The UK tax system can be complex and there are many pitfalls, particularly for individuals who don’t take regular advice or perhaps prepare their own return. Often individuals make mistakes without intending or realising they have done so.
This can often result in large unexpected tax liabilities. The below tells the real life story of such a situation, anonymised to protect those concerned. We were engaged to assist in relation to the personal tax returns for two individuals Mr and Mrs Y.
Mr Y had unfortunately recently passed away and since he had always dealt with the tax returns for both individuals, Mrs Y needed help to handle their tax affairs.
Mr and Mrs Y had started a successful company many years ago, had retired a few years ago leaving their daughter to continue with the business.
They retained their shares in the company and benefited from the substantial dividends that resulted. Following their retirement, Mr and Mrs Y purchased a property in Italy, where they spent more than half of each tax year. They still made regular visits to the UK and had a home in the UK for such visits.
Mr Y prepared the UK tax return for himself and his wife, declaring their non-residence status from the date they left the UK, whilst engaging an adviser in Italy to prepare Italian tax returns. All tax was paid in Italy.
Unfortunately, Mr Y never took sufficient advice on his UK tax affairs. He did carry out his own research, but international residency issues are often very complex.
Following Wisteria’s involvement, it became clear that a number of issues had come up, including:
In order to determine whether an individual is tax resident, the number of days spent in the UK needs to be considered. In addition, in some cases, the number of “ties” also needs to be considered, such as work, family and property. Spending less than half the year in the UK is often not sufficient to conclude an individual is non-resident, especially for individuals leaving the UK.
There are rules that allow individuals to ‘split the year’ when leaving the UK to become non-resident. However the circumstances and rules are relatively specific.
For one year, a “nil” return had been submitted without providing clear evidence of the amount of time spent in the UK.
Mr Y had not kept accurate records of the number of days and visits to the UK, so following his death Mrs Y struggled to remember the position going back a number of years.
Mr Y had come back to the UK for medical treatment. He had researched a tax exemption which meant that if he had to remain in the UK for medical treatment, this may not affect his residency position. However the details of the law mean that this exemption was not available in the case where an individual intentionally travels to the UK for medical treatment.
The rules for determining UK tax residency changed on 6th April 2013 and this was not considered by Mr Y.
As a result, it was determined that for all tax years, Mr and Mrs Y had in fact not qualified as non-residents. Tax had incorrectly been paid in Italy on all of the UK source income and insufficient tax had been paid in the UK.
Wisteria’s tax team provided support to rectify the issue, advising on the correct treatment, using the information at hand to rebuild a picture of the tax years in question and allowing them to produce correct tax returns.
Careful liaison with HMRC based on past experience has already resulted in the majority of the tax years being resolved with no penalty imposed by HMRC. Unfortunately, dealing with the Italian tax authorities and securing a repayment for taxes paid is a somewhat longer road.
Wisteria’s tax team provide support and advice to individuals in many complex situations. Having many years’ experience dealing with tax enquiries, Wisteria can guide you through the process, helping you to deal with any issues and in the case tax is due, ensuring things are regularised whilst having an eye on minimising penalties as far as possible. For a confidential discussion please contact Nick Tagg on 020 8429 9245.