HMRC Nudge Letter - Foreign Income - How To Respond?

ivormonee

masonic said:

There is no tax liability, just a missed obligation to declare the volume of disposals.

If using USD to buy USD stock is not a disposal (of USD currency as an asset) then the total disposals figure is <4x. This would imply that there was no obligation to report the volume to HMRC. If the broker marked these as disposals incorrectly, when they may not have been disposals at all, then the OP would have had no reporting obligations. The only disposals would be Sept 2019 and March 2020 which, combined, amount to £39.5k, ie. <4x. So, in his reponse to HMRC, he would only need to tick the box that says everything is in order and there is/ was nothing further that is required to be reported.

D924

The broker holds all currency in money market funds. As the GBP is held in a GBP money market fund it seems probable that any of the following actions will count as a disposal, since in all cases a money market fund (GBP, USD, or any other currency) is disposed of:

1. Withdrawing GBP from the account

2. Buying shares, in any currency

3. Any currency conversion

It's pretty clear now that I've completely screwed up by not reporting these money market fund disposals in the 2019/2020 tax year regardless that no tax was due. 2018/2019 and 2017/18 are also most likely over the 4x limit for the same reasons.

ivormonee

Is the broker Degiro, the one you mentioned in an earlier post?

If the cash is held in money market funds, then, by definition the balance in each "fund" would be steadily increasing over time, albeit by miniscule amouts. Is this what's been happening?

D924

ivormonee said:

Is the broker Degiro, the one you mentioned in an earlier post?

If the cash is held in money market funds, then, by definition the balance in each "fund" would be steadily increasing over time, albeit by miniscule amouts. Is this what's been happening?

Yes, and yes, it's not the miniscule increases/decreases that are a problem but the liquidation of the funds into "actual" currency when "actual" currency is needed for any kind of transaction.

ivormonee

D924 said:

it's not the miniscule increases/decreases that are a problem

Sure, that wasn't what I meant but perhaps didn't explain it very well. I'll come onto this below.

I've looked at Degiro's platform and it seems to suggest that you can hold multiple currencies in your account with them. There doesn't seem to be a mention of having to keep these in any money market funds (such as, presumably, a money market OEIC, unit trust or ETF). I would assume you chose to invest cash (in USD and GBP) into such funds rather than keeping it in the form of just cash in your account. Please correct me if I am wrong in this assumption.

Further, as it appears (although you haven't provided the full details) that you have made an overall loss in the tax year in question (2019/20) then you would not have had to report the volume of trades (ie. the total amount of disposals) anyway. So you would not have had an obligation or requirement to contact HMRC. The only reason to report the value of total disposals would be if you had made an overall gain in the year. I think you lost around £2k on your stock investments, your gains from the money market funds would be miniscule (which is what I was thinking in my last post), so the net outcome for the year would be a loss. Hence nothing to report.

Based on what we know so far it seems you're in the clear. Worst case scenario, if you did have an obligation to report, it would just be the late filing fee, which is relatively small, and a penalty based on unreported gains, of which there are none. So actually, it does appear that there isn't anything to cause you any concern (unless of course there is other information we don't know about or if anyone else has a different angle on all of this which might be more accurate than what I've offered).

masonic

ivormonee said:

Further, as it appears (although you haven't provided the full details) that you have made an overall loss in the tax year in question (2019/20) then you would not have had to report the volume of trades (ie. the total amount of disposals) anyway. So you would not have had an obligation or requirement to contact HMRC. The only reason to report the value of total disposals would be if you had made an overall gain in the year. I think you lost around £2k on your stock investments, your gains from the money market funds would be miniscule (which is what I was thinking in my last post), so the net outcome for the year would be a loss. Hence nothing to report.

Are you sure that total disposals >4xCGT allowance only needed to be declared when there was an associated capital gain? From the information I've seen the obligation was there regardless of the gain.

D924

ivormonee said:

I've looked at Degiro's platform and it seems to suggest that you can hold multiple currencies in your account with them. There doesn't seem to be a mention of having to keep these in any money market funds (such as, presumably, a money market OEIC, unit trust or ETF). I would assume you chose to invest cash (in USD and GBP) into such funds rather than keeping it in the form of just cash in your account. Please correct me if I am wrong in this assumption.

Degiro's explanation for this is that they do not have a banking license and therefore cannot hold customers money directly, so all customers money is invested automatically, by default, into the money market funds appropriate for the currency.

ivormonee said:

Further, as it appears (although you haven't provided the full details) that you have made an overall loss in the tax year in question (2019/20) then you would not have had to report the volume of trades (ie. the total amount of disposals) anyway. So you would not have had an obligation or requirement to contact HMRC. The only reason to report the value of total disposals would be if you had made an overall gain in the year. I think you lost around £2k on your stock investments, your gains from the money market funds would be miniscule (which is what I was thinking in my last post), so the net outcome for the year would be a loss. Hence nothing to report.

Losses can only be offset against gains if they are reported to HMRC either through self assessment or by writing, in the year they occur - only then do they become "allowable losses". Since I did not report the losses, they are not allowable losses and in the eyes of HMRC I have made a small profit for the year due to the currency movement. Technically.

spider42

masonic said:
Are you sure that total disposals >4xCGT allowance only needed to be declared when there was an associated capital gain? From the information I've seen the obligation was there regardless of the gain.

The 4xAE limit is only relevant to those who have received a notice requiring completion of a Self Assessment tax return. The only mention of the 4xAE limit in the tax legislation is in Section 8C of the Taxes Management Act 1970 (see https://www.legislation.gov.uk/ukpga/1970/9/section/8C), which states:

(1) This section applies if—

(a) the amount of chargeable gains accruing to a person in a tax year does not exceed the annual exempt amount for the year applicable to the person under section 1K of the 1992 Act,
(b) the total amount or value of the consideration for all chargeable disposals of assets made by the person in the year does not exceed four times that annual exempt amount,
(c) the person is not a remittance-basis individual for the year, and
(d) a notice under section 8 or 8A is given to the person requiring information for the purpose of establishing the amount in which the person is chargeable to capital gains tax for the year.
(2) If the person makes a statement confirming the matters set out in subsection (1)(a) to (c), the statement constitutes sufficient compliance with that requirement.

So if you meet all of the conditions (a) to (c) and (d) also applies, then subsection (2) relieves you from having to include a full breakdown of all of the gains on the tax return. (A notice under Section 8 is a notice to submit a Self Assessment tax return and Section 8A is the equivalent requirement for a trust tax return).

So this measure is actually a relaxation measure, and is certainly not any sort of requirement to report disposals to HMRC just because the proceeds exceed 4xAE. So if (d) doesn't apply, then (a) to (c) are irrelevant, since all of (a) to (d) need to apply for the section to be relevant.

The requirements to notify chargeability to HMRC are contained in Section 7. This is (IMHO) a poorly worded bit of legislation in so far as CGT is concerned, and probably has some consequences that weren't intended. As a result, HMRC do not enforce all of it strictly.

To paraphrase, Section 7(1) requires you to notify HMRC if you are chargeable to either Income Tax or CGT, and you have not received a notice to complete a tax return. 

Section 7(3) then goes on to say that the taxpayer is not required to notify if all the person's income falls within subsections (4) to (7) AND the person has no chargeable gains AND the person is not liable to additional tax (this covers things like high income child benefit charge and pension annual allowance charges).

Subsections (4) to (7) cover situations where the income has already been taxed at source (PAYE, or investment income provided you aren't a higher or additional rate rate taxpayer, or dividend income within the dividend allowance etc).

So if all your income has already been taxed at source, then there is normally no obligation to report. However, per subsection (3) all your income must have been taxed at source AND you must have no chargeable gains.

So strictly speaking, if you are liable for Income Tax (even if it has already been paid at source) and also have any capital gains (no matter how small), then you are required to notify HMRC. However, in practice, they only expect you to notify them if you owe some tax (see https://www.gov.uk/hmrc-internal-manuals/enquiry-manual/em4551).

The penalty for not notifying them is linked to the amount of tax you owe. So even if you should theoretically have notified them of all capital gains, if you do not owe any tax, then there can be no penalty for non-notification.

masonic

spider42 said:

masonic said:
Are you sure that total disposals >4xCGT allowance only needed to be declared when there was an associated capital gain? From the information I've seen the obligation was there regardless of the gain.

The 4xAE limit is only relevant to those who have received a notice requiring completion of a Self Assessment tax return. The only mention of the 4xAE limit in the tax legislation is in Section 8C of the Taxes Management Act 1970 (see https://www.legislation.gov.uk/ukpga/1970/9/section/8C), which states:

Thanks, I understand that's the situation after 5th April 2020, but the legislation in force and treatment in practice prior to this was different, as I understand it. I posted a link earlier in the thread outlining what changed and when. The OP's trading relates to the 2019/20 tax year, so I'd assume it would be governed by the regime of that time. If it had happened in 2020/21 or 2021/22, then it would be a non-issue as you say.

spider42

masonic said:

Thanks, I understand that's the situation after 5th April 2020, but the legislation in force prior to this was different, as I understand it. I posted a link earlier in the thread outlining what changed and when. The OP's trading relates to the 2019/20 tax year, so I'd assume it would be governed by the legislation in place at that time. If it had happened in 2020/21 or 2021/22, then it would be a non-issue as you say.

No, the legislation didn't change in this regard after 5 April 2020, it has been essentially the same for many, many years.

The changes here were actually after 5 April 2019 not 5 April 2020. All that happened from 19/20 was that the legislation was moved from the Taxation of Chargeable Gains Act 1992 to the Taxes Management Act 1970. See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg20220. The main changes to reporting requirements from 6 April 2020 were to deal with the introduction of the new rules re residential property CGT, which have no bearing here.

Here is Section 7 TCGA1992 as it stood at 6 April 2018: https://www.legislation.gov.uk/ukpga/1970/9/section/7/2018-04-06. It is pretty much identical, at least in regards to the bits we are talking about, to the current legislation. Here is the legislation as it stood at 31 July 1998: https://www.legislation.gov.uk/ukpga/1970/9/section/7/1998-07-31. Again, pretty much identical.

There isn't, and never has been, any requirement to notify HMRC merely because your disposal proceeds exceed 4xAE (unless you have received a notice to complete a self assessment return).