Why is HMRC interested in overseas income?
- TBA
- Sep 11, 2024
- 3 min read
Updated: Feb 25
We recently handled a case which we’d like to share with you. It’s regarding the investigation of an individual’s overseas income.
So, what happened here? What counts as ‘overseas income’, and why is HMRC interested in it?
1. What happens when I have overseas income?
Our client obtained British citizenship in 2015, and has since been working and living in the UK on a long-term basis. In 2018, during a visit to China to see family, they also dealt with the sale of an empty property worth approximately £500k.
After selling the house, the funds were deposited into a bank account in China, and some of the money was gradually transferred to the client’s personal account in the UK. Last year, the client suddenly received a letter from the tax authorities regarding an audit of their personal income declaration – HMRC had detected the transfer from the client’s Chinese bank account to their British bank account.
Our client was quite surprised upon receiving the letter, particularly about why overseas income earned in China would be investigated by HMRC in the UK.
Understandably, they were also concerned, as nobody wants to deal with tax authorities, especially for something that could easily cause further trouble.
This was where we stepped in to help.
2. Why is HMRC interested in overseas income?
Let’s first talk about why HMRC might be notified of overseas income.
You may have heard of the Common Reporting Standard, also known as CRS.
In October 2014, 45 countries signed this agreement, agreeing to exchange asset and income information of tax residents with each other.
In April 2016, HMRC issued guidelines for information exchange. Also, in September 2016, HMRC also launched the ‘Worldwide Disclosure Facility’, encouraging taxpayers living in the UK who have overseas assets to voluntarily fulfil their tax obligations.
Now, over 100 countries and regions have agreed to share information, including the EU, UK, China, India, Hong Kong, Russia, and others. Consequently, HMRC started receiving updated information about overseas accounts, trusts, and investments from over 100 jurisdictions worldwide.
So, once the tax authorities receive information about overseas income and assets, they will examine whether this income has been properly taxed.
3. Reporting overseas income correctly
In the case of our client, since they have been living in the UK for many years and hold British citizenship, they are subject to the global taxation system, also known as the ‘arising basis of taxation’.
This taxation rule means that the client must pay taxes based on their overseas income within the tax year in which it was generated.
It doesn’t matter whether the overseas income is brought back to the UK; they must disclose their global income and capital gains to HMRC and follow the principle of global income taxation. There’s also a significant possibility of facing double taxation. however, tax residents in the UK are entitled to personal allowances and capital gains tax exemptions.
We recalculated the amount of tax owed for this client and also helped resolve the issue of double taxation.
We also helped to explain the reasons for the errors to HMRC, and successfully helped our client reduce the tax penalties owed.
For more information on how overseas income should be declared and taxed, arrange a consultation with one of our tax advisors. We’re here to provide professional guidance and support, no matter your tax situation.
