UK financial institutions will not be required to file FATCA ‘nil returns’ – other territories could follow, expert says

UK financial institutions (FIs) that have no US-reportable accounts will not be required to submit annual ‘nil returns’ in order to ensure compliance with new rules designed to prevent tax evasion by US citizens, HM Revenue and Customs (HMRC) has confirmed.

The change comes after the US Internal Revenue Service (IRS) updated its own Foreign Accounts Tax Compliance Act (FATCA) information to clarify that it itself does not require nil returns but that they might be required by the FI’s local tax authority. A spokesperson at HMRC told Out-Law.com that the UK tax authority would update the UK’s laws to remove the obligation for nil return “as soon as we can”.

Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement was “a welcome application of common sense”.

“There is little advantage in requiring people to file a return saying they have no information to give,” he said. “Some other ‘model 1’ territories, such as Guernsey and the Cayman Islands, also require nil returns so hopefully they will now review their positions.”

“This change originated through a clarification from the IRS that it itself did not need a nil return. This issue has also been vexing FFIs in ‘Model 2’ territories – such as Switzerland, Hong Kong and Bermuda – that have to report directly to the IRS, and the clarity is very welcome,” he said.

FATCA is aimed at preventing tax evasion by US residents using foreign accounts. It introduces reporting requirements for non-US financial institutions (FFIs) with respect to accounts held by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% ‘withholding tax’ on US source income and sales proceeds, unless an intergovernmental agreement (IGA) applies.

The UK is one of several countries to have entered into a ‘model 1’ IGA with the US. Among other changes to the FATCA process, the model 1 system allows UK-based FIs to report to HMRC under UK law, and HMRC then passes the information on to the IRS. The first FATCA reports are due on 31 May 2015 in respect of accounts in existence as of 31 December 2014.

According to amended FAQs published recently by the IRS, only non-financial foreign entities that report directly to the IRS are required to submit nil returns unless otherwise required to do so by local tax authorities. HMRC currently requires such reporting, reflecting the previously-understood position. However, it intends to remove the requirement from its existing reporting mechanisms “to reduce ongoing burdens on business”, according to a statement provided to Out-Law.com.

FIs that have already registered for FATCA in order to file a nil return with HMRC are not currently able to ‘de-register’ from the system. HMRC has said that it will “issue further advice” for these firms as soon as possible.

Other countries have adopted the ‘model 2’ IGA approach, which still provides for direct reporting to the IRS but with certain benefits which do not exist without an IGA, such as the removal of the need to close non-compliant accounts. As reporting is to the IRS, the IRS’s clarification has immediate effect.

A similar system to FATCA has been introduced by the UK with the Crown Dependencies and British Overseas Territories (CDOTs). FIs in those territories have to report on UK as well as US account holders. Furthermore, under the OECD’s “common reporting standard” project, the UK and the CDOTs, along with a host of other “early adopter” countries, have agreed to introduce laws requiring cross-reporting on accounts held by residents of the other participating countries. This will apply to accounts in existence from 1 January 2016. Other major financial centres such as Switzerland, Hong Kong, Dubai and Singapore, have agreed to join the project with effect from 1 January 2017.

“Hopefully, all countries participating in the ‘CRS’ will follow the US lead here and not require the filing of ‘nil returns’,” said Jason Collins. “If they don’t, they will only serve to create an unnecessary bureaucratic nightmare.”