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Offshore Tax Penalties – Tackling Offshore Tax Evasion

Author

Ryan Conlon

Ryan qualified as a Chartered Tax Adviser with a Big Four firm before continuing his tax career at national firms and HMRC’s Fraud Investigation Service.

HMRC & Offshore Tax Penalties – The Facts

Introduction

According to Government figures, HMRC have raised over 32.9 billion from tackling offshore tax evasion and avoidance since 2010.

The Requirement to Correct and associated Worldwide Disclosure Facility encouraged over 18,000 individuals to come forward by the 30 September 2018 deadline to tell HMRC about offshore non-compliance for tax years up to 5 April 2017.

HMRC’s latest No Safe Havens policy sets out the department’s new strategy to ensure that the correct UK tax is paid on offshore income. Compared to the previous 2014 policy, it includes all types of error, including innocent mistakes, rather than tax avoidance and tax evasion.

Higher offshore penalties

Following the end of the Requirement to Correct period on 30 September 2018, from 1 October 2018, HMRC may charge higher penalties for offshore matters involving individuals and unincorporated businesses.

The penalties apply to income tax, capital gains tax and inheritance tax. They do not apply to other taxes. They apply to:

  • inaccuracies in returns and other documents relating to the 2011/12 tax year and later years which are given to HMRC on or after 6 April 2011;
  • failures to notify that arise on or after 6 April 2012;
  • deliberate withholding for the 2011/12 tax year and later years.

For inheritance tax, the penalties apply to inaccuracies in returns submitted for deaths and chargeable events on or after 1 April 2016.

What is an offshore matter?

HMRC consider an offshore matter is one where the potential loss of tax relates to:

  • income arising from a source in a territory outside the UK;
  • assets situated or held in a territory outside the UK;
  • activities carried on wholly or mainly in a territory outside the UK;
  • anything having effect as if it where income, assets or such activities.

Errors, failures to notify and the deliberate withholding of information about overseas bank accounts, other investment income, rents from property overseas, and sales of asset overseas will all be treated as offshore matters.

Higher penalties also apply to what HMRC term offshore transfers. Offshore transfers take place when there is a deliberate inaccuracy, failure to notify or withholding that does not involve an offshore matter but:

  • Taxable income is received in a territory outside the UK
  • Taxable income is transferred to a territory outside the UK;
  • Disposal proceeds are received in a territory outside the UK;
  • Assets that give rise to an inheritance tax charge are transferred outside the UK.

That is, the higher penalties can also apply in instances where income or gains have arisen in respect of UK assets but there is then a transfer of the proceeds outside the UK. The disposal of a UK investment property and the transfer of the proceeds to an offshore account without disclosing the disposal would be an offshore transfer. However, the transfer of the same proceeds to an offshore account is not a problem where the gain is properly disclosed on the tax return for the relevant tax year and the tax paid.

Offshore transfers only apply for the 2016/17 tax year and later years (or, for inheritance tax, for transfers of value on or after 1 April 2016).

Territories

Penalties for offshore matters are determined by the place where the income or gains arose while for inheritance tax the territory is the place where the asset was located.

HMRC distinguishes three categories of territory, differentiated by the territory’s willingness to share information with HMRC.

  • Category 1 penalties are those with automatic information exchange agreements with the UK. For such territories the maximum penalty is 100% of the tax.

 

  • Category 2 territories are generally those which exchange information with HMRC, but only on request rather than automatically. For such territories, the maximum penalty is 150% of the tax

 

  • Category 3 territories are those which have not agreed to share information with the UK. For such territories the maximum penalty is 200% of the tax.

 

Category 1 jurisdictions include EU states, Switzerland the United States, Canada, Australia, New Zealand and Japan. Some offshore financial centres such as Guernsey, the Isle of Man, and the Cayman Islands are also classified as Category 1. Category 3 jurisdictions include Panama, Monaco, Macau and the United Arab Emirates. If a country is not listed under Category 1 or 3, it is Category 2. These include China, Hong Kong, Jersey and the British Virgin Islands. (Learn More…)

Penalties for inaccuracies

The penalties for inaccuracies range from nil in the case of an unprompted disclosure of a careless inaccuracy to 200% for the prompted disclosure of a deliberate and concealed error.

For each category of territory, and the type of behaviour. There is a range of penalties rather than a single one. Where the penalty falls within that range will depend on the degree of cooperation offered to HMRC, what the department describes as ‘telling, helping and giving’.

The potential penalties are summarised in the table below.

Category of territory and type of disclosure Careless Deliberate Deliberate and concealed
1 Unprompted

 

 

1 Prompted

0 – 30%

 

 

15% to 30%

20% (30% from 6 April 2016) – 70%

 

35% (45% from 6 April 2016) to 70%

30% (40% from 6 April 2016) to 100%

 

50% (60% from 6 April 2016) to 100%

2 Unprompted

 

 

2 Prompted

 

0% to 45%

 

 

22.5% to 45%

30% (40% from 6 April 2016) to 105%

 

52.5% (62.5% from 6 April 2016) to 105%

 

45% (55% from 6 April 2016) to 150%

 

75% (85% from 6 April 2016) to 150%

3 Unprompted

 

 

3 Prompted

 

0% to 60%

 

 

30% to 60%

40% (50% from 6 April 2016) to 140%

 

70% (80% from 6 April 2016) to 140%

60% (70% from 6 April 2016) to 200%

 

100% (or 110% from 6 April 2016) to 200%

 

Penalties for failure to notify

As for penalties of inaccuracies, the penalties for failure to notify depend on the territory and the behaviour.

Category of territory Non-deliberate Deliberate Deliberate and concealed
1 Unprompted

Failure to disclose after more than 12 months

10% to 30% 20% (30% from 6 April 2016) to 70% 30% (40% from 6 April 2016) to 70%
1 Unprompted

Failure to disclose within 12 months

0% to 30% 20% (30% from 6 April 2016) to 70% 30% (40% from 6 April 2016) to 100%
1 Prompted

Failure disclosed after more than 12 months

20% to 30% 35% (45% from 6 April 2016) to 70% 50% (60% from 6 April 2016) to 100%
1 Unprompted

Failure disclosed within 12 months

10% to 30% 35% (45% from 6 April 2016) to 70% 50% (60% from 6 April 2016) to 100%
2 Unprompted

Failure to disclosure after more than 12 months

15% to 45% 30% (40% from 6 April 2016) to 105% 45% (55% from 6 April 2016) to 150%
2 Unprompted

Failure disclosed within 12 months

0% to 45% 30% (40% from 6 April 2016) to 105% 45% (55% from 6 April 2016) to 150%
2 Prompted

Failure disclosed after more than 12 months

30% to 45% 52.5% (62.5% from 6 April 2016) to 105% 7% (85% from 6 April 2016) to 150%
2 Unprompted

Failure disclosed within 12 months

15% to 45% 52.5% (62.5% from 6 April 2016) to 105% 75% (85% from 6 April 2016) to 150%
3 Unprompted

Failure disclosed after more than 12 months

20% to 60% 40% (50% from 6 April 2016) to 140% 60% (70% from 6 April 2016) to 200%
3 Unprompted

Failure disclosed within 12 months

0% to 60% 40% (50% from 6 April 2016) to 140% 60% (70% from 6 April 2016) to 200%
3 Prompted

Failure disclosed after more than 12 months

40% to 60% 70% (80% from 6 April 2016) to 140% 100% (110% from 6 April 2016) to 200%
3 Prompted

Failure disclosed within 12 months

20% to 60% 70% (80% from 6 April 2016) to 140% 100% (1010% from 6 April 2016) to 200%

 

Penalties for deliberate withholding of information

Again, as for the other penalties, those for deliberate withholding of information depend on the territory involved and the behaviour. Given that these relate to the deliberate withholding of information, the minimum penalty applying is 20%, even with cooperation.

Category of territory Deliberate Deliberate and concealed
1 Unprompted

 

 

1 Prompted

20% (30% from 6 April 2016) to 70%

 

35% (45% from 6 April 2016) to 70%

30% (40% from 6 April 2016) to 100%

 

50% (60% from 6 April 2016) to 100%

2 Unprompted

 

 

2 Prompted

30% (40% from 6 April 2016) to 105%

 

52.5% (62.5% from 6 April 2016) to 105%

45% (55% from 6 April 2016) to 150%

 

75% (85% from 6 April 2016) to 150%

3 Unprompted

 

 

3 Prompted

40% (50% from 6 April 20176) to 140%

 

70% (80% from 6 April 2016) to 140%

60% (70% from 6 April 2016) to 200%

 

100% (110% from 6 April 2016) to 200%

 

Asset-based penalties

HMRC may also impose asset-based penalties where the following conditions are satisfied:

  • HMRC have charged an underlying penalty for a deliberate inaccuracy, failure to notify or deliberate withholding;
  • The inaccuracy, or failure relates to an offshore matter or transfer;
  • The income, gain or transfer of value that relates to the inaccuracy has a clear link to the underling asset;
  • The potential tax at stake in respect of the offshore matter exceeds £25,000 in a single tax year;
  • The underling penalty relates to capital gains tax, inheritance tax or asset-based income tax.

The standard asset-based penalty is the lower of 10% of the value of the asset and 10 times the offshore tax at stake.

Conclusion

Given the expansion of HMRC’s concern with offshore non-compliance to include innocent errors and mistakes, and the enhanced penalties that can apply for such errors, it is important to consider what steps can be taken to minimise. As such it is better to make an unprompted disclosure to HMRC rather than a prompted one, whether the error is innocent or not.

For more information on off shore tax matters, simply contact a member of our helpful tax advice team. You can also read more about offshore tax below…

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