2013 Finance Act.
It applies to income tax, corporation tax, CGT, petroleum revenue tax, IHT, SDLT, and ATED, but not VAT, although VAT has its own anti-abuse provisions. The GAAR applies to arrangements entered into on or after 17 July 2013. The GAAR was also extended to cover NIC as of 13 March 2014, Diverted Profits Tax (DPT) from 1 April 2015, and the apprenticeship levy with effect from 15 September 2016.
The government has stressed that the GAAR is only intended to apply to abusive tax avoidance arrangements. The indicators of abuse do not specifically include arrangements that contain non-arm's-length terms (as this was considered impractical for many bona fide transactions that were not centred around avoiding tax). However, the legislation is broadly drafted and includes the subjective ‘double reasonableness test’, under which arrangements are regarded as abusive if carrying them out 'cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions'. HMRC is advised by an independent 'GAAR advisory panel' in respect of what is 'reasonable'.
Another addition is an indicator that arrangements might not be regarded as abusive if they accord with established practice at the time they were entered into; HMRC is aware of that practice and has not challenged it. It isn't immediately clear how taxpayers will demonstrate this in practice, but it is expected that the application of these principles will continue to develop.
Disclosure of Tax Avoidance Schemes (DOTAS)
The DOTAS regime is designed to enable HMRC to proactively tackle attempts to avoid tax and introduced the concept of 'notifiable arrangements'. The term 'arrangements' is widely defined and includes any scheme, transaction, or series of transactions. Promoters and users of schemes that, in summary, contain defined 'hallmarks' of tax avoidance and provide a tax advantage are required to notify HMRC of the arrangement when it is first marketed.
Accelerated tax payment
There is legislation where HMRC can, if they so wish, extend the accelerated payment of tax to users of arrangements disclosed under the DOTAS rules, and to taxpayers involved in planning held to contravene the GAAR, so that the tax amount in dispute is held by HMRC until the dispute is resolved. Legislation can also potentially be applied that requires taxpayers who have used arrangements that are defeated in another party's litigation to pay the disputed amount to HMRC on demand.
Personal tax offshore anti-avoidance legislation
The United Kingdom has anti-avoidance rules that are broadly designed to attribute the income of a 'person' abroad (e.g. a non-UK company or trust) to either an individual who transferred the funds to the person abroad and has the power to enjoy the income of the overseas person (e.g. they hold shares) or an individual who received a benefit from the person abroad. These rules are referred to as the 'Transfer of Assets Abroad' provisions, and they only apply to UK resident individuals.
The requirement to correct (RTC) and failure to correct (FTC)
After 30 September 2018, taxpayers (including non-UK resident trustees and non-resident landlords) that ‘failed to correct’ are subject to a range of significant penalties in respect of any errors that come to light in respect of income tax, CGT, and IHT (but excluding corporation tax).
Where a taxpayer has failed to correct an error or notify a liability within the statutory window, the new regime post September 2018 will impose the following penalties:
- A penalty of between 100% and 200% of the tax. The penalty will apply regardless of the reason for the error for years up to and including 2015/16.
- Potential asset-based penalty of up to 10% of the value of the relevant asset where the tax at stake is over GBP 25,000 in any tax year.
- Potential 'naming and shaming' where over GBP 25,000 of tax per investigation is involved.
- A potential additional penalty of 50% of the amount of the standard penalty if HMRC could show that assets or funds had been moved to attempt to avoid the RTC.
The RTC and FTC apply to any tax error arising from offshore financial interests or in respect of offshore transfers; it is not limited to those who have deliberately or carelessly failed to pay the right amount of tax. The regime applies to anyone who has relevant UK tax liabilities, which would include non-UK resident trustees and non-resident landlords.
The RTC and FTC regimes only apply to inaccuracies or failures that arose prior to 30 September 2018; however, for subsequent tax periods, HMRC have alternative extended assessing time limit and penalty powers.