23 March 2018
Absent another horse meat scandal, the clear focus on the evils of tax avoidance seems here to stay until the General Election; with the major political parties all seeing an easy way to win votes (while trying to defend individual action taken by their own members). So called ‘UK FATCA’ is now ‘live’ (until it self-destructs to make way for the Common Reporting Standard (‘CRS’ or ‘FATCA on steroids’)).
UK FATCA or ‘Mini-FATCA’ or ‘son of FATCA’ is the UK equivalent of the original FATCA and is designed to uncover the unreported funds of UK taxpayers held in accounts in the Crown Dependencies and British Overseas Territories.
UK resident non-domiciliaries (RNDs), who have interests in accounts or structures in these jurisdictions, are currently not required to provide any information about the funds to HMRC, provided that they claim the remittance basis of taxation in the UK and nothing is remitted to the UK from the account/structure.
The UK FATCA regime will require a minimum level of reporting in relation to ALL UK tax residents regardless as to whether the taxpayer is domiciled or not and regardless as whether the remittance basis applies. RNDs who use the remittance basis and who make an election may, in certain circumstances, avoid reporting on account balances but other information will still be disclosed automatically.
First election deadline April 2015
As is seen below, the first elections need to be made by RNDs by 30 April 2015 (depending upon the jurisdiction in which the account/structure is located). Failure to make the election will mean automatic disclosure of all information to the local regulator which in turn will be automatically provided to HMRC from September 2016.
Which accounts/structures are impacted by UK FATCA?
For now only structures in the UK Crown Dependencies (1) and certain British Overseas Territories (2) are impacted. These jurisdictions have entered into agreements with the UK setting out the basis upon which information will be provided. The agreements are not identical and the comments below are a guide only to the position. The application of the rules will be fact-specific, and advice should be sought as necessary.
Obligations are imposed upon trusts within these jurisdictions that are ‘investment entities’ or passive ‘non-financial foreign entities’ (NFFEs). Broadly, if a trust has a corporate trustee or a professionally managed investment portfolio, it will be an investment entity unless under 50% of its income derives from ‘financial assets’ (excluding real property). If the trust is not an investment entity then it will be a NFFE. It will be a passive NFFE if 50% or more of its income is ‘passive income’ (which includes rents). Non-passive NFFEs are ‘active NFFEs’ which do not need to report.
What information must be given?
Where a trust is an investment entity, then information about UK resident settlors, beneficiaries, protectors, trustees, and any other person exercising ultimate control over the trust, must be provided. The information comprises name, address, National Insurance number, the value of the trust (or a share of it depending on the circumstances) at the end of the year, the amount paid, if any, to the relevant UK person and the number of any relevant bank account.
Where a trust is not an investment entity but is a passive NFFE, a relevant financial institution (such as the trustee or investment manager) must provide information on UK resident ‘controlling persons’. These include the settlor, the trustees, beneficiaries with a certain level of entitlement to the trust assets, and in some cases the protector. The information is similar to that detailed above for investment entities.
Alternative reporting regime for remittance basis users
As indicated above, RNDs who use the remittance basis are able to elect into a special regime. This regime requires an opt-in by the financial institution controlling/managing the account/trust. In addition the RND must make an annual election to the financial institution and self-certify that he is not UK domiciled and is a remittance basis user. In this situation the financial information to be provided is limited, broadly, to information in respect of funds coming from the UK to the trust, passing to the UK from the trust, or coming from or passing to unidentifiable jurisdictions. But the name and address of the trust must also be provided, in most cases.
RNDs need to be aware that the CRS rules contain no alternative reporting regime and all information will be automatically exchanged regardless as to whether the RND is a remittance basis user or not.
When do the rules apply from?
Information must be given by early/mid 2016 in respect of 2014 and 2015, but the elections to be given for the RND regime to apply for 2014 must be made by mid-2015 (save in relation to accounts/structures in Bermuda where the election is to be made direct to HMRC by 30 September 2016). Disclosure regimes may apply to enable taxpayers to regularise their affairs prior to information exchange taking effect.
UK RND taxpayers were assured, when the remittance basis was remodelled in 2008, that superfluous reporting obligations would not be imposed upon them under the extended rules. The change in landscape since 2007/08 makes it difficult to raise cogent arguments against transparency – even on behalf of those personal security is potentially put at risk if the information finds its way into the public domain (as we’ve seen recently with certain bank information).
In our last newsletter Richard Cassell and Jaime McLemore saw so called ‘US FATCA’ as a scapegoat for all complexities of increased regulatory compliance. Americans are obligated to pay tax on a worldwide basis regardless of where they are living. In addition they are undoubtedly negatively impacted by a myriad of other issues e.g. PFIC rules and EU directives. The pain inflicted by the fifty shades of FATCA will be more far reaching than could ever have been envisaged at the outset of a regime which, for Americans has transpired to be a simple form filling exercise.
(1) Jersey, Guernsey and Isle of Man
(2) Gibraltar, the Cayman Islands, Bermuda, Montserrat, the Turks and Caicos Islands, the British Virgin Islands and Anguilla