HMRC’s five traps to avoid with CRS/FATCA reporting

Emily Deane TEPHMRC has identified the most common errors made by financial institutions (FIs) when filing their Automatic Exchange of Information (AEOI) returns, which include Common Reporting Standard (CRS) and Foreign Account Tax Compliance Act (FATCA) reportable information.

1. The FI misunderstands what constitutes an undocumented account

FIs are wrongly reporting accounts as ‘undocumented’ on the basis that a self-certification requested from an account holder has not been completed.

Accounts should only be reported as undocumented where they meet specific criteria, which include that the account has either a hold-mail instruction or a ‘care-of’ address. The full criteria can be found in CRS, Section III: Due Diligence for Preexisting Individual Accounts, subparagraphs B(5) and C(5). HMRC guidance is available at IEIM402850 and IEIM403040.

Any accounts that are correctly reported as ‘undocumented’ must show Great Britain as the residential country code.

2. The FI misunderstands what information is required to be reported 

Some FIs only complete the mandatory fields in the schema or portal, even though they hold additional information which is legally required to be reported. In addition, some FIs fill in mandatory fields with ‘n/a’ or similar.

CRS and the UK-US FATCA Intergovernmental Agreement (IGA) state which information is required to be reported. Where a schema or portal field is not mandatory, there can still be a legal requirement to provide this information. For example, where a Taxpayer Identification Number (TIN) or date of birth is held or obtained by the FI, it is required to be reported even though it is not down as a mandatory field within the portal or schema. Where an address is held, the full address must be provided, even though the only mandatory field is for ‘city’ in the schema or portal.

3. The FI reports accounts held by persons who are not reportable persons

FIs are reporting publicly traded corporations, as well as related entities, governmental entities, international organisations, central banks, and financial institutions. In most cases, such accounts are not reportable. HMRC guidance at IEIM402010 outlines which accounts are not reportable.

4. The FI misreports joint accounts and/or partnership account

Some FIs confuse the treatment of joint individual accounts and partnership accounts.

Joint individual accounts must be reported as individual accounts with the entire balance or value of the account, as well as the entire amounts paid or credited, attributed to each holder of the account.

A partnership is defined as an entity for reporting purposes, and accounts held by partnerships should be reported as entity accounts, with the respective due diligence and reporting requirements applied.

5. The FI reports entities as controlling persons 

Some FIs report entities as the controlling persons of entity accounts, resulting in trusts and companies being reported as controlling persons. However, entities cannot be controlling persons; under CRS and FATCA, ‘controlling persons’ means‘natural persons who exercise control over an entity. In the case of a trust, such term means the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other natural person exercising ultimate effective control over the trust, and in the case of a legal arrangement other than a trust, such term means persons in equivalent or similar positions. The term ‘Controlling Persons’ shall be interpreted in a manner consistent with the Recommendations of the Financial Action Task Force.’

Full HMRC guidance on AEOI reporting can be found at: International Exchange of Information Manual.

Please email Emily.Deane@step.org with any further queries.

Emily Deane TEP is STEP Technical Counsel

GDPR Roundtable

Emily Deane TEPSTEP’s GDPR working group recently hosted a roundtable event that enabled representatives from professional bodies, including the Law Society, ICAEW and CIOT, to update each other on their progress in relation to GDPR implementation. It is widely felt by the private client industry that when the legislation was drafted it was not designed with trust and estate practitioners in mind and there are some significant grey areas in practice.

Key issues that continue to be an industry concern discussed were:

  • How the GDPR applies to lay trustees and personal representatives.
  • How non-legal advisors process special category data.
  • How the GDPR impacts upon international transfers.
  • Queries in relation to joint data controllers and confidentiality.
  • GDPR and its impact upon engagement letters.
  • GDPR and its impact upon attorneys and deputies.
  • Erasure of files and filing system requirements.

STEP’s working group is in the process of preparing a joint paper that it will submit to the Information Commissioner’s Office (ICO) identifying the practical issues that have arisen for trust and estate practitioners. We hope that the ICO will be able to address some of the gaps in the guidance and legislation.

STEP has scheduled another roundtable in February 2019 to further discuss these issues and aims, to provide STEP members with a best practice position and guidance in due course. In the meantime, STEP has published an update to its briefing note on the GDPR, listed below.

Please note that STEP will be publishing a webinar in January 2019, recorded by the chair of STEP’s GDPR working group, Edward Hayes TEP of Burges Salmon, that will offer some interim guidance on the application of the GDPR to trust and estate practitioners.

Emily Deane TEP is STEP Technical Counsel

Cross-border protection of vulnerable adults in Europe under discussion

Emily Deane TEPSTEP took part in the EC-HCCH Joint Conference on the Cross-Border Protection of Vulnerable Adults last week in Brussels, to discuss the ratification of the Hague Convention of 13 January 2000 on the International Protection of Adults (the Hague Convention) at EU and global level and the possible future EU legislative initiatives in this field.

The event, organised jointly by the European Commission and The Hague Conference on Private International Law, brought together legal practitioners, judges, academics and government officials who deal practically with the challenges associated with the cross-border protection of vulnerable adults in Europe and beyond.

STEP’s EU cross-border expert Richard Frimston TEP joined panellists to discuss the need for an international and regional legal framework for the cross-border protection of vulnerable adults from the perspective of organisations providing services and/or protection. Richard was accompanied by representatives from Dementia Alliance and Alzheimer’s Disease International, AGE Platform Europe, CEOs in global banking and the President of the International Union of Notaries (UINL).

Richard is the coordinator of the Protection of Adults in International Situations Project Team and spoke on behalf of STEP as a member of the Board and Co-Chair of the Public Policy Committee. He delivered some pertinent points on the need for a protective framework for our increasingly aged society and those living with disabilities, and their supportive loved ones, including family members and guardians, in accordance with their human rights.

He expressed concern with powers of representation which are generally not measures of protection, unless confirmed with sufficient legal process, and the manner of exercise of such powers of representation being governed by the law of the state in which they are exercised. He argued for more balance between the protection and autonomy of individuals, and called for improved methods of powers of representation to be accepted cross-border.

The conference emphasised that this work is invaluable since the Hague Convention determines which courts have the jurisdiction to take protection measures, and which law is to be applied in circumstances when a vulnerable person requires it.

Importantly it establishes a system of central authorities to cooperate with one another and locate vulnerable adults, as well as providing information on the status of vulnerable persons to other authorities. Although much work has been carried out already, more could be done to improve the quality of European law, increase practical guidance in the European legal field and enhance European legal integration.

STEP is asking members for any practical examples of when they have encountered difficulties in practice in relation to England and Wales not having ratified the Hague Convention. Please email STEP’s policy team if you have any feedback on this issue, at step@policy.org.

STEP will keep you updated on the outcome of these discussions.

Emily Deane TEP is STEP Technical Counsel

Committee draws probate fees legislation to UK parliament’s special attention

Daniel NesbittUPDATE 07/12/2018

The Joint Committee on Statutory Instruments’ full report (PDF) has now been published and includes the following conclusion:

The Committee draws the special attention of both Houses to this draft Order on the grounds that, if it is approved and made, there will be a doubt whether it is intra vires, and that it would in any event make an unexpected use of the power conferred by the enabling Act.

The Committee reached the same view regarding the government’s attempt to raise probate fees in 2017. Underlining this position, the report notes that the Ministry of Justice’s arguments did not ‘dispel the Committee’s doubts about vires expressed in its report on the 2017 Order’.

The depiction of the changes as a ‘fee’ was also challenged by the Committee, which felt the new banded system bore the characteristics of a tax. The report noted that the higher payments were disproportionate to the actual cost of the service and that the measure represented what was in effect a type of stamp duty on probate applications.

The views expressed by the Committee match the legal opinion STEP obtained from Richard Drabble QC in response to the 2017 proposals.

ORIGINAL BLOG 6/12/2018

The Joint Committee on Statutory Instruments has scrutinised the Non-Contentious Probate (Fees) Order 2018, and drawn it to parliament’s special attention.

The committee is responsible for examining the technical aspects of secondary legislation; ensuring that the drafting is correct, clear and within the powers granted by the act under which they are being made. Although it can highlight measures it believes to be of concern, the Joint Committee cannot block or amend legislation itself.

The other committee tasked with examining secondary legislation, the House of Lords Secondary Legislation Scrutiny Committee, in the 6th Report of Session 2017–19 (PDF) has also drawn parliament’s attention to the measure, calling it a ‘stealth tax’.

The next stage for the order in the House of Lords is for it to be voted on; and as an affirmative measure it will require a majority to pass. In the House of Commons a delegated legislation committee will be convened to scrutinise the legislation.

The Joint Committee’s full report on the order, setting out its detailed views, is yet to be published but it is expected to be released tomorrow (Fri 7 Dec 2018).

STEP will continue to monitor the situation and will provide updates where appropriate.

Daniel Nesbitt, Policy Executive, STEP 

UK Labour party tables motion against probate fees rise

Houses of Parliament, LondonThe UK government’s plan to increase probate fees has been criticised by the opposition in the House of Lords.

Labour’s Justice Spokesperson, Lord Beecham, has tabled the following motion of regret in relation to The Non-Contentious Probate (Fees) Order 2018:

‘Lord Beecham to move that this House regrets that the draft Non-Contentious Probate (Fees) Order 2018 will introduce a revised non-contentious probate fee structure considered by the Secondary Legislation Scrutiny Committee to be “so far above the actual cost of the service [it] arguably amounts to a stealth tax and, therefore, a misuse of the fee-levying power” under section 180 of the Antisocial Behaviour, Crime and Policing Act 2014; and that this Order represents a significant move away from the principle that fees for a public service should recover the cost of providing it and no more.’ 6th Report from the Secondary Legislation Scrutiny Committee (Sub-Committee A).

As statutory instruments cannot be amended, this type of measure can put parliamentarians’ disapproval on record, if passed. Motions to regret are usually voted on at the same time as the legislation.

The probate fees order is currently awaiting scrutiny by the Joint Committee on Statutory Instruments. As noted by Lord Beecham’s motion, the House of Lords Secondary Legislation Scrutiny Committee has already voiced its concern [PDF] about the proposals.

STEP will continue to monitor the situation and will provide further updates where appropriate.

Daniel Nesbitt, Policy Executive, STEP 

House of Lords report criticises HMRC’s treatment of taxpayers

HMRCThe House of Lords Economic Affairs Committee has found that HMRC is failing to guarantee fairness for taxpayers by failing to differentiate between users of sophisticated tax avoidance schemes and ordinary citizens who break the law through uninformed or naive actions.

In its report, The Powers of HMRC: Treating Taxpayers Fairly (PDF), the committee found that declining resources had left HMRC unable to tackle tax avoidance and evasion whilst ensuring taxpayers are treated fairly. Highlighting a number of areas where the HMRC’s conduct appeared disproportionate, the committee recommended further work take place to ensure there is sufficient oversight of the department.

The report heavily criticised the process HMRC uses to introduce new powers, noting that too often specific solutions were identified by the department before any consultation on the wider objectives. The committee recommended that HMRC listen more carefully to the views of tax and business experts during future consultations, to ensure new legislation is properly targeted.

The committee said new measures on offshore time limits should be withdrawn, pending further discussions between HMRC and tax professionals. The plans would require those with offshore elements to their tax affairs to keep records for up to 12 years to deal with HMRC questions. Any new legislation should be more proportionate and targeted than the current plans allow.

There was heavy criticism for proposed new civil information powers, which would allow HMRC to seek information from third parties without the agreement of the tax tribunal, or the relevant taxpayer. The committee said HMRC had failed to offer a convincing rationale for the change, and recommended it be withdrawn ahead of further consultation.

The committee also noted that the government has a responsibility to give HMRC sufficient funding to be fair to taxpayers. The Treasury is recommended to assess whether the department is adequately resourced as part of the 2019 Spending Review.

The next stage in the process is for the government to respond to the committee’s findings. STEP will monitor the situation and provide updates on any further developments.

Daniel Nesbitt, Policy Executive, STEP 

UK trust taxation under review

Simon HodgesOn 7 November, the UK government launched its review into the taxation of trusts, almost a year after announcing it in the 2017 Autumn Budget.

The consultation, which will run until 30 January 2019, focuses on the principles of transparency, fairness and neutrality, and simplicity. The government’s stated aim is to ensure that the many people who use trusts will benefit from a ‘clear and transparent regime that is easy to understand’.

STEP welcomes the review, which provides an opportunity to address some of the complexities that exist around the current system of trust taxation and to suggest changes to the taxation of trusts that would be positive for both practitioners and their clients. It will also enable us to address any misconceptions around the uses of trusts.

Media around the consultation has, in many cases, focused on the issue of improving transparency in relation to trusts to prevent them being used for tax avoidance purposes. However, transparency is only one of the aims of this review, and the government acknowledges in the consultation document that there is already a large amount of ongoing activity in relation to trust transparency, and suggests that any new activity must take into account that the vast number of trusts are used legitimately.

STEP has already formed a working group to help respond to this important review, which includes senior members drawn from both the UK Technical and UK Practice committees. We have been in contact with HMRC since the review was announced, and will continue to engage as we develop our response further. We will keep members updated of further news in this area over the coming months.

Simon Hodges is Director of Policy at STEP

Government changes E&W probate procedure without consultation

Emily Deane TEP

This Blog was updated on 26/11/2018 – for latest developments, please see the update at the end of the article below.

The government has announced amendments to the procedure for applying for probate in England and Wales, with less than a month’s notice. The Statutory Instrument (The Non-Contentious Probate (Amendment) Rules 2018) will come into force on 27 November 2018.

The Rules were laid as a negative instrument, meaning they don’t need the approval of Parliament and have already been signed into law by the relevant Minister. The instrument can be annulled by Parliament before implementation, but this is rare.

In brief the amended rules:

  1. allow personal online applications for probate to be made by an unrepresented applicant;
  1. enable all applications for probate to be verified by a statement of truth (instead of an oath) and without the will having to be marked (by the applicant, solicitor or probate practitioner);
  1. extend time limits in the caveat process, which give the person registering the caveat notice of any application for probate;
  1. allow caveat applications and standing searches (which give notice of grants being issued) to be made electronically;
  1. extend the powers of district probate registrars equivalent to those of district judges; and
  1. make further provision for the issue of directions (instructions to the parties) in relation to hearings.

The Probate Service has accepted online applications from personal applicants (individuals not represented by probate specialists) since earlier this year, with a view to making the system simpler and ‘easier to understand’.

There are concerns that the introduction of the online service may discourage individuals from using a probate specialist where it may be advisable to do so, for example where the estate is taxable, has foreign or complex components, or may be disputed.

The announcement comes at the same time as the Ministry of Justice’s proposal to increase the probate application fee with a banded fee structure depending on the value of the estate.

STEP strongly opposed this new system when it was proposed in 2016, on the basis that it is disproportionate to the service provided by the probate court. It is effectively a new tax on bereaved families. The government intends to introduce this measure without any proper debate via Statutory Instrument (see STEP blog: The death tax returns).

STEP will continue to follow developments in this area.

UPDATE 26/11/2018

HMCTS has advised that they will shortly provide further information with regard to the template of the statement of truth, but at present it is their intention only to make small changes to the current oath format to ensure that it fits with the new procedure and to make sure that practitioners do not need to change the format completely. They will soon provide template wording that must replace the jurat at the foot of the oath, as well as wording to account for the removal of the need to sign the will.

HMTCS have also provided guidance on the changes to the way caveat applications can be submitted. This is as follows.

Please note the following changes to Rule 44 regarding caveats:

  • Rules 44(2) (b) and 44 (3) (a) and (b): Caveats can now be entered and extended via email as well as post. If the caveat is to be entered electronically, the caveat form should be emailed to the DPR solicitors enquiries address. The email attaching the caveat form should ask for the fee to be taken from your PBA account. The fee must be paid before the caveat is entered/extended and currently there is no provision to pay a fee electronically other than by use of a PBA account. The caveat should be in the prescribed form i.e. form 3 (precedent form number 41 in Tristram & Cootes Probate Practice, 31st Edition). Caveats received after 4pm will be entered the following day.
  • Rules 44(6),(10) and (12): The period for entering an appearance/summons for directions following a warning to a caveat is now 14 days (calendar days including weekends and Bank Holidays).
  • Rule 44(13): District Probate Registrars can now deal with all summons to discontinue caveats following an appearance – whether by consent or not. The summons should be sent to the registry where the grant application is pending and if there is no application pending to the registry where the caveat was entered.
  • Rule 44(14): District Probate Registrars can now deal with applications to enter a further caveat entered by or on behalf of any caveator whose caveat is either in force or has ceased to have effect under R44(7) or (12) and under R45(4) and R46(3). These applications should be sent to the registry where the caveat was entered.
  • R45(3) and R46(3): Registrars can now deal with applications under these rules.
  • R43: Standing Searches can now be entered and extended via email as well as post. If the Standing Search is to be entered electronically, form PA1s should be emailed to the DPR with confirmation that the fee is to be taken by PBA. The fee must be paid before the Standing Search is entered/extended and currently there is no provision to pay a fee electronically other than by use of a PBA account.

In addition, please note that caveats received after 4pm will be deemed as having been received on the following day.

Emily Deane TEP is STEP Technical Counsel

The death tax returns

George HodgsonUpdate 13 Nov: Please see the Statutory Instrument timeframe below.

Original blog: The UK government has re-introduced proposals to fund the courts service via charging higher probate fees. The proposals emerged late yesterday (5 Nov 18), a week after the budget.

While the headline charges are less extortionate than were proposed last year, for an estate of GBP300,001 – GBP500,000 the fee will rise 249 per cent to GBP750, and for a GBP1 million estate, the fee will rise to GBP4,000, an increase of 1,760 per cent (see table below).

According to 2014/15 figures, 261,500 estates went to probate, of which only 35,000 were under GBP50,000. This indicates that 85 per cent of estates, where probate applies, will therefore see an increase in fees.

Value of Estate New Fee % Change (from £215)
Up to £5,000 £0   0%
£5,000 – £50,000 £0 -100%
£50,001 – £300,000 £250 +16%
£300,001 – £500,000 £750 +249%
£500,001 – £1m £2,500 +1,063%
£1m – £1.6m £4,000 +1,760%
£1.6m – £2m £5,000 +2,226%
Over £2m £6,000 +2,691%

The new charges bear no relation to the cost of probate, and are simply another form of taxation, sneaked in through the back door.

The government has failed to explain why it is choosing to place this burden on bereaved families, many of whom will have spent months or years paying expensive care fees for their elderly relatives. It is this group which has been singled out to shoulder the cost of the courts service via this additional tax, to be paid on top of IHT and legal expenses.

The government still plans to try and introduce this measure without any proper debate via statutory instrument. STEP has obtained a legal opinion which confirms that, given the tax nature of this measure, this is an abuse of the parliamentary process, a view shared by the House of Commons Joint Committee on Statutory Instruments (link below).

We will continue to press for a fairer and more transparent approach to probate fees reform.

George Hodgson is Chief Executive of STEP.

Update re Statutory Instrument timeframe

For members wishing to know the next stages of the statutory instrument the process in the House of Lords is as follows:

The instrument is laid before Parliament and is subsequently considered by the Joint Committee on Statutory Instruments and the House of Lords Secondary Legislation Scrutiny Committee:

  • The Joint Committee on Statutory Instruments usually considers an instrument after two sitting weeks have elapsed. This process involves looking at the legal content of statutory instruments, for example whether the drafting follows the correct process and if the relevant powers have been interpreted correctly. The Committee meets on Wednesdays.
  • The Secondary Legislation Scrutiny Committee usually considers instruments within 12-16 days of them being laid in Parliament. The Committee examines the policy in each instrument. It draws the House of Lord’s attention to interesting, flawed or inadequately explained measures. The Committee meets on Tuesdays and publishes its reports on Thursdays.

Once both committees have considered the instrument and given their advice a debate can take place in the House of Lords.  Peers can either approve the instrument, decline to approve it (which would stop the measure) or regret a part of it (which doesn’t stop it, but may influence how it is implemented). The timing of this debate will depend on the other items in front of the House of Lords.

This process can be accelerated under certain circumstances but there is also a large amount of Brexit-related secondary legislation both awaiting consideration by the Joint Committee as well as quite a few other instruments listed as awaiting an Affirmative Resolution.

The process in the House of Commons is as follows:

At the same time as the above process for the Joint Committee on Statutory Instruments an instrument is referred to a Delegated Legislation Committee:

  • Delegated Legislation Committee: Made up of between 16 and 18 members it is tasked with ensuring an instrument is legal and within scope of its enabling powers. MPs not serving on the Committee can attend to speak on the issue, but only those on the Committee can vote.

After the Committee has met, the instrument is debated in the House of Commons.

If approved by both Houses of Parliament it is signed into law by the relevant Minister.

It is estimated that the average time for the process to be completed in the House of Commons is 6 to 7 weeks.

GDPR – Invitation to Members

Emily Deane TEP

Even though the European General Data Protection Regulation (GDPR) came into force on 25 May this year in the UK there is still widespread confusion around its application to the private client industry.

STEP has formed a Data Protection Impact Group with the objective of reviewing the GDPR’s impact in relation to the trust and estate industry. The group would like to collate some of the practical issues that have arisen and submit them to the Information Commissioner’s Office (ICO) with the intention of the ICO addressing some of the gaps in the guidance and legislation.

Tell us your views

STEP would like to invite members to provide examples of how the ICO guidance/legislation may be difficult to apply in practice, so that we can present these issues to the ICO and underline that the impact is potentially far-reaching.

Issues that have been identified include:

  • Firms will be holding large amounts of personal data on clients and non-clients relating to their wills, family trusts and estates. Information (‘special category data’) on individuals other than clients is generally required in order to carry out the client’s instructions, for example a will. However as it stands a firm will have to obtain consent from third parties for this information because there are no express exemptions that apply in Article 9(2). Unlike the express exemption for ‘legal advice’ in the DPA 1998.
  • Subject access requests have become a first port of call now for potential beneficiaries who are seeking further information about a will or trust. It is currently very difficult for an advisor to gauge how much information they can provide or restrict and what the applicable justifications are for doing so.
  • The majority of private client firms in the UK will also undertake international work. File notes and legal documents containing personal data will need to be sent to third countries. If this data applies to a client it is possible to reply upon their consent to the transfer, however when the data relates to non-client data subjects then their consent is required. There does not appear to be an exemption in the GDPR that deals with this common occurrence.
  • Firms are currently uncertain as to whether they should destroy/delete some of the personal data that they hold, for example, some personal information that is held on a family member could be more pertinent to one person than another. The firm may be exposing itself to risk by destroying data that become relevant at a later date.
  • There is uncertainty as to whether all potential beneficiaries of a trust or estate should be provided with a copy of the trust’s privacy policy, even when the settlor or testator was adamant that they did not want the individual, who may be vulnerable, to know that they may benefit at some stage.

STEP is hopeful that by providing the ICO with some working examples then it might recognise and review the difficulties that advisors are facing in this connection. We aim to provide members with a best practice position when further information is available.

We would very much value your input. Please send your examples to standards@step.org.

Emily Deane TEP is STEP Technical Counsel