Uncle Sam is watching you!

If you have tried to open a bank account recently, taken out a business mortgage, or especially if you are a trustee of a trust, you have probably been asked to confirm your status under ‘FATCA’.  

FATCA is a US term that stands for the ‘Foreign Accounts Tax Compliance Act’.  It is colloquially used here to refer to legislation which requires UK banks and financial institutions to identify and report on their US citizens. Banks and similar bodies must report annually details of accounts held by US citizens to HMRC. HMRC will then pass the data onto their US equivalent - the Internal Revenue Service or IRS.

Most of you reading this will be tempted to stop at this point. If you aren't a US citizen surely you can’t be expected to worry about any of this? Well, in order to identify their US clients, banks and similar institutions have been requesting further details from many of their customers. For a UK resident individual this is often not too onerous, but we have seen examples where a husband and wife partnership trading in the Lake District, borrowing money to buy their premises, were required to complete pages of forms from their lender to confirm that the transaction had nothing to do with the US. The forms were difficult to follow and the lender refused to assist, saying that the forms all related to tax legislation and therefore they wouldn’t - and couldn’t - advise.  

The position is much worse if you are a trustee. All UK trusts - even those where all the individuals and assets involved are UK based - have had to consider their status under FATCA. Many UK trusts have had to register with the IRS as they qualify as a ‘financial institution’ under FATCA rules. This could be because of the way their investments are run, or because they have a corporate trustee. It is entirely irrelevant that the trust may have absolutely no US connections at all.  

At the start of October 2015 the IRS website shows that 24,271 ‘financial institutions’ in the UK have registered under FATCA. While this number does include UK banks, the vast majority of these are ordinary private trusts. The list is fully searchable and although you can’t see any details of trust contents, many previously private trusts will now be identifiable by name.  

So what is the point of FATCA? Well, the point is we now have UK legislation to stop tax evasion for the US. US citizens are required to report their worldwide income every year to the US authorities no matter where they live. Until recently the IRS tended to be fairly lax in enforcing these rules but, concerned they were losing tax revenue, they have started to pursue their overseas citizens with increasing vigour. FATCA throws a global net to catch them and HMRC and our banks have to assist.  

In practice, for many US citizens who haven't been filing while living outside the US, there will be little or no tax to pay, as the US reliefs and exemptions for non-US income are relatively generous. However, the penalties for non-compliance are high and FATCA will force most to bring their IRS filings up to date.  

For the rest of us, information exchange on financial assets will soon go global with the Common Reporting Standard (CRS). Over 60 countries are signed up to the CRS and it is intended that tax authorities will start exchanging data by 2017. If you have undisclosed assets outside the UK, there is no better time to come clean. If you have no such assets, or are already disclosing correctly, just expect a lot more paperwork. The price of closing the net on tax evaders is more administration and much less privacy for us all.  

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Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.

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