In recent years a raft of legislation has been introduced to ensure the tax affairs of individual citizens are as transparent as possible, particularly those citizens not living in their country of residence who may (intentionally or unintentionally) be avoiding paying tax in their country of residence. Requirements to report on the tax affairs of individuals started with the USA’s Foreign Account Tax Compliance Act (FATCA), effective in the UK from 2014. FATCA was followed by the Common Reporting Standard (CRS), which was implemented into UK law by the International Tax Compliance Regulations 2015.
While FATCA focussed solely on US citizens who received income abroad, the CRS is much wider. The number of countries committed to adopting CRS by the end of 2018 has now reached 101. First reporting under CRS is due by 31 May 2017.
What are FATCA and CRS?
They are broadly referred to as Automatic Exchange of Information (AEOI) agreements between countries, meaning adopter countries will share tax information with each other. This isn’t just information on big businesses or wealthy individuals seeking to avoid paying tax: now CRS is with us, this is information on anyone who has connections to any other CRS adopter country and who receives income from a “financial institution” (as defined in the legislation).
How will it affect me?
Even if you have no connections to any other country, your bank or wealth managers will ask you to confirm this by sending forms to you to complete about yourself. Furthermore, if you hold any of the following positions, you will need to consider what steps you need to take:
- If you are a trustee of a family trust – the trust may be a “financial institution” meaning you need to gather information about the trust’s beneficiaries. If someone with connections to another country benefits, you may need to file a specific return with HMRC. In relation to FATCA, you may also need to register with the USA’s Inland Revenue Service.
- If you are a trustee of a charitable trust – you may have an exemption from FATCA, but there is no exemption under CRS. You therefore need to consider whether any reporting is required, depending on the source of the charity’s income; and also ensure you respond to any requests for information from banks etc. Find out more about charities and the CRS in our briefing.
- If you receive benefit from a trust - it is likely you will be asked by the trustees to give details of your tax residence. If you do have connections to other countries and have received benefits from the trust, it is likely the trustees may have to disclose your details to HMRC who will, in turn, pass those details to the authorities in countries with which you have connections.
- If you are director of a family investment company - you will need to consider whether the company is a financial institution. If the company is not trading, it is likely to be caught by the legislation and you will have to consider what reporting is required.
Both onshore and offshore trusts and companies can be caught by the legislation, so it is essential to consider each entity in turn and what reporting is required.
Simplifying the process and next steps
Due diligence and reporting under FATCA and CRS are mandatory and penalties are imposed for non-compliance. Help is available to make this process easier, either through the use of professional trustees or instructions to third party advisors.
Individuals who have been receiving undeclared income or gains also need to view this as an early warning – their banks and other institutions will be required to report on them.
Early advice is essential, both for those required to report and those who may be reported on.