Declaring foreign income to HMRC - Tax Disclosure

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Zofia permanently lives and works in Scotland. Since 2015, she has been renting out an apartment in Poland and always pays the 8.5% Polish tax to the Polish tax office on time. However, during our conversation, it turned out that she had never paid tax on this income in the UK.

As a resident of Scotland, Zofia is a UK tax resident, and it is here that she should be paying taxes on income from other countries, something she was previously unaware of. You can find more on this topic in the article on double taxation.

We discussed the available options. The conclusion was clear – we would go through the Tax Disclosure process „Let PropertyCampaign”, to minimise the consequences. We proposed the lowest possible penalty of 10% to HMRC, given our client's lack of knowledge and her willingness to rectify the situation.

Penalties in the UK for not declaring foreign income

An article recently appeared in TaxAdviser magazine concerning the plugging of the budget deficit, which significantly widened due to the Covid-19 pandemic. HMRC is therefore focusing on recovering due taxes. Over 2,000 employees have been hired for this purpose alone!

In cases of alleged fraud, HMRC first considers initiating a criminal investigation.

If that is not applicable, a civil investigation begins.

Contractual Disclosure Facility, a contractual information disclosure mechanism

HMRC then contacts the taxpayer, giving them 60 days to respond and submit a voluntary Tax Disclosure through a process called Contractual Disclosure Facility (CDF). If the offer is accepted by an individual who deliberately concealed their taxes, HMRC continues with a civil investigation, foregoing a criminal one. The CDF process is usually long and arduous, and it also allows HMRC to recover due tax from the last 20 years!

Besides deliberate tax fraud, a large portion of tax offences stem from oversight and accidental errors. Such cases are also closely monitored by HMRC, so it's worth seeking professional help – especially if you receive a CDF offer from HMRC.

Tax authorities in different countries exchange information

HMRC cooperates with over a hundred foreign jurisdictions, which means it can check us at any time, in any location. On HMRC's blacklist our compatriots permanently residing in Poland also appear.

You can find more about international communication between authorities in our article.

Tax Disclosure Timelines

As with Tax Disclosure related to UK income, resolving such a case takes about six months.

From reporting your error to HMRC, we have 3 months to send the Tax Disclosure. HMRC then has another 3 months to respond.

Tax Disclosure: An Example with Rental Income from Poland

Zofia has employment income from the UK and rental income from an apartment in Poland.

To calculate the taxes owed to HMRC, we had to recalculate earnings from the UK and Poland and deduct taxes from both countries since 2015.

Assuming Zofia is employed in the UK, she pays her taxes via payslip. However, since she has income from abroad, she must also declare these to HMRC in her annual tax return.

In the period 2016/2017, when Zofia was renting out her apartment in Poland, she earned £39,930 via payslip and paid £5,790 in tax. She also had rental income from an apartment in Poland, which, after conversion to pounds, amounted to £4,064. The authorities were not informed about this income, so Zofia could have faced a high penalty.

Penalties in the UK for not filing a tax return on time

The penalty amount can range from 10% to 200% and depends on several factors:

- the country from which the undeclared income originates;

- the attitude of the person disclosing the tax, the timeframe, and the quality of information submitted to HMRC. If the taxpayer made a voluntary disclosure and provided clear information, they can expect a lower penalty. Delaying the filing can be very costly.

In this context, it's worth recalling failure to notify, which we have previously written about:

Individuals who did not file their tax return on time (i.e., before January 31st) will automatically receive the next day a £100 penalty. Then, 3 months after the due date of the late return, they will receive a £10 daily penalty - HMRC can impose a maximum of 90 days of such a penalty - which amounts to a total of £900. If the tax return is 6 months late, the offender will additionally receive £300. And another £300 after 12 months. Within one year, the minimum penalty a taxpayer will incur for a late tax return will amount to a staggering £1,600. The penalty amount can also be higher, because £300 after 6 and 12 months is the minimum HMRC can impose on us. The maximum is 5% of the unpaid tax.

So Zofia had a good reason to fight. And let's remember, we're only talking about one year here...

How to settle arrears with HMRC

First, we prepared a tax calculation to find out what tax amounts had not been paid. In Zofia's case, the amount due was £6,369, of which she had already paid via payslip £5,790. The remaining tax due was £579.21. Considering the double taxation agreement between the UK and Poland, if Zofia paid a flat-rate 8.5% tax in Poland, we can deduct this from the tax due in the UK. From the amount of £579.21 we deducted the tax paid in Poland - £349.30 (after conversion to pounds). If Zofia had declared her foreign income tax on time, she would have had only to pay £229.91 in tax. Is it worth risking penalties for such a small amount of tax?

We helped Zofia prepare her tax return and contacted HMRC on her behalf. Since we made a Tax Disclosure before HMRC identified Zofia's error, the authority agreed to our proposal for tax repayment with only a 10% penalty on the amount due, plus interest (the minimum penalty stipulated by the Finance Act). In Zofia's case, the total penalty therefore amounted to less than £300..

We discuss the topic of double taxation in more detail in an article written by us for the portal Emito.net.