Is the arm of the British tax man long enough to nab expats who have skipped the country owing tax?
A landmark court ruling means expats should not snub tax inquiries from HM Revenue and Customs without worrying about any comeback or penalties.
But even though, HMRC would have expats believe that they will chase down anyone owing tax who lives in another country, the reality is any response from a foreign government is likely to be patchy at best.
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The Revenue Rule
The main hurdle is the rule against foreign revenue enforcement – more commonly called the revenue rule.
The rule is a general legal principle that says the courts of one country will not enforce the tax laws of another country.
The courts at home and overseas, especially in the US, Australia, Canada, Ireland, and New Zealand have applied the rule regularly.
That does not mean HMRC does not have the power to demand money and financial information from expats.
Schedule 36 investigations
In February 2019, HMRC won a long-running case about if HMRC has such powers against Tony Jimenez, the former owner of Charlton Athletic Football Club.
Jiminez left the UK in 2002 to live in Cyprus and Dubai.
In May 2016, HMRC sent him a notice under paragraph 1, Schedule 36 of the Finance Act 2008 listing information that tax inspectors wanted to scrutinise. The list included bank and credit card statements and a timeline of his visits to the UK since April 2013.
Jiminez appealed and won at the First-Tier Tax Tribunal, which concluded HMRC had overstepped their powers and could not ask for the information because Jiminez was not a UK resident.
HMRC took the case to the Court of Appeal. There, the judges agreed that trying to work out how the law applied across international borders was difficult.
But they ruled HMRC sending a notice demanding information backed with the threat of financial penalties for non-compliance did not breach the revenue rule.
The court stopped short of discussing how the financial penalties might be enforced.
What to do if you receive a Schedule 36 demand
So, what does an expat do if HMRC sends a Schedule 36 notice?
The notice is a legal request and not complying could lead to financial penalties.
Taxpayers can appeal the notice within 30 days of the date of issue on grounds including:
- The request is too wide-ranging, and the documents are hard to gather
- The taxpayer does not have the documents and cannot obtain them
- The demand is out of time – if the documents are more than six years old, a senior officer must countersign the request
- HMRC has not asked for specific, identifiable information
- The taxpayer does not have time to respond within the limits set by HMRC
If someone receives a Schedule 36 notice, their first stop should be a professional tax consultant.
Even HMRC admits collecting financial unpaid tax and enforcing financial penalties on expats is harder than imposing a Schedule 36 inquiry.
HMRC confirms expat and non-resident debts are written-off even though some overseas tax authorities work together.
HMRC and MARD
MARD is Mutual Assistance in the Recovery of Debt, an international network of tax authorities committed to help each other recover unpaid tax.
HMRC has a specialist debt recovery department called the RIS Exchange of Information Team, which acts as a hub for international tax co-operation.
Information about which countries belong to the network and how the RIS team works is sketchy.
MARD has somewhat overtaken the revenue rule in Europe by setting up a framework that allows HMRC to collect tax debts in the European Union under the Mutual Assistance Recovery Directive 2008/55/EC.
The agreement also allows foreign tax authorities to serve documents for HMRC.
Outside Europe, HMRC’s ability to chase debts from expats is more limited.
At this time, the system is working under the transition rules attached to the Brexit Withdrawal Agreement, but how the directive may work when Britain leaves the EU on December 31, 2020, is not known.
What Does HMRC Know About Expat Finances?
Britain also relays information about the financial accounts controlled by foreign residents – including expats – to overseas tax authorities.
- FATCA – the Financial Account Tax Compliance Act – swaps data between the US Internal Revenue Service and HMRC relating to American accounts and taxpayers
- The Common Reporting Standard (CRS) allows more than 100 countries to trade financial data
The likelihood is wherever an expat lives, their offshore accounts and investments are known to their local tax authority.
Tax authorities crosscheck FATCA and CRS data with tax filings. Any discrepancies between what a taxpayer reports and data received by the tax authority can trigger an investigation.
Can HMRC Chase Expats Abroad FAQ
While HMRC has the power and often the inclination to chase expats for unpaid tax or financial information, the tax man’s ability to enforce the matter is doubtful.
Technology and new agreements to swap financial information are aiding the cause, but the focus is still on multinational corporations allegedly evading tax worth billions.
Nevertheless, a demand for tax or financial information should not go unheeded by an expat.
A sophisticated data analysis tool called Connect looks for links between taxpayers and their wealth. Connect picks up data from foreign tax authorities as well as financial institutions in the UK and tries to make sense of the puzzle. HMRC says the data is the basis for 50,000 new tax inquiries each year.
A Schedule 36 notice is an official demand from HMRC for information about your financial affairs and should not be ignored because financial penalties for not complying can be imposed.
Expats are most at risk in the European Union, where a directive urges every member state to help tax authorities in other member states to serve documents and enforce tax liabilities.
The revenue rule is a legal agreement between countries not to enforce tax liabilities in their jurisdiction on behalf of another country. Although the rule has been invoked many times, the US FATCA regulations and the Common Reporting Standard are a back-door for tax authorities to swap data without breaking the agreement.
The Jiminez v HMRC case sought to show if HMRC had the power to demand financial documents from an expat who had left the UK to live in a foreign country. Tony Jiminez claimed Schedule 36 was not enforceable outside the UK and won his case at the First-Tier Tax Tribunal. HMRC appealed and won, which means expats are subject to Schedule 36 inquiries.