The requirement to correct
7 February 2018
In this article, we explore the new penalty regime that will apply later this year in relation to undeclared UK tax liabilities relating to offshore matters.
Legislation was introduced in the Finance (No.2) Act 2017 requiring those with undeclared offshore tax liabilities to disclose them to HMRC on or before 30 September 2018.
30 September 2018 was chosen as the final date for corrections as this is the date by which more than 100 countries will exchange data on financial accounts under the Common Reporting Standard.
Who is within the scope of the requirement to correct (the 'RTC')?
Anyone (both UK residents and non-residents) who has failed to disclose an income tax, capital gains tax or inheritance tax charge that has arisen involving 'offshore matters or transfers' prior to 6 April 2017.
Tax non-compliance involves an offshore matter if the unpaid tax is charged on or by reference to:
- Income arising from a source in a territory outside the UK;
- Any asset situated in a territory outside the UK;
- Activities carried on wholly or mainly in a territory outside the UK; or
- Anything having effect as if it were income, assets or activities of a kind described above.
Therefore, a non-UK resident trustee or company could be caught within these provisions if any UK income, capital gains or inheritance tax charges that have fallen due in relation to that trust or company have been missed. UK residents could similarly be caught in relation to any assets they hold outside the UK, such as rental income on foreign property.
To ensure that there is an incentive to correct any offshore tax non-compliance there will be increased penalties for any failures to correct by 30 September 2018.
- Standard penalty
In all cases where a penalty applies, there will be standard penalty equivalent to 200% of the tax liability which should have been disclosed to HMRC under the RTC but was not.
This penalty can be reduced (to a minimum of 100% of the tax involved) depending on:
- The taxpayer's level of co-operation with HMRC;
- The quality of the taxpayer's disclosure to HMRC; and
- The seriousness of the taxpayer's failure to correct.
- Asset based penalty
In the most serious cases and where the tax involved exceeds £25,000 in any tax year and the taxpayer knows they have relevant offshore non-compliance and failed to correct, the asset based penalty will apply.
This will mean that a penalty of up to 10% of the value of assets connected to the failure will be charged, in addition to the standard penalty.
- Offshore asset moves penalty
Where it can be shown that the taxpayer moved assets to avoid having details reported to HMRC under international agreements on exchange of information an enhanced penalty will apply.
This will mean that a penalty of 300% of the tax involved will apply.
In the more serious cases, where one failure to disclose gives rise to a tax charge of at least £25,000 or there are 5 or more separate failures (of whatever amount), in addition to the penalties that may apply, HMRC may publish the taxpayer's details.
Extension of period for assessment
The RTC legislation allows for a longer period for HMRC to take action to recover any tax that falls within the scope of the RTC legislation.
For any offshore tax that HMRC could have assessed on 6 April 2017, it can assess that tax until 5 April 2021. This means that where HMRC can argue the non-compliance is deliberate (where HMRC can look back over a 20 year period), it will have until April 2021 to review non-compliance that occurred in 1997.
Where the taxpayer can satisfy HMRC that they had a 'reasonable excuse' for non-compliance, no penalties will be payable (although the tax owed as well as interest will still be due).
HMRC regards none of the following as reasonable excuses:
- an insufficiency of funds;
- reliance on any other person to do anything, unless the taxpayer took 'reasonable are' to avoid the failure; and, importantly
- relying on advice in the following circumstances:
- if the advice is given by an interested person, or as a result of arrangements made between an interested person and the person giving the advice;
- if the person giving the advice did not have the appropriate expertise;
- where the advice failed to take account of all the taxpayer's circumstances; or
- if the advice was addressed to, or was given to, a person other than the taxpayer.
Where there is any doubt as to whether UK tax charges may have been missed in the past, we recommend that specialist advice be sought as to whether a taxpayer falls within the scope of the RTC.
Any disclosure under the RTC must be submitted to HMRC by 30 September 2018. As a full disclosure may take time to investigate and prepare, advice should be sought as soon as possible.
Please get in touch with your usual Wilsons contact if you have any questions in relation to the RTC.