5 reasons not to overlook the Common Reporting Standard

It’s easy to glaze over when the word global crops up if you don’t have an international client base.  However the various information exchange schemes designed to tackle global tax avoidance need to be considered even if your clients are UK based.

Of the various agreements, it is the Common Reporting Standard (CRS) that covers the most countries with the agreement currently involving around 100 countries exchanging financial information to combat tax evasion. Some firms must officially notify their clients about CRS by the end of August 2017 or face penalties. Not just an issue for banks and other financial institutions, here are five reasons why you shouldn’t overlook CRS.

  1. It’s part of UK law

Regulations to comply with the requirements of CRS are part of UK law and took effect from 1 January 2016.  All relevant entities – partnerships, companies, trusts and charities – need to determine what their status is under CRS. Individuals need to make sure that their tax affairs are in order.

Entities will be either Financial Institutions (FIs) or Non-Financial Entities (NFEs). There are various definitions of an FI, but the most relevant is where more than 50% of the entity’s income comes from investments and it is managed by another FI which has discretionary authority over those investments.

A trading entity with little or no investment activity will be an NFE. A trust with an investment portfolio income will be an FI if it has a corporate trustee or has signed a discretionary fund management agreement with its advisers.

All entities need to know their status so that they can inform the banks and financial institutions with which they deal. This enables those institutions to comply with CRS. Many advisers will have been asked by clients to help with status requests over the last 18 months and so need to understand the rules.

  1. Affected clients will have compliance obligations

FIs need to know their status as they will have further due diligence and potential reporting obligations which NFEs do not have.

Firstly, they need to identify who has a financial account. This language is straightforward in the context of a bank, where you can point to a customer account, but has a wider meaning for other FIs. For trusts, a financial account means someone with an equity interest. This includes the settlor, trustees and beneficiaries. For a company, a financial account includes shareholders with an interest in company profits or assets.

A UK-resident FI must then determine if any of its financial account holders are tax resident outside the UK in one of the countries signed up to CRS.

Clients affected might include a trust set up with a managed portfolio for inheritance tax planning purposes. The trustees must carry out due diligence to confirm the tax residency of the settlor, trustees, beneficiaries and anyone else with an equity interest. If any of those individuals are resident overseas then a report may be required. In our increasingly mobile world there is a greater probability of someone connected with the trust moving overseas for some period of their lives.

Charities which meet the FI definition will also need to consider the tax residency of individuals or entities that benefit from their funds. This is potentially onerous and they may want specialist advice. HMRC has produced guidance for affected charities, which can be found here.

  1. CRS reporting is required annually

Reports run to 31 December each year. Reports for 2016 were due by 31 May 2017 and a £300 penalty applies to late reports. Each year, more countries will need to be included in reports.

Fortunately, nil reports are not required. But, FIs still need to hold suitable evidence to show they have considered their position.

  1. You may be required to tell clients about CRS

For individual clients, regulations were introduced in September 2016 which require certain tax and accountancy firms to notify relevant clients about the reporting requirements. The notifications are in a specified format and advise clients that HMRC will be receiving financial information via CRS.  The notices recommend that clients check their UK tax affairs are correct.

Firms that fail to comply with this exercise could be fined £3,000. Correspondence such as this is sensitive and time consuming. The deadline for issuing any notifications is 31 August 2017, so prompt attention is required. Fortunately, it is a one-off exercise.

  1. Clients have limited time to resolve irregularities  

Any client with undisclosed offshore income or gains must resolve this with HMRC quickly. One option is the Worldwide Disclosure Facility which closes on 30 September 2018. Disclosures made after that date, or which are prompted by HMRC enquiry following receipt of information via CRS, will be subject to increasingly severe penalties.

Helen Thornley is a technical officer with the Association of Taxation Technicians.

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