Time is Running Out!
Time is running out to make a disclosure of historic offshore tax non-compliance before a punitive new regime of tax penalties is introduced.
The Requirement to Correct (RTC) introduced in Finance (No 2) Act 2017 obliges taxpayers to correct any historic UK tax issues in respect to offshore income, assets and activities. If they fail to act they will face sanctions including punitive financial penalties.
Taxpayers must correct their UK tax position in respect of periods up to 5 April 2017 by 30 September 2018.
The 30 September 2018 deadline coincides with the start date for the Common Reporting Standard when tax authorities in over 100 countries including HMRC begin exchanging data on financial accounts.
The Requirement to Correct applies to individuals, partnerships and trustees and non-resident landlord companies with potential undeclared UK income tax, capital gains tax and inheritance tax liabilities.
The RTC applies to tax non-compliance involving offshore matters which are defined as:
- income arising from a source in a territory outside the UK;
- assets situated in a territory outside the UK;
- activities carried on wholly or mainly in a territory outside the UK; or
- anything having effect as if it where income, assets or activities as described above.
There is no need to be UK resident to have a relevant liability. For example, trustees of offshore trusts with ten-year anniversary inheritance tax charges and non-UK companies with rental income from UK property may also be impacted where there are historic, undisclosed liabilities.
Taxpayers with current and historic offshore financial connections should urgently review their UK tax affairs to ensure that all tax returns are correct and ensure they have submitted tax returns for all relevant tax years.
This will include:
- Ensuring that any historic planning with an overseas element is reviewed to check that it has been correctly implemented;
- Considering whether advice taken in the past was refreshed when the law or circumstances changed;
- Reviewing claims to be non-UK resident or non-UK domiciled to confirm that the are technically correct;
- Reviewing remittances by non-UK domiciled taxpayers;
- Reviewing offshore structures including trusts and companies considering the implications of anti-avoidance legislation.
If errors are identified they should be rectified by 30 September 2018.
It may be appropriate to submit disclosures where there is doubt over a technical argument to protect a taxpayer’s position against Failure to Correct penalties in case HMRC argues that additional tax is due.
Penalties for Failure to Correct
After 30 September 2018, the Failure to Correct (FTC) regime will start with punitive penalties including:
- tax-geared penalty of between 100% and 200% of the uncorrected tax liabilities;
- a potential asset-based penalty of up to 10% of the relevant asset where the tax at stake is over £25,000 in any tax year.
Anyone who fails to correct their position despite knowing that they should do so may also face:
- a potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC;
- potential ‘naming and shaming’ where over £25,000 of tax is involved.
No penalty will be charged where the taxpayer can demonstrate that they have a reasonable excuse.
Undertaking a thorough review of a taxpayer’s position may provide a defence HMRC subsequently argues that there are historic liabilities that were not corrected.
Making a Disclosure: The Worldwide Disclosure Facility
The Worldwide Disclosure Facility (WDF) opened 5 September 2016 and provides an opportunity to disclose UK tax liabilities that relate wholly or partly to offshore matters.
HMRC promises a streamlined disclosure process for the WDF through its Digital Disclosure Service portal. After initial notification of intention to make a disclosure, within 90 dates the taxpayer is required to complete the disclosure.
For complex cases the time line is a demanding one. The disclosure requires self-assessment of the behaviour that gave rise to the underpayment of tax. In certain circumstances, it may be possible to seek clarification pre-disclosure from HMRC. The disclosure should address any UK non-compliance issues as well as offshore matters.
Unlike the Liechtenstein Disclosure Facility that ran from September 2009 to December 2015, the WDF offers no guarantee of immunity from prosecution. It further requires full payment of outstanding taxes must be made within 90 days of registration.
The WDF is open to those who have already made settlements or disclosures previously but if the disclosure covers the same period there may be higher penalties imposed.
The Contractual Disclosure Facility: Another Option?
The Contractual Disclosure Facility (CDF) is most commonly offered by HMRC as part of an investigation under Code of Practice 9 where tax fraud is suspected.
Such a disclosure report made under the CDF will typically be a very substantial, detailed document and subject to robust testing by HMRC. However, the CDF is not limited to disclosures prompted by a HMRC investigation and may be used for voluntary disclosures too. The advantage here is that unlike the Worldwide Disclosure Facility is that if a submission is accepted under the CDF, there is a guarantee of immunity from prosecution. Consequently, if omissions identified are deliberate, substantial and have occurred over a significant period, or in relation to a period where there has previously been an investigation or disclosures, then CDF should be considered.
While managing such disclosures is more complex and onerous, the additional costs and complexity should be weighed against the risk of criminal investigation.
HMRC’s New Stance: More Stick, Less Carrot?
The RTC measures are illustrative of HMRC’s increasingly muscular approach to dealing with tax avoidance and evasion. It is an approach where there is more stick, less carrot.
For the FTC, penalties make no differentiation between those who deliberately fail to pay the correct tax, those who may merely have been careless.
Unlike historic disclosure opportunities, there are no beneficial penalty rates and, unless a disclosure is made under the Contractual Disclosure Facility, there is no offer of immunity from prosecution.
This is, however, a last chance opportunity to regularise historic liabilities, with no further disclosure opportunities or amnesties on offer. Moreover, armed with increasing quantities of information, including information shared by other revenue authorities, HMRC is expected to further ramp up its investigation activity and so those with existing undisclosed liabilities are advised to come forward now rather than waiting for HMRC to approach them.
Enterprise Tax Consultants can help
Enterprise Tax Consultants are experienced in all aspects of tax compliance including disclosure requirements.
If you have a query in this area, please contact us for a no-obligation initial consultation with one of our chartered tax advisers.