The taxman is looking much more at overseas accounts. Are you CRS-compliant?
Our taxman is speaking to his foreign counterparts more but even with him alone, here in Britain, UK-registered limited companies must realise that their activities abroad are no longer opaque to HMRC, writes Kevin Austin, managing director of Access Financial.
According to a recent Freedom of Information request by Price Bailey, HMRC made 620 requests for information about UK taxpayers in 2022 -- that represents the largest number of requests in FIVE years. Although the FoI release appears to have stopped there, you can be sure that foreign tax authorities made similar requests to HMRC about their taxpayers, tax residents, and those otherwise working -- potentially as contractors -- in their countries.
‘Global financial transparency’ -- HMRC’s link-up with 110 taxmen
And it’s not just these deep-dives by officials that contracting overseas now comes with, in terms of tax risks. Back in 2014, the OECD agreed on a Common Reporting Standard (CRS), which 110 states have adopted since.
The upshot? There is an underway exchange of information between tax authorities, with the effect that former ‘safe’ havens like Bermuda, the British Virgin Islands, the Cayman Islands, and Switzerland, are now bound to share information with the tax authorities of those many signed-up states.
What is the Common Reporting Standard (CRS)?
The CRS is an international agreement that requires financial institutions to automatically exchange information about their account holders with the tax authorities of their home countries. This information includes the account holder's name, address, tax identification number, account balance, and interest and dividend income.
The point of the CRS is to combat tax evasion and promote transparency. It allows tax authorities to identify and track taxpayers trying to hide their assets and income in other countries.
What the CRS means for limited company contractors
For limited company contractors in the UK and elsewhere, the CRS means such PSCs need to be aware of the reporting requirements and comply. Crucially, this includes ensuring the financial institutions which you interact with, have your correct tax residency information.
If a limited company contractor is a tax resident in a country that is not the UK, they may need to report their UK income to their tax authority. The specific requirements will vary depending on the country of residence.
Compliance with the CRS as a UK-registered PSC looks like this…
Here are some specific things that limited company contractors can do to comply with the CRS:
- Review their financial account statements to ensure their correct tax residency information is on file.
- Update their tax residency information with their financial institutions if necessary.
- If they are tax-resident in a country that is not the UK, they should consult with their tax advisor to determine if they need to report their UK income to their tax authority.
The CRS is a complex topic, but limited company contractors must know the requirements and take steps to comply.
Further CRS compliance tips for limited company directors
Here are some additional things that limited company contractors should keep in mind:
- The CRS applies to various financial accounts, including bank, investment, and insurance accounts.
- The CRS requires financial institutions to report information about account holders who are tax residents of other countries, even if those countries are not members of the CRS.
- The CRS does not apply to all taxpayers. For example, taxpayers below a certain income threshold are generally exempt from reporting.
In short, if you are contracting overseas or working abroad using your limited company (i.e. your personal service company), without taking the necessary steps to record your presence in the work country, your company will fail to comply with the CRS.
And then there’s the CFA…
Oh, and if you operate through one, it is also a failure of your recruitment agency to meet the requirements of the Criminal Finances Act 2017 (CFA). Little wonder, then, agencies were only just warned to check their supply chain in wake of new avoidance schemes being uncovered by HMRC.
Remember, the CFA obligates all contractual parties not to aid or abet tax evasion in the UK or abroad.
In addition, as its name implies, non-compliance with the CFA a criminal offence which can result in unlimited fines and even imprisonment.
Lastly, you’ve been warned
The bottom line? If you use your PSC to work abroad and you are thinking of operating foreign bank accounts, or holding some of your wealth in assets that you choose not to disclose to HMRC -- or the tax authorities where you are working, your very real risks are getting bigger and bigger from the tax world becoming smaller and smaller.