Undisclosed foreign income in Self Assessment by UK residents, 2018 to 2019
Published 24 October 2024
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Summary
This publication presents analysis of tax non-compliance of UK resident individuals failing to disclose foreign income covered by Automatic Exchange of Information (AEOI). These official statistics in development are official statistics that are undergoing evaluation and testing, with a potentially wider degree of uncertainty in the resulting estimates as the methods and processes are established and verified. They are published to involve users and stakeholders at an early stage in assessing their suitability and quality.
HMRC publishes an estimate of the overall tax gap in the annual ‘Measuring tax gaps’ official statistics publication. The estimate for non-compliance in this statistical release is a subset of the Self Assessment and hidden economy tax gaps. It arises from the submission of incorrect Self Assessment tax returns or failure to submit a Self Assessment tax return.
The scope of the analysis is limited to UK resident individuals with foreign income reported to HMRC for the 2017 and 2018 calendar years using the AEOI data, which consists of the Common Reporting Standard (CRS) and United States Foreign Account Tax Compliance Act (FATCA) data. The final estimate is for the 2018 to 2019 tax year so the results are scaled up using the number of traced individuals with a discrepancy for the 2018 to 2019 tax year. The analysis excludes any non-compliance relating to companies with any form of foreign income; and individuals, foreign income or jurisdictions not covered in the AEOI data, and therefore represents a subset of overall foreign income non-compliance.
Receipt of the AEOI data has enabled HMRC to develop an estimate for this subset of taxpayers with undisclosed foreign income. Whilst this initial publication is for individuals only, HMRC will assess the feasibility of quantifying the undisclosed foreign income for companies with income from assets reported through AEOI data. HMRC has not identified a suitable data source or methodology to provide a wider measure of the tax gap from assets not covered by AEOI data (please see the ‘Methodology’ section for a definition of assets covered by AEOI data).
The analysis of tax non-compliance of UK resident individuals failing to disclose foreign income covered by AEOI is based on a random sample. The findings are scaled to the full population to estimate the extent of under-declaration of tax liability.
Figure 1 gives an overview of the key methodological steps and derivation of the main estimate. We estimate that 4% of UK resident individuals covered by AEOI and traced to an HMRC record under-declared tax on their foreign income in 2018 to 2019. The overall under-declared tax liability of UK resident individuals with foreign income notified through the AEOI agreements net of compliance yield is estimated at £0.3 billion in the tax year 2018 to 2019 (year ending 5 April 2019). Further information on how the estimate is calculated can be found in the methodology section.
Figure 1: Methodological overview and main estimate
Key statistics
HMRC received over 7 million foreign financial account reports through AEOI data for 2018, relating to an estimated 3.9 million distinct individuals. Of these 3.9 million individuals, HMRC traced 3.2 million to an HMRC record, a match rate of 82%. Individuals remain untraced where HMRC was unable to match the AEOI data to an identifiable individual.
Comparison of data on foreign income between AEOI and Self Assessment tax returns was then used to identify discrepancies between these data sources. This identified that 77% of individuals (2.4 million) traced from the 2018 AEOI data had consistently declared their foreign income. These individuals are assumed to be compliant for the purpose of this analysis.
The remaining 23% (0.7 million individuals) were identified as potentially under-declaring their foreign income. A phased random enquiry programme approach was then used to estimate the non-compliance within this population of individuals with a discrepancy on foreign income between AEOI and Self Assessment tax return data. This consisted of an initial ‘one-to-many’ approach via correspondence, notifying individuals if they had additional tax liabilities to disclose and providing these taxpayers with the opportunity to correct their tax liability followed by an in-depth compliance check for individuals with an outstanding unresolved discrepancy on foreign income.
The random enquiry approach consisted of a sample of 400 individuals to identify the extent of under-declaration of liabilities arising from the submission of incorrect Self Assessment returns. From the one-to-many exercise, most individuals either amended their Self Assessment return or responded with no further action, confirming their tax affairs were up to date. Of the sample cases, 97% had been completed when these statistics were being prepared, with HMRC compliance caseworkers providing predicted assessments of non-compliance for ongoing cases.
After investigation, 16% of this sample, including ongoing cases, were identified as non-compliant. Scaling the findings from the random enquiry programme results to the population of the 3.2 million individuals who were traced to an HMRC record, it is estimated that 0.1 million, or 4% (16% of 23%), of those individuals were non-compliant and under-declared their tax liability on their foreign income due to HMRC in 2018 to 2019, as shown in Table 1.
Table 1: Percentage of individuals in AEOI data traced to an HMRC record estimated to have under-declared their tax liability on foreign income in 2018 to 2019. Upper and lower bound based on 95% confidence interval
| Lower bound | Central estimate | Upper bound | |
|---|---|---|---|
| Percentage of individuals with under-declared tax liability on foreign income of all traced individuals | 2% | 4% | 5% |
Table 2 shows the percentage of non-compliant individuals in the random sample and their proportion of total under-declared tax liability by their amount of under-declared tax liability per individual in 2018 to 2019. Of the non-compliant individuals in the sample, 55% had a tax under-declaration below £1,000, 44% between £1,000 and £10,000 and 2% over £10,000.
The figures from Table 2 illustrate the variation in size of non-compliance per individual in the sample. The 2% of non-compliant individuals with a tax under-declaration over £10,000 had a share of 5% of the total value of non-compliance. Those individuals with a tax under-declaration below £1,000 who made up most of the sample accounted for a 13% share of the total amount of under-declared tax.
Table 2: Proportion of non-compliant individuals and their share of total under-declared tax liability by amount of under-declared tax liability in 2018 to 2019
| Amount of under-declared tax liability per individual in 2018-19 | Proportion of total non-compliant individuals | Proportion of total under-declared tax liability |
|---|---|---|
| £1 to £999 | 55% | 13% |
| £1,000 to £9,999 | 44% | 82% |
| £10,000+ | 2% | 5% |
Notes for Table 2
- Figures are rounded to the nearest 1%. As a result, components may not appear to sum.
Results from scaling the findings on under-declared tax liability from the random enquiry programme to the population of the 3.2 million individuals who were traced to an HMRC record are shown in Table 3. We estimate the overall under-declared tax liability of UK residents with foreign income notified through the AEOI agreements who could be traced to an HMRC record at £0.3 billion in 2018 to 2019.
Table 3: Gross under-declared tax liability in 2018 to 2019, £ billion (UK residents with foreign income covered by AEOI and traced to an HMRC record), upper and lower bound based on 95% confidence interval
| Lower bound | Central estimate | Upper bound | |
|---|---|---|---|
| Gross under-declared tax liability (£ billion) | 0.2 | 0.3 | 0.5 |
Small sample size and variation in the size of under-declared tax liability per case (illustrated in Table 2) cause uncertainty in this estimate, with a lower bound of £0.2 billion and an upper bound of £0.5 billion based on a 95% confidence interval. This means that we are 95% confident that the true scale of under-declared tax liability for the population of individuals traced from AEOI data to an HMRC record is between £0.2 billion and £0.5 billion.
Individuals with foreign financial accounts reported through AEOI data untraced to an HMRC record are excluded from the random enquiry programme. Non-compliance arising from this group is therefore excluded from the estimate shown in Table 3. These figures are uplifted to include an estimate for non-compliance from untraced individuals, with the resultant estimates show in Table 4.
Table 4: Total gross under-declared tax liability in 2018 to 2019, £ billion (all UK residents with foreign income covered by AEOI), upper and lower bound based on 95% confidence interval
| Lower bound | Central estimate | Upper bound | |
|---|---|---|---|
| Gross under-declared tax liability (£ billion) | 0.2 | 0.4 | 0.7 |
HMRC recovers some under-declared tax liability on foreign income through its compliance activity. During the 2018 to 2019 tax year, around £0.1 billion was recovered through unprompted voluntary disclosures, prompted disclosures following HMRC nudge letters to individuals identified through AEOI data, and HMRC compliance checks targeting individuals identified through AEOI data.
Table 5 presents the estimate for the total net under-declared tax liability of UK residents with foreign income covered by AEOI accounting for compliance yield recovered in 2018 to 2019. This is estimated at £0.3 billion.
Table 5: Net under-declared tax liability in 2018 to 2019 accounting for HMRC’s compliance yield recovered, £ billion (all UK residents with foreign income covered by AEOI), upper and lower bound based on 95% confidence interval
| Lower bound | Central estimate | Upper bound | |
|---|---|---|---|
| Under-declared liability (£ billion) | 0.2 | 0.3 | 0.6 |
Table 6 shows a summary of the key statistics included in this section.
Table 6: Summary of key statistics
| Number of UK resident financial account reports notified to HMRC through AEOI data for 2018 | Over 7 million | |
| Number of distinct UK resident individuals with foreign income identified as account owners in 2018 AEOI data | 3.9 million | |
| Number of distinct UK resident individuals with foreign income identified as account owners in 2018 AEOI data and traced to an HMRC record | 3.2 million | |
| Percentage of individuals in 2018 AEOI data traced to an HMRC record | 82% | |
| Number of distinct UK resident individuals with foreign income identified as account owners in 2018 AEOI data and untraced to an HMRC record | 0.7 million (721,000) | |
| Number of traced individuals with no discrepancy in foreign income between AEOI and Self Assessment tax return data | 2.4 million | |
| Number of traced individuals with a discrepancy in foreign income between AEOI and Self Assessment tax return data, potentially under-declaring tax liability | 0.7 million (742,000) | |
| Percentage of discrepancy population estimated as under-declaring their tax liability from foreign income through the random enquiry programme | 16% | |
| Number of individuals in AEOI data traced to an HMRC record estimated to have under-declared their tax liability on foreign income in 2018 to 2019 | 0.1 million (119,000) | |
| Percentage of individuals in AEOI data traced to an HMRC record estimated to have under-declared their tax liability on foreign income in 2018 to 2019 | 4% | |
| Gross under-declared tax liability in 2018 to 2019 (UK residents with foreign income covered by AEOI and traced to an HMRC record) | £0.3 billion | |
| Total gross under-declared tax liability in 2018 to 2019 (all UK residents with foreign income covered by AEOI) | £0.4 billion | |
| HMRC compliance yield recovering under-declared tax liability on foreign income through AEOI data in 2018 to 2019 | £0.1 billion | |
| Net under-declared tax liability in 2018 to 2019 accounting for HMRC’s compliance yield recovered (all UK residents with foreign income covered by AEOI) | £0.3 billion |
Measuring tax gaps
The analysis of tax non-compliance of UK resident individuals failing to declare foreign income covered by AEOI estimates the extent of under-declaration of tax liability arising from the submission of incorrect Self Assessment tax returns or failure to submit a Self Assessment tax return. The estimate for this non-compliance is a subset of the Self Assessment and hidden economy tax gaps. HMRC separately publishes estimates for these tax gaps in the annual ‘Measuring tax gaps’ official statistics publication.
The foreign income component of the Self Assessment tax gap was previously difficult to quantify due to data limitations and the small sample size of the main Self Assessment random enquiry programme which limits analysis of subgroups. The availability and coverage of AEOI data has provided the opportunity to explore this element of foreign income non-compliance further as it provides HMRC with a known population of UK residents with foreign income in jurisdictions covered by AEOI.
The tax gap estimate relating to Income Tax, National Insurance contributions and Capital Gains tax lost through the hidden economy relates to individuals who are not registered for Self Assessment despite having an income which is liable to taxation which has not been declared to HMRC. This may include income from activities which might be classified as self-employment or income such as interest or lettings.
Individuals identified through the AEOI data exchanges who are shown to owe tax from foreign income and who are not registered for Self Assessment form part of the hidden economy tax gap. Individuals with undeclared foreign income remaining untraced from the AEOI data who are not registered for Self Assessment also contribute to it.
For tax year 2018 to 2019 the Self Assessment net tax gap was £7.7 billion – that is, the tax gap remaining after HMRC compliance activity. For tax year 2018 to 2019 the hidden economy net tax gap was £1.4 billion.
The net estimate of £0.3 billion total under-declared tax liability of UK residents failing to declare foreign income covered by AEOI represents 3.5% of the Self Assessment and hidden economy Income Tax, National Insurance contributions and Capital Gains tax gap in 2018 to 2019.
The methodology for estimating the hidden economy tax gap will be reviewed given the findings of this publication.
Methodology
Automatic Exchange of Information (AEOI) data
This analysis covers UK resident individuals identified from AEOI agreements made between the UK and other countries and the information HMRC receives under these agreements. This includes information on foreign interest, dividends and gross proceeds from the sale or redemption of financial assets.
The UK receives information on the foreign financial account information of its residents under the following AEOI agreements:
-
United States Foreign Account Tax Compliance Act (FATCA), the agreement between the UK and USA
-
Common Reporting Standard (CRS), the Organisation for Economic Cooperation and Development (OECD) standard for automatic exchange of financial account information
FATCA has been in effect since 2012. CRS came into effect in 2017 with 49 jurisdictions undertaking data exchanges that year. In 2018 this increased to 100 jurisdictions. Combined, the agreements now cover over 100 jurisdictions which make up over 90% of global gross domestic product. See the Exchanges of information under the AEOI Standard for a full list of jurisdictions undertaking exchanges through AEOI.
This analysis covers AEOI data for individuals which HMRC received in 2017 and 2018.
Data matching
AEOI data is matched to HMRC records using HMRC’s Connect system to identify known individuals from the AEOI data. Connect is HMRC’s analytical tool which cross-references more than 22 billion lines of data including Self Assessment returns, property and financial data.
AEOI data for individuals is matched with Self Assessment tax return data to identify taxpayers who may have an under-declared tax liability on their foreign income. Individuals whose foreign income data matches consistently are treated as being compliant for the purpose of this analysis.
Taxpayers identified as having a discrepancy in their foreign income between AEOI and Self Assessment tax return data and potentially non-compliant form the target population for the random enquiry programme activity.
A discrepancy may arise for reasons other than taxpayers being non-compliant. For example, individuals may no longer be resident in the UK and are therefore no longer liable to UK tax. Alternatively, HMRC’s data matching may have been unable to correctly verify all income as being declared to HMRC.
Sampling
A random sample of 400 individuals (200 individuals from the 2017 data and 200 individuals from the 2018 data) is selected from the population of individuals identified as having a discrepancy in foreign income. Samples were selected for the 2017 to 2018 tax year from the 2017 AEOI data and the 2018 to 2019 tax year from the 2018 AEOI data.
The samples are combined to produce one overall measure for the total non-compliance, assuming all cases apply to the same tax year. This measure is for the 2018 to 2019 tax year so results are scaled up using the number of traced individuals with a discrepancy for the 2018 to 2019 tax year. A stratified sampling approach is used, based on the size of discrepancy in foreign income between the AEOI and the Self Assessment tax return data.
Random enquiry programme
Random enquiry programmes are used by HMRC to estimate the total value of non-compliance by scaling the findings from a random sample to the full population.
Cases selected for the random enquiry programme are first subject to a ‘one-to-many’ approach to encourage voluntary compliance. Taxpayers are notified of their potential discrepancy and given an opportunity to tell HMRC about any under-declared foreign income by making a disclosure. Cases where there is still an outstanding or unexplained discrepancy following this stage proceed to a compliance check.
Total under-declared tax liability calculation
The average amount of under-declared tax liability relating to any foreign income determined from each individual in the sample is multiplied by the number of individuals in the target population to estimate the total tax non-compliance of UK residents failing to declare their foreign income covered by AEOI in the 2018 to 2019 tax year. The figures are then uplifted to account for non-compliance among the untraced individuals. This uplift is based on the ratio of the total distinct individuals with accounts to the traced distinct individuals matched to an HMRC record.
Analytical steps and assumptions
A series of key analytical decisions are taken in producing this analysis which impact the results.
Open cases
Compliance checks can take many months or years to resolve and 3% of cases in the random enquiry sample are ongoing at the time of the analysis. Rather than waiting for all of these to close we forecast the compliance yield for these ongoing cases.
For these cases, the responsible HMRC compliance caseworker provides a compliance yield estimate and percentage likelihood rating. We then use this forecasted yield multiplied by the likelihood of achieving it as the yield value for open cases. This means there is additional uncertainty in the estimate as these cases may close for a different amount to what has been forecasted.
Non-detection
Non-detection multipliers are used as part of the methodology for ‘Measuring tax gaps’ to estimate the tax gap from audit data. The multiplier values are applied to random enquiry results to account for non-compliance which is missed or not fully investigated in a compliance check. They have been applied as part of the methodology for estimating the tax gap for direct taxes since HMRC first began publishing tax gap statistics.
Unlike in the random enquiry programme methodology for ‘Measuring tax gaps’, we have chosen not to apply a non-detection multiplier. Results are based directly on the compliance yield identified through the random enquiry programme. This means the estimate is likely to be a lower bound of the full scale of non-compliance.
Information provided to HMRC through AEOI data limits the risks relating to non-detection as it allows HMRC to independently verify taxpayer declarations on foreign income in scope of these data exchanges. However, complexities working with this data, as well as key analytical and operational assumptions, such as assuming all individuals with no identified discrepancy are compliant and decisions on which cases are progressed to a full compliance check, are likely to lead to failing to identify all non-compliance within the population.
You can find out more about the ‘Measuring tax gaps’ methodology in the ‘Methodological Annex’.
Combining samples
Sample sizes used in this analysis are relatively small and lead to high uncertainty in the results, particularly given the high variation in levels of non-compliance identified across the sample. To limit this uncertainty, we combine cases from 2 separate samples across 2 tax years, taking the overall sample size to 400 cases. This assumes that these 2 samples, and in turn the 2 separate populations they have been drawn from, are sufficiently similar.
Deselections
Cases in the random enquiry programme are not worked for several reasons and this is done in a non-random way. This means that the cases which are not worked are likely to be systematically different from the cases that are worked.
Normally, to avoid biasing the sample, we treat and include cases that are deselected from the sample but are still within the population of interest. However, we have chosen not to make this adjustment due to the size of the sample and limited information to do this accurately. The analysis is therefore based on worked cases only, with a central assumption that cases which were not worked are no different to the worked cases.
Accuracy, reliability and development
Official Statistics in development
The analysis in this technical paper is presented as official statistics in development. Official statistics in development are a subset of newly developed or innovative official statistics undergoing evaluation, with the aim of involving users and stakeholders in the assessment of their suitability and quality at an early stage. They are published in line with the Code of Practice for Statistics.
The analysis excludes any non-compliance relating to individuals, foreign income or jurisdictions not covered in the AEOI data, and therefore represents a subset of overall foreign income non-compliance. The statistics are ‘official statistics in development’ as we explore options for further development and consider implications of the limitations on the usefulness of the outputs.
As part of this evaluation, HMRC are seeking feedback from users. This may relate to the usefulness of the analysis or ideas for further expansion or improvement. Feedback can be provided by emailing taxgap@hmrc.gov.uk.
Uncertainty rating
Uncertainty relates to a range of factors that can affect the accuracy and robustness of a statistic, including the impact of measurement or sampling error and all other sources of bias and variance that exist in a data source.
We have assessed the uncertainty of the estimate on tax non-compliance of UK residents failing to declare foreign income covered by AEOI in 2018 to 2019 using the ‘Measuring tax gaps’ publication’s uncertainty rating system. To evaluate uncertainty in a systematic and transparent way, we assign an uncertainty rating, ranging from ‘very low’ to ‘very high’. The rating is derived from assessing the uncertainty arising from 3 sources: the model scope, the methodology used and the data underpinning the estimate.
In assessing model scope, we evaluate the model’s capture of the appropriate tax base and its coverage of the entire potential taxpayer population and all potential forms of non-compliance. In assessing the methodology used, we assess the complexity and challenges of the model including the quality and impact of assumptions. In assessing the data underpinning the estimate, we consider data suitability and its impact, including sensitivity analysis.
The estimate for non-compliance relating to foreign income from individuals notified to HMRC through the AEOI data is rated as having high uncertainty.
No adjustment has been made for non-detection during random enquiry checks.
Small sample sizes and large variation in under-declared tax lead to wide upper and lower bounds of the estimate. Treatments such as forecasting the yield from open cases can impact the outcomes.
The estimate is based on data shared with HMRC through the 2017 and 2018 AEOI agreements. HMRC process this data to a format suitable for the purpose of this activity, tracing financial account information to unique individuals and identifying those with a discrepancy in foreign income. Analysis is then based on the information captured over the course of the random enquiry programme.