Final opportunity to correct offshore tax irregularities before tough new penalties

Out-Law Legal Update | 14 Jun 2017 | 12:22 pm | 5 min. read

LEGAL UPDATE: Tough new penalties are being introduced from 30 September 2018 for those that have made errors in their UK tax returns relating to ‘offshore tax matters’. A new legal obligation will require taxpayers to correct any returns that fail to properly report offshore matters that would give rise to a UK tax liability. 

From carrot to stick

Even with the commitment to tackle offshore tax evasion in the policy paper ‘No Safe Havens’, the UK's HM Revenue & Customs (HMRC) has received severe criticism for what has been perceived as a ‘light touch approach’ to dealing with offshore tax irregularities. HMRC was criticised for, amongst other things, the Liechtenstein Disclosure Facility (LDF) which was seen by many as an ‘amnesty’ with modest penalties, a lack of action to deter those that facilitated evasion and its reluctance to criminally prosecute those that had benefitted from using offshore jurisdictions to evade tax.  Overall the criticism was based around HMRC’s approach being seen as more ‘carrot’ than ‘stick’.

However, change is coming driven by the introduction of the Common Reporting Standard (CRS) which, by September 2018, will see information being provided to HMRC about accounts held by UK residents in around 100 countries. With this in mind, HMRC’s approach has moved from offering disclosure facilities to the imposition of tough sanctions. The imposition of such tough penalties will apply even where someone has been careless with their affairs - intent is not necessarily required.

Who and what are covered by the RTC?

Individuals and trustees with offshore interests who have a UK tax liability should review their tax affairs to ensure that they are fully compliant.

The requirement to correct (RTC) covers:

  • Income tax, capital gains tax and inheritance tax;
  • offshore matters (broadly income, gains or assets outside the UK) and offshore transfers (transfers of UK income, gains or assets out of the UK); and
  • non-compliance – whether deliberate, careless, or even an innocent mistake including incorrect returns, failure to submit returns and a failure to notify that a return should be issued.

What are the time limits?

Corrections must take place by 30 September 2018, but any disclosure should take place as soon as possible.

The relevant years to be corrected and level of penalties will be based on behaviour – but broadly it will be the last four years (for non-careless behaviour), six years (for careless behaviour) and 20 years (for deliberate behaviour).

The RTC provisions were dropped from the pre-election Finance Act, which had to be rushed through Parliament before it was dissolved. They are expected to be included in a further Finance Bill published over the summer.

The penalties

For those that fail to correct any errors before 30 September 2018, the penalty will start at 200% of the tax due. This can be reduced, but to no lower than 100% of the tax due. Any reduction will be based on the quality of the disclosure, co-operation and the seriousness of the behaviour.

Taxpayers could also face a further penalty of up to 10% of the value of the relevant offshore assets and public naming and shaming depending upon the particular circumstances.

Are there any defences to the penalties?

Unlike the existing penalty regime, these new penalties will focus less on taxpayers’ motives. HMRC will work on the basis that taxpayers will have already committed the original failure, failed to respond to previous publicity/disclosure opportunities and failed to respond to the RTC. As such, the penalties would even apply to innocent mistakes. The only defence is that a person had a ‘reasonable excuse’ not to correct. The existing case law on what constitutes ‘reasonable excuse’ is narrowly drawn and therefore a mere assumption on the part of someone that all is in order is likely to be no defence.

What about Swiss assets? 

Many people may think that if the one-off charge under the UK-Swiss agreement was applied to them, then there will be nothing further to correct. This could be a mistaken assumption. Amounts could still be exposed to UK tax; for example, most non-doms could have opted out of the one-off charge for the past and most discretionary structures were excluded so it is important for people in these categories to be confident of their tax compliance.  

If I am affected, what should I do?

Those with offshore interests must be confident that their affairs are in order. Whilst acknowledging that offshore tax issues are complex, HMRC expects those who may be unsure if they have a problem or un-notified liabilities, to seek professional help to clarify whether or not issues need correcting. Failure to do so will have severe consequences as already highlighted.

Even where tax advice has been taken in relation to offshore matters, penalties could still be faced, if:

  • the original advice turns out to be incorrect, and/or
  • not up to date, following changes in the law, and/or
  • in practice the arrangements have been implemented in a way that invalidates the tax advice.

It is therefore vital that those with offshore tax issues consider their historic UK tax compliance as soon as possible and certainly well in advance of 30 September 2018.

Anyone with UK tax liabilities who has not recently reviewed the taxation of their offshore assets or structures should seek specialist professional advice to help with this.

The RTC is, in part, aimed at individuals and trustees who do not classify themselves as having evaded tax but may have out-dated or less than robust tax planning or structures in place. It is therefore important to consider amongst other matters, the following:

  • older structures, lacking up to date tax advice;
  • bank accounts held outside the UK;
  • whether residence and domicile positions have been correctly reported;
  • benefits/payments/distributions received from offshore trusts;
  • payments made from offshore assets; and
  • any other offshore assets not/not accurately declared.

Tax health check

To ensure that the obligations of RTC are met and the stringent penalties for failure are avoided, a tax health check should be considered. This will allow for an independent assessment to check compliance, identify risk areas based on experience and the preparation of a risk assessment to give an understanding of any underlying issues. If irregularities are discovered, disclosures could be made under either the Contractual Disclosure Facility or Worldwide Disclosure Facility.

CASE STUDY:

An example of how a tax health check prompted by RTC could be advantageous is detailed below:

Mrs Brown checks her affairs and realises that she has undeclared income from an offshore investment portfolio, which is valued at £2m. Approximately £50,000 of taxable income has not been reported on her tax returns for each of the last six years. Her behaviour amounts to carelessness rather than deliberate. The effect of disclosure would be as follows:

Disclosure now

  • Tax - £120,000 plus interest
  • Penalty – nil (voluntary and unprompted)

Disclosure post 30 September 2018

  • Tax - £120,000 plus interest
  • Penalty – minimum £120,000 up to a maximum of £240,000

If the behaviour was deliberate post 30 September 2018

  • Tax - £120,000 plus interest
  • Penalty – minimum £120,000 up to a maximum of £240,000
  • Additional tax geared penalty of up to £200,000 (10% of asset value)
  • Naming and shaming

Paul Noble is a tax investigations expert at Pinsent Masons, the law firm behind Out-Law.com