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Overseas UN income prompted declaration

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I've recently had an enquiry from a prospective client regarding undeclared overseas income.  The income is from a pension from a United Nations Agency which began to be paid quite some years ago  when the prospective client separated from the Agency on medical grounds.

Although I was happy to deal with the admin side in making the declaration etc,  my knowledge is limited on overseas income so have suggested she gets in touch with a firm that specialises in these matters.

However, having researched it myself, my curiosity was piqued and I would like some understanding of certain matters.  

Ms.  A receives a an overseas pension, which I understand is taxable in the UK, but she was totally oblivious that it was taxable until recently, when she received a prompt letter from HMRC.   She is  mortified as the salary prior to the pension wasn't taxable.

The pension goes back over ten  years and I understand she needs to report this via a digital declaration using the Worldwide Disclosure Facility.

This is where it gets interesting because my initial understanding was that penalties of 20-30% could be applied if over 3 years for a prompted declaration, but under the WDF penalties are between 100% - 200% of the tax outstanding, if not declared by 30th September 2018, called Failure to Correct.   Ouch!!

It seems to me (and it may well be my understanding is wrong)  that the WDF facility is primarily for people who have deliberately  kept income/assets hidden and this was a prompting exercise to give people during 2016-18 ish chance to come clean and report without fear of excessive penalties, but that there was a cut off point after which the FTC penalties would apply.

 But what about people like Ms. A, who was blissfully unaware of any tax liability, on her pension, due to her previous  salary from the same source  being tax free?

Are they severely penalised in the same way, which is now causing her sleepless nights wondering how the heck she's going to pay 100-200% penalties on top of a high tax bill.  It seems strange that the income during working years  was tax free, yet the pension isn't (again assuming I've got that bit right as well). 

It appears that there was a case in Australia where the taxpayer argued U.N. pensions were not taxable at all.  He succeeded at first instance but was unsuccessful when the Revenue appealed.  But has the issue  ever been argued in the UK ?

I also looked at the reasonable excuse clause, and understand the FTC penalties can't be applied if there is a reasonable excuse.

My research tells me it is unclear whether   HMRC would consider  ignorance / naivety  as a Reasonable Excuse,  but personally I think in Ms. A's case and others like her, it should be acceptable.  No Income Tax returns have ever been submitted with inaccuracies ( because none were received to fill in, and other, UK income, is taxed at source.)

 Thoughts?

Replies (7)

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By David Ex
15th Jun 2022 17:14

legerman wrote:

My research tells me it is unclear whether   HMRC would consider  ignorance / naivety  as a Reasonable Excuse,  but personally I think in Ms. A's case and others like her, it should be acceptable.  No Income Tax returns have ever been submitted with inaccuracies ( because none were received to fill in, and other, UK income, is taxed at source.)

 Thoughts?

In my view, not bothering to do the most basic check and assuming only small people pay tax isn’t a reasonable excuse but it wouldn’t surprise me if HMRC accepted that it was. How long have we had SELF-assessment for?

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Replying to David Ex:
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By legerman
16th Jun 2022 13:30

David Ex wrote:

legerman wrote:

My research tells me it is unclear whether   HMRC would consider  ignorance / naivety  as a Reasonable Excuse,  but personally I think in Ms. A's case and others like her, it should be acceptable.  No Income Tax returns have ever been submitted with inaccuracies ( because none were received to fill in, and other, UK income, is taxed at source.)

 Thoughts?

In my view, not bothering to do the most basic check and assuming only small people pay tax isn’t a reasonable excuse but it wouldn’t surprise me if HMRC accepted that it was. How long have we had SELF-assessment for?

But Ms. A wasn't in self assessment, and was receiving a tax free salary. The salary changed to a pension that she didn't realise was taxable. From what i could gather, she didn't have any objections to paying the back tax, but a tax penalty equivalent to the same tax or even double would cripple her financially.

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By Paul Crowley
15th Jun 2022 17:25

https://www.thomaswestcott.co.uk/news/639-taxation-of-united-nations-pen...
Googled in a minute or so
The client did not once think to Google 'UN pension Taxable' (or ask someone to do it)

I personally would pass this on to those who know how to argue and know what excuses work, having argued with HMRC on that matter regularly.

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By Leywood
15th Jun 2022 20:10

legerman wrote:

consider  ignorance / naivety  as a Reasonable Excuse,  but personally I think in Ms. A's case and others like her, it should be acceptable. 

you are joking right?!!

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Replying to Leywood:
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By Paul Crowley
15th Jun 2022 20:37

+1
I am amazed how many people let out a property, received rent in cash only, and did not use an agent only to discover that rent is taxable. Who would have thought it?
Income is in fact liable to income tax.

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Replying to Paul Crowley:
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By legerman
16th Jun 2022 13:48

Paul Crowley wrote:

+1
I am amazed how many people let out a property, received rent in cash only, and did not use an agent only to discover that rent is taxable. Who would have thought it?

Slightly different I would have thought, and of course the penalty is nowhere as severe.

Paul Crowley wrote:
Income is in fact liable to income tax.

Of course it is, but if the source was tax free to begin with, and if you continue to receive a payment from the same source, then to me its understandable to believe it's still tax free. Ms. A was wrong to believe that, obviously, and has a fair amount of tax to repay, but my post was regarding the penalties imposed, and whether it was fair to impose such a draconian rate for what was, imo, a genuine mistake.

It would have been a different matter, of course, if the person was aware of the duty to declare during 2016-18, and then missed the deadline.

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