Following the increased push for financial and tax transparency, the government introduced a ‘Requirement to Correct’ (RTC) existing offshore non-compliance by 30 September this year. Where HMRC discovers historic non-compliance after 30 September – including as a result of information they receive under the Common Reporting Standard (CRS) – it will seek to collect not only the tax due and interest on late payment, but also penalties at levels unprecedented in the UK.
What are these higher penalties?
The starting level for penalties will be 200% of the undeclared tax. This may be reduced if the taxpayer cooperates with HMRC’s enquiries, but it will not be reduced below 100% unless the taxpayer can show that there was a reasonable excuse for the irregularity. This is in contrast to the current position, where (depending on the circumstances) it may be possible to have penalties completely eliminated.
In addition, in serious cases, where the tax involved is more than £25,000 in a given tax year, a further penalty of up to 10% of the value of relevant overseas assets may be levied. Finally, the taxpayer faces the prospect of being named and shamed as a tax defaulter.
Who does the Requirement to Correct cover?
The RTC applies to all taxpayers with an undisclosed income tax, capital gains tax or inheritance tax liability relating to an offshore issue or to an offshore transfer (ie where monies relating to UK activities or transactions have been received or transferred offshore). The RTC does not cover corporation tax or VAT.
It is vital to understand that the RTC and the new failure to correct penalties do not simply target individuals who have set up complex structures to hide money in tax havens abroad. They may equally affect anyone with income, gains or assets outside the UK who has not taken sufficient care to ensure that they have submitted complete and accurate tax returns each year.
What tax years are covered?
The RTC applies to any undisclosed liabilities that were in time for assessment on 6 April 2017 (or, for inheritance tax, on 17 November 2017). Assessment time limits vary depending on the particular circumstances in any case. The normal time limits for income tax and capital gains tax are:
- Innocent error, despite taking reasonable care: four years from the end of the year of assessment.
- Careless error: six years from the end of the year of assessment.
- Deliberate error or failure to make tax returns: 20 years from the end of the year of assessment.
Any innocent error arising in tax years 2013-14 and 2015-16 is, therefore, covered by the RTC, whilst for deliberate omissions or complete failures to submit a tax return, the disclosure may have to go back to 1997-98. Identifying the correct period for a disclosure will be vital, but establishing the category into which particular omissions fall is not always straightforward.
Errors or omissions relating to 2016-17 or later years (ie where the filing deadline falls after 6 April/17 November 2017) are not caught by the RTC or the associated failure to correct penalties (although they will be caught by the general penalty regime applicable to offshore disclosure failings).
What do I need to do?
If you had an overseas component to your financial affairs for 2015-16 or earlier years, you should review your position before 30 September 2018, even where you have previously taken advice or where you believe that all amounts have been correctly reported. A check now will allow inadvertent errors to be picked up and corrected in good time, and supplementary advice sought where needed, to prevent the possibility of higher penalties down the line.
Surely if I took professional advice in the past I don’t have anything to worry about?
Even where you have taken advice, we would recommend that you review your position now to make sure that there have been no inadvertent reporting errors which would need to be disclosed by 30 September.
Assuming that you find no such errors, the fact that you have previously taken professional advice on the UK tax implications of your offshore financial affairs may protect you from penalties in the event that HMRC does later discover an error. This protection will not apply, however, in the following circumstances:
- Where your adviser did not have the appropriate expertise.
- If your adviser failed to take account of all your individual circumstances.
- If the advice was given to a third party and not directly to you. This could include situations where advice was given to a family office and then relied upon by family members.
- If the advice was given as part of a tax avoidance scheme.
It will therefore be important to consider any advice you have received when reviewing your overseas position. If the advice is insufficient, or falls within one of the exclusions above, you should consider obtaining an independent second opinion to provide protection from future penalties.
If I find something wrong, how do I make a disclosure?
There are various options for anyone needing to make a disclosure under the RTC. HMRC’s Worldwide Disclosure Facility (WDF) provides an online facility. In more complex cases, or where deliberate omissions have been made, it may be that other disclosure options are more appropriate. This could include disclosure as part of an ongoing enquiry, or raising the issue with an HMRC Customer Relationship Manager, where one exists. We would always recommend discussing the appropriate disclosure route with your tax adviser.
Whichever method of disclosure you choose, the minimum requirement will be for HMRC to have received sufficient information by 30 September 2018 to enable it to quantify any unpaid tax liabilities for all relevant tax years.
Are there any exceptions?
On 11 July 2018, HMRC updated its guidance to include a 90 day extension to the reporting deadline in the following three limited circumstances.
- If by midnight on 30 September 2018 you notify HMRC of your intention to make a disclosure under the Worldwide Disclosure Facility (WDF) and the disclosure process is “completed fully and accurately” within 90 days of that date (ie. before 29 December 2018).
- If you contact HMRC on or before 30 September 2018 to inform them that you wish to make a disclosure of deliberate behaviour involving offshore tax non-compliance.
- If HMRC is already undertaking an enquiry into your affairs and on or before 30 September 2018 you inform the person conducting the enquiry that you wish to make a disclosure of offshore tax non-compliance. You will then need to submit an outline disclosure to by 29 November 2018.
Can you help me?
Saffery can assist in reviewing your position, with a view to ensuring that you have met your UK tax obligations and, where relevant, have the necessary professional advice to safeguard against penalties. We can also provide a second opinion on earlier advice where needed.
In addition, we have considerable experience in assisting taxpayers to make disclosures and, should one be necessary, in identifying the appropriate disclosure path and fulfilling the requirements of the RTC.