Requirement to correct the tax due on offshore assets
Imagine that you had sold your Spanish holiday home at a profit several years ago. However, you weren’t sure if it gave rise to any UK tax issues so you hadn’t given it much thought.
Imagine though if HM Revenue & Customs (HMRC) had access to a wealth of information regarding offshore matters, discovered the sale of your Spanish holiday home sometime next month and charged you a minimum penalty of 150% of the unpaid tax.
Imagine if you sorted your tax affairs with the taxman by the end of this month and could negotiate a penalty of 35% (or less) of the unpaid tax for bringing your offshore tax affairs into order and paying the correct amount of tax that you owed.
This is the scenario that taxpayers are facing as the deadline to disclose information to HMRC approaches.
The Common Reporting Standard (CRS), which was first developed in 2014, is an agreement between over 100 countries. It is for the automatic exchange of information regarding bank accounts, trusts, structures and investments on a global level, between tax authorities.
On 30 September 2018, the first full reporting under the CRS will occur. It will significantly enhance HMRC’s ability to detect offshore non-compliance. This could be as a result of genuine errors, carelessness or deliberate action.
Penalties are increasing for any failures to correct by 30 September. This is to ensure an incentive for taxpayers to correct any offshore tax non-compliance.
Detail – including the new higher penalty regime
The incentive takes form in the Requirement to Correct (RTC) legislation. This is the last chance settlement opportunity for taxpayers to notify HMRC of any offshore non-compliance before the deadline.
This will allow HMRC to take the appropriate action regarding collecting tax, charging late payment interest and, most importantly, ensuring the penalties due will be under the appropriate legislation currently in force.
Failure to disclose the relevant information to HMRC on or before 30 September 2018 will result in the taxpayer becoming liable to a new penalty. This will be as a result of their failure to correct (FTC). The new FTC penalty is likely to be much higher than the existing penalties. The minimum penalty is 100% of the tax involved.
In all cases where a FTC penalty applies, there will be a standard penalty equivalent to 200% of the tax liability which should have been, but was not, disclosed to HMRC under the RTC. This penalty can be reduced to reflect co-operation with HMRC and the quality of the disclosure to HMRC. This includes telling HMRC of anyone who helped enable the non-compliance.
If there is a voluntary disclosure of offshore non-compliance post 30 September 2018, then there could be a reduction of the FTC penalty. It would be reduced from the standard penalty of 200% to the minimum penalty of 100%. However, the actual reduction will be based on co-operation and quality of disclosure as detailed above.
If HMRC discover any offshore non-compliance or if they prompt the disclosure (i.e. the taxpayer does not make the disclosure voluntarily), then the minimum penalty will be 150%.
Anyone who fails to correct their position despite knowing that they should do so may potentially also face the following:
- An asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
- A “naming and shaming” where there is an involvement of over £25,000 of tax per investigation
- An additional penalty of 50% of the amount of the standard penalty, if HMRC could show movement of the assets or funds to attempt to avoid the RTC
The HMRC guidance covering RTC provides comprehensive detail regarding a ‘reasonable excuse’ for a taxpayer not meeting their obligations under the legislation and any related reliance upon professional advice received.
The RTC rule relates to liabilities to Income Tax, Capital Gains Tax and Inheritance Tax involving offshore matters or transfers. The RTC does not cover corporation tax or VAT.
Example 1 shown in HMRC’s guidance (see link above) details the scenario where cash receipts from a UK unincorporated trade have not been disclosed and the monies deposited in an overseas bank before 6 April 2017. The failure to declare the cash receipts is not an offshore matter. However, there has been an offshore transfer because the money was transferred abroad before 6 April 2017. The failure to declare the UK related business receipts must therefore be disclosed before 30 September 2018 under the RTC rule to avoid the higher penalty regime.
In advance of the deadline, HMRC have been forwarding letters ‘highlighting’ the RTC legislation to particular categories of taxpayers. This is typically those covered by HMRC’s high Net Worth Unit and taxpayers who have previously disclosed foreign income or gains within their UK self-assessment tax returns. The letters list the following examples of sources of income or gains where there may be a requirement to disclose:
- Overseas bank accounts – tax may be deducted on interest but additional tax may be due in the UK even if you do not withdraw the money from the account
- Bond deposits and loans
- Stocks and shares – disposals and also dividends received
- Rental income from land and buildings, including holiday timeshares
- Disposal of assets – such as art, antiques, jewellery, property
- Incorrect claims for Overseas Workday Relief
- Incorrect claims for Foreign Tax Credit Relief
- Undeclared taxable remittances to the UK
They also make reference to the RTC covering people who reside outside of the UK but may have an undisclosed UK source of income.
Periods covered by the RTC
Only tax non-compliance committed before 6 April 2017 falls within the RTC.
The RTC applies to any undisclosed liabilities that were in time for assessment on 6 April 2017 (or, for IHT, on 17 November 2017). Assessment time limits vary depending on the particular circumstances in any case. The normal number of tax years that HMRC can go back for income tax and CGT are:
- Innocent error, despite taking reasonable care: 4 years
- Careless error: 6 years
- Deliberate error or failure to make tax returns: 20 years
There will be an extension on time limits so that HMRC can assess tax up until 5 April 2021 where there has been a failure to correct (FTC). Therefore on 5 April 2021, the number of assessed previous years will be seven, nine and 23 respectively based to the type of errors detailed above.
Ways of making a correction under the RTC rule
You can correct any offshore tax non-compliance on or before 30 September 2018 in a number of ways.
Regardless of the nature of the non-compliance you can correct by:
- using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility or any other service provided by HMRC as a means of correcting tax non-compliance
- telling an officer of HMRC in the course of an enquiry into your affairs or
- any other method agreed with HMRC
What to do next…
If you have any concerns that you may have an offshore matter or transfer that needs correcting, it is vitally important that you give due consideration to the issue and that you look to take action as soon as possible. HMRC are soon to have access to an unprecedented amount of offshore related data.
We have seen HMRC making better use of the limited reporting that has occurred to date. HMRC are approaching taxpayers about the sale of offshore properties from data obtained from foreign jurisdictions.
Whilst undisclosed income or gains would be the most obvious example of non-compliance, it will also include more technical matters that would require consideration. This includes checking implementation of planning and technical opinions (e.g. that someone is non-UK domiciled are correct). It also includes whether advice taken in the past was refreshed when the law or circumstances changed. You should also review offshore structures, anti-avoidance legislation and remittances.
Some matters may give rise to, for example, a 35% negotiated penalty today compared to minimum penalties of 100% or 150% for the same matters in less than a month’s time. This means that this is a considerable financial risk in not taking any corrective action before 30 September 2018.
There is likely to be period of information gathering and initial contact and set-up with HMRC. This depends upon the method of notification and disclosure to HMRC. It is therefore important not to leave any positive action until it’s too late. This is in order to given sufficient time to comply with the strict deadline.
How Tait Walker can help?
We can help you review any offshore matters and transfers to ensure that you have met your UK tax obligations. We also have considerable experience in assisting clients to make the required disclosures to HMRC.
If you would like to arrange an initial consultation for any the matters relating to the RTC legislation, please contact: