How HMRC finds out
Under the Common Reporting Standard, financial institutions in more than 100 jurisdictions report account holders' details to their local tax authority every year, and that information is passed automatically to HMRC. It covers bank and savings accounts, brokers and investment platforms, and reporting is expanding to overseas cryptoasset exchanges. HMRC matches the data against Self Assessment records and sends one-to-many nudge letters where the two do not line up. A nudge letter is not an investigation, but it is a formal signal that HMRC holds data about your offshore affairs: see our full guide to nudge letters and the Worldwide Disclosure Facility.
The common trap: assuming the data means you owe tax, or ignoring it
Having a foreign account is not itself a problem, and the exchanged data is not always right: it can be duplicated, shown gross rather than net, or attached to the wrong person. Many people owe nothing because they were non-resident, the income was already declared, or double tax relief covers the UK liability. Ignoring HMRC is the real trap: unanswered letters tend to become compliance checks, and offshore matters can be assessed up to 12 years back, or 20 years for deliberate behaviour. Nudge letters usually enclose a Certificate of Tax Position; there is no statutory obligation to sign it, and you should not sign it without professional advice.
What to do if you have undeclared foreign income
Disclose before HMRC writes to you. The Worldwide Disclosure Facility runs through HMRC's Digital Disclosure Service: you notify HMRC, then have 90 days to calculate and submit your disclosure with payment. Penalties are behaviour based, from nil where you took reasonable care up to 200% of the tax for the most serious cases, and an unprompted voluntary disclosure keeps you in the lower ranges. A Chartered Tax Adviser can first check whether anything is actually due, then classify the behaviour and scope the years correctly, which is where most of the money is saved.