Client Notification Regulations

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Client notification regulations: Introduction

This chapter considers the rules which were introduced on 30th September 2016.


The International Tax Compliance (Client Notification) Regulations 2016 inserted the rules into the International Tax Compliance Regulations 2015 ("ITCR").

The background can be found in a HMRC Policy paper[1] but this is now of historical interest only.

Definitions

The definitions draw on the rich vocabulary of defined terms in CRS/DAC.


"Offshore advice or services"

Para 12A(1) ITCR provides:

"offshore advice or services" has the meaning given in paragraph (2);

So we turn to para (2) which provides:

(2) "Offshore advice or services" means advice or services relating to—
(a) a financial account in a participating jurisdiction[2] or the United States of America;
(b) a source of relevant foreign income, as defined by section 830 of ITTOIA 2005, arising from a participating jurisdiction or the United States of America;
(c) a source of employment income, as defined by section 7(2) of ITEPA 2003, arising from a participating jurisdiction or the United States of America;
(d) an asset, as defined by section 21 of TCGA 1992, which is held or situated in a participating jurisdiction or the United States of America.

"Overseas person"

Para 12A(1) ITCR provides:

"overseas person" means a person who would be a specified financial institution or specified relevant person if they carried on business in the United Kingdom;

This implies that an institution or relevant person (adviser) is only caught by the regulations if they carry on business in the UK, though this is not stated expressly.

"Relevant period"

Para 12A(1) ITCR provides:

"relevant period" means the period of one year ending with 30th September 2016;

"Specified financial institution"

Para 12A(1) ITCR provides:

"specified financial institution" has the meaning given in paragraph (3);

So we turn to para (3) which provides:

(3) "Specified financial institution" means a financial institution under the DAC or the CRS, unless that financial institution is—
(a) a non-reporting financial institution under the DAC or the CRS, or
(b) a financial institution that, if it was an NFE, would be an active NFE under
[i] Section VIII(D)(8)(h) of Annex I to the DAC or
[ii] Section VIII(D)(9)(h) of the CRS
(organisations with charitable or other non-profit purposes).

"Specified relevant person"

We start with the definition of "relevant person". Section 222(4) FA 2013 provides:

(4) In this section—
"relevant person" means—
(a) a tax adviser (as defined by section 272(5) of FA 2014),[3] and
(b) any other person who in the course of business—
(i) gives advice to another person about that person's financial or legal affairs, or
(ii) provides other financial or legal services to another person


ITCR footnote (d) states that this definition applies for ITCR. One would have expected that to be said in the body of the ITCR, but it has to be implied.

Relevant person is an opaque term, and I refer to relevant person (adviser).


Para 12A(1) ITCR provides:

"specified relevant person" has the meaning given in paragraph (4).


So we turn to para (4) which provides:

(4) "Specified relevant person" means a relevant person who, in the relevant period, has—

(a) provided offshore advice or services in the course of business, or
(b) referred an individual to a connected person[4] outside the United Kingdom for the provision of advice or services relating to the individual's personal tax affairs.


Para 12A(5) ITCR provides two exceptions

(5) For the purpose of determining whether a person is a specified relevant person—
(a) offshore advice or services must be disregarded if—
(i) they were provided to an individual by the relevant person only in connection with the preparation and delivery on behalf of that individual of returns and accounts, statements and documents required under section 8 of TMA 1970,
(ii) they were provided to an employee or officer[5] of the relevant person, or
(iii) they were provided to an employee or officer of a connected person;
(b) a referral must be disregarded if—
(i) the individual was an employee or officer of the relevant person, or
(ii) the individual was an employee or officer of a connected person.


Para 12A(6) ITCR deals with the case where a person is both a specified relevant person and a specified financial institution. The SFI rules take priority:

(6) Where a specified financial institution is also a specified relevant person, regulations 12B to 12F apply as if it were only a specified financial institution.

Specified client: specified relevant person

Para 12C ITCR provides:

(1) A specified relevant person must identify all of that person's specified clients.
(2) In order to identify its specified clients, a specified relevant person must use either—
(a) the specific approach set out in paragraphs (3) and (4), or
(b) the general approach set out in paragraphs (5) and (6).

"Specified client"

Para 12A(1) ITCR provides:

"specified client" means an individual who is identified—
(i) as a specified client of a specified financial institution under regulation 12B, or
(ii) as a specified client of a specified relevant person under regulation 12C;

Specific approach

Para 12C ITCR provides:

(3) An individual is a specified client of a specified relevant person under the specific approach if—
(a) at any time in the relevant period, the specified relevant person has—
(i) provided the individual with offshore advice or services relating to the individual's personal tax affairs, or
(ii) referred the individual to a connected person[6] outside the United Kingdom for the provision of such advice or services, and
(b) paragraph (4) does not apply to the individual.


Para 12C(4) ITCR provides three exceptions. In short they are:

(1) Non residents

(2) Ex-clients

(3) Compliance-guaranteed clients

In more detail:

(4) This paragraph applies to an individual if—
(a) the specified relevant person reasonably believes that the individual
[i] was not resident in the United Kingdom for income tax purposes for the tax year 2015-16 and
[ii] will not be so resident for the tax year 2016-17,
(b) on 30th September 2016 the specified relevant person has no reasonable expectation of providing further advice or services to the individual, or
(c) the specified relevant person has prepared and delivered, or reasonably expects to prepare and deliver, a return under section 8 of TMA 1970 on behalf of the individual disclosing the effect of the offshore advice or services referred to in paragraph (3)(a).

General approach

Para 12C ITCR provides:

(5) An individual is a specified client of a specified relevant person under the general approach if—
(a) the specified relevant person has provided the individual with any advice or services relating to the individual's personal tax affairs in the relevant period, and
(b) paragraph (6) does not apply to the individual.


Para 12C(6)(7) ITCR provides three exceptions:

(6) This paragraph applies to an individual if—
(a) the specified relevant person reasonably believes that the individual was not resident in the United Kingdom for income tax purposes for the tax year 2015-16 and will not be so resident for the tax year 2016-17, or
(b) on 30th September 2016 the specified relevant person has no reasonable expectation of providing further advice or services to the individual.
(7) A specified relevant person may choose to exclude an individual from being a specified client under the general approach if the specified relevant person has prepared and delivered, or reasonably expects to prepare and deliver, a return under section 8 of TMA 1970 on behalf of the individual in respect of the tax year to which the advice or services relate.

The two approaches

Each approach only applies to individuals. Advice to trusts/companies is not caught.

The differences between the general and the specific approach are:

(1) The specific approach applies if there is offshore advice or services.

(2) The exemption in para (7) (preparation of tax return) is expressed to be optional, for the general approach (but that makes no real difference).


"Client"

Section 222 FA 2013 purports to be a definition:

"client" includes—
(a) any client or customer, and
(b) any former client or customer;


But even if this applies in the ITCR (which might if necessary be implied), it does not add anything.

Specified client: specified financial institution

Para 12B ITCR provides:

(1) A specified financial institution must identify all of its specified clients.
(2) In order to identify its specified clients, a specified financial institution must use either—
(a) the services approach set out in paragraphs (3) and (4), or
(b) the high value approach set out in paragraph (5).
(3) An individual is a specified client of a specified financial institution under the services approach if—
(a) the specified financial institution reasonably believes that the individual was resident in the United Kingdom for income tax purposes for the tax year 2015–16 or will be so resident for the tax year 2016–17,
(b) the individual is an account holder with the specified financial institution on 30th September 2016, and
(c) in any part of the relevant period, the specified financial institution has—
(i) maintained a financial account in a participating jurisdiction or the United States of America in relation to which the individual is an account holder, or
(ii) referred the individual to another specified financial institution (wherever located) for the other specified financial institution to provide a financial account for the individual in a participating jurisdiction or the United States of America.
(4) In paragraph (3)(c)(i), "financial account" does not include a financial account which the specified financial institution is prevented by legal or regulatory obligations in force on 30th September 2016 from providing as a new account.
(5) An individual is a specified client of a specified financial institution under the high value approach if—
(a) the specified financial institution reasonably believes that the individual was resident in the United Kingdom for income tax purposes for the tax year 2015–16 or will be so resident for the tax year 2016–17, and
(b) the individual is an account holder of a high value account maintained by the specified financial institution on 30th September 2016.

Tax notification

Para 12D ITCR provides:

(1) A specified financial institution or specified relevant person must make client exchange of tax information notifications to all of its specified clients on or before 31st August 2017.


I abbreviate the term "client exchange of tax information notification" to "tax notification".


Para 12D(2) ITCR provides two exceptions:

Connected person has notified

Para 12D(2) ITCR provides:

(2) Paragraph (1) does not apply in relation to a specified client if—
(a) a specified financial institution or specified relevant person[7] is aware that a connected person, who is not an overseas person, has already made a client exchange of tax information notification to that specified client

No contact information

Para 12D(2) ITCR provides:

(2) Paragraph (1) does not apply in relation to a specified client if ...
(b) despite maintaining proper records, a specified financial institution or specified relevant person holds insufficient information on 30th September 2016 to be able to contact the specified client.


The example of given in IEIM600540 is "a barrister engaged by a solicitor who never received the client contact details".

While the position is not as clear as might me, it is considered that:

(1) "Contact details" means an address to which a letter can be sent.
(2) There is no obligation to notify if the relevant person does not have that address.
(3) It is irrelevant that the barrister may be able to obtain the address otherwise than from their records, eg that the solicitors may forward correspondence or the address may be available from public sources.


The Manual supports that view, which is also consistent with the policy behind the regulations.

There is no obligation to find those details. If they are held at 30 September 2016, they must be retained.

Notification from overseas person

Para 12E ITCR provides:

(1) A specified financial institution or specified relevant person having control[8] of an overseas person must take all such steps as are reasonably open to it to ensure that the overseas person makes a client exchange of tax information notification on or before 31st August 2017 to all individuals to whom paragraph (2) applies.
(2) This paragraph applies to an individual who—
(a) the overseas person reasonably believes to have been resident in the United Kingdom for income tax purposes at any time in the relevant period, and
(b) either—
(i) was an account holder in relation to a financial account maintained by the overseas person in a participating jurisdiction[9] or the United States of America in the relevant period, or
(ii) was provided with offshore advice or services relating to the individual's personal tax affairs by the overseas person in the relevant period.

Making tax information notifications

Para 12F ITCR provides:

12F.—(1) A client exchange of tax information notification is made to a specified client or an individual to whom regulation 12E(2) applies if—
(a) it is in the form set out in Part 1 of Schedule 3,
(b) it is accompanied by a covering message which includes—
(i) the name of the specified client, and
(ii) the statement set out in the relevant paragraph of Part 2 of that Schedule, and
(c) it is given in accordance with paragraph (3) or (4).


"Factsheet"

HMRC describe the required information as a factsheet.


Part 1 Sch 3 ITCR provides:

If you have money or other assets abroad, you could owe tax in the UK
Things are changing – the tax world is becoming more transparent
• HM Revenue and Customs (HMRC) is getting tougher on those not paying the right amount of tax across their offshore tax affairs.
• From 2016, HMRC is getting new financial information about our customers from more than 100 jurisdictions – including details about overseas accounts, structures, trusts, and investments.
• HMRC is already using information, supplied by overseas banks, insurers, and wealth and assets managers, to identify the minority who are not paying what they owe.
Are you confident that your UK tax affairs are up-to-date?
You need to regularly check that you have declared all of your UK tax liabilities and, if needed, bring your tax affairs up-to-date. This is your responsibility.
Personal circumstances change. For example, you may have recently inherited assets overseas. Tax laws change too. All of this means that previous advice can be out-of-date, with costly consequences.
• If you are confident that your tax affairs are up-to-date and complete, then you don't need to do anything further.
• If you are unsure, we recommend that you speak to a tax adviser to find out if you need to take action now.
• If you find that you need to bring your tax affairs up-to-date, it can be easier than you think. You can choose to do this now using HMRC's straightforward online disclosure facility at https://www.gov.uk/guidance/worldwidedisclosure-facility-make-a-disclosure
If you have not paid the right amount of tax and choose not to take action now, you need to know that:
• HMRC will find out about your money and assets overseas through new information from more than 100 jurisdictions.
• Penalties are increasing for those who are not paying the right amount of tax on their offshore assets, and you can even face criminal prosecution. Under new rules, you could face further penalties based on the value of the asset as well as the tax due, resulting in potentially life-changing consequences.
If you choose to delay in coming forward, it's very likely to cost you more and there is also more chance that HMRC will come for you.
Come to us before we come for you
Remember
• If you are confident that your tax affairs are up-to-date, and you have declared all of your UK tax liabilities, then you don't need to do anything further.
We are already using early financial information to identify the minority who are not paying what they owe.
If you need to bring your tax affairs up-to-date, it is your responsibility to do so – act now at https://www.gov.uk/guidance/worldwide-disclosure-facility-make-a-disclosure


This is the language of intimidation ("HMRC will come for you" with "potentially life-changing consequences"). We have moved some way from the views expressed in the HMRC Charter (HMRC will "Respect you and treat you as honest...

We'll treat you .. with courtesy and respect... We'll presume that you're telling us the truth, unless we have good reason to think otherwise.")[10]

Covering message: specified financial institution

Para 12F ITCR provides:

(2) The relevant paragraph in Part 2 of Schedule 3 is—
(a) paragraph 2 in the case of a client exchange of tax information notification made by a specified financial institution or an overseas person who would be a specified financial institution if they carried on business in the United Kingdom ...


Part 1 Sch 3 ITCR provides:

The statement in this paragraph is—
"Financial institutions in more than 100 jurisdictions around the world are being legally required to find out the tax residence of their account holders and report details of their accounts, structures, trusts, and investments to be exchanged with the appropriate tax authorities. As a UK tax resident, any overseas accounts you have will be sent to HM Revenue & Customs (HMRC). This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.
If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.".


Covering message: specified relevant person

Para 12F ITCR provides:

(2) The relevant paragraph in Part 2 of Schedule 3 is ...
(b) paragraph 3 in the case of a client exchange of tax information notification made by a specified relevant person or an overseas person who would be a specified relevant person if they carried on business in the United Kingdom.


Part 1 Sch 3 ITCR provides:

3. The statement in this paragraph is—
"From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people's overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency. This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.
If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.".


Covering message to covering message

A financial institution /relevant person (adviser) may add to the required covering message, and their clients are entitled to some thoughts as to how they should react. Readers may think it appropriate to add a covering message to the covering message, noting in particular that the HMRC material is required to be put, but disassociating the sender from the tone of the HMRC material. Providing the HMRC material in a small font may convey the desired message.


Method of sending information

Para 12F ITCR provides:

(3) A client exchange of tax information notification is given in accordance with this paragraph if it is sent or supplied in a paper copy.
(4) A client exchange of tax information notification is given in accordance with this paragraph if it is given by email by a specified relevant person who—
(a) wholly or mainly communicated with individuals by e-mail when providing advice or services to them in the relevant period, and
(b) reasonably believes that the specified client will become aware of the content of a client exchange of tax information notification given to them by e-mail.


The email option is only available to a relevant person. A financial institution must use paper.

(5) If it appears appropriate to a specified financial institution, a specified relevant person or an overseas person, the client exchange of tax information notification and covering message set out in Schedule 3 may be translated into a language other than English or produced in a Braille or audible form.

Penalties

I do not discuss penalties in full. They are moderate in amount. Para 13 ICTR provides:

(1) A person is liable to a penalty of £3,000 if the person fails to comply with any obligation under regulations 12B to 12E.


This is a flat rate penalty, and not charged per client not notified. But serious failure to comply (eg deliberate breach, perhaps on the basis that compliance may cost more than the penalty) would in principle constitute professional misconduct or have other regulatory implications.

Footnotes

  1. HMRC, "Tackling offshore evasion: requiring financial intermediaries and tax advisers to notify their customers" (2015)
    https://www.gov.uk/government/publications/tackling-offshore-evasion-requiring-financial-intermediaries-and-tax-advisers-to-notify-their-customers/tackling-offshore-evasion-requiring-financial-intermediaries-and-tax-advisers-to-notify-their-customers
  2. The list of Participating Jurisdictions is in schedule 1 ITCR. For practical purposes the list covers more or less everywhere.
  3. This provides a commonsense definition: "tax adviser" means a person appointed to give advice about the tax affairs of another person (whether appointed directly by that person or by another tax adviser of that person).
  4. Para 12A(1) ITCR provides the standard definition: "connected person" means a person connected with the specified financial institution, specified relevant person or relevant person in question within the meaning of "connected" given in section 1122 of CTA 2010.
  5. Para 12A(1) ITCR provides: "officer", in relation to a specified relevant person or a connected person, includes—
    (i) where a person is a body corporate, a director, manager or secretary;
    (ii) where a person is a partnership, a partner.
  6. Para 12A(1) ITCR provides the standard definition: "connected person" means a person connected with the specified financial institution, specified relevant person or relevant person in question within the meaning of "connected" given in section 1122 of CTA 2010.
  7. Para 12A(1) ITCR provides the standard definition: "connected person" means a person connected with the specified financial institution, specified relevant person or relevant person in question within the meaning of "connected" given in section 1122 of CTA 2010.
  8. Section 222 FA 2013 provides: "control" is to be construed in accordance with section 1124 of CTA 2010; that is the ultra-wide sense of control. One would have expected this to be repeated in the regulations, but in the absence of any other indication, this definition must be taken to be implied.
  9. The list is in sch 1 International Tax Compliance Regulations 2015.
  10. https://www.gov.uk/government/publications/your-charter/your-charter