Requirement to Correct

Requirement to Correct

Requirement to Correct – Introduction

The Requirement to Correct(RTC) legislation was introduced in the Finance (No 2) Act 2017 to bring into account offshore tax evasion and non-compliance that relates to income, assets, activities or anything having an effect as if it were income, assets and activities. In effect, this relates to anyone with an interest, in whole or in part in an offshore asset, receives income from an offshore source, or have moved income or the proceeds of gains offshore. 

As noted, in substance this measure relates to all potential overseas income sources and gains, therefore anyone with overseas property income or gains, trust incomeor business incomeshould take particular note, even if the income is not brought into the UK. 

During the introduction of the RTC scheme, under the legislation taxpayers had until 30 September 2017 to declare any relevant information. Alongside this, HMRC have provided an opportunity for taxpayers to correct and disclose any relevant information by the 30 September 2018 deadline. This was introduced in anticipation of and in line with a new data sharing agreement (Common Reporting Standard) between HMRC and over 100 other countries, therefore providing a last opportunity for those who have failed to disclose information, or withheld information to ‘come clean’. 

Timing

Importantly, this does not only relate to current and future tax years, it relates to previous years too, so long as the relevant period is still within assessment limits. These limits are 4 years, 6 years or 20 years. The limits depend on the substantive actions of the taxpayer, the former where there is an error and the time increases where there is carelessness and then deliberate conduct. 

Requirement to Correct – Penalties

Taxpayers may be subject to penalties on unpaid tax whether or not a disclosure is made under the RTC. 

The maximum penalty that can be suffered by a taxpayer who does make a disclosure under RTC is 100%. By comparison, the maximum penalty for someone who does not make a disclosure is 200%, this is referred to as a Failure to Correct(FTC) penalty. These penalties are issued alongside interest and payment of the underlying tax owed.

Discretion can be exercised in circumstances whereby a taxpayer does disclose offshore matters and there has been a genuine mistake. In comparison, where there is an FTC the penalty may only be reduced depending on, whether the taxpayer has co-operated, or not, the extent of the disclosure and whether the disclosure was prompted, or not. 

Alongside the penalties mentioned above, HMRC may also charge up to 10% of the value of an asset, where the tax owed was over £25,000; name and shame individuals in serious cases and an additional penalty of 50% of the tax is applicable where steps are taken to move assets or funds to counter RTC. 

Reasonable excuse

The legislation does provide for reasonable excuses for failing to notify and if satisfied, no penalty will be applied. 

However, the legislation specifically excludes certain circumstances being raised as a reasonable excuse, these are:

• Not having the funds available;
• If, relying on another person to do something, you must have taken reasonable care to avoid the failure;
• Where the taxpayer does have a reasonable excuse, this only last as long as the excuse is valid, therefore a taxpayer cannot rely on this after the excuse has ceased;
• Relying on advice in certain circumstances.

As the deadline has now passed, if someone has failed to disclose any relevant offshore income, gains, interests and activities, they will fall squarely within the FTC penalty regime. However, as noted above, penalties can vary significantly, depending on co-operation, extent of disclosure and when the taxpayer discloses the information. 

If you feel you, or your client, require any advice in relation to the Requirement to Correct  then please get in touch.

Requirement to Correct was last updated on 10 January 2019