Requirement to correct: tick tock
Taxpayers who have ‘relevant offshore tax non-compliance’ have until 30 September 2018 to come forward and correct their historic UK tax filings or face significant penalties. Time is now of the essence to correct any outstanding offshore tax irregularities for UK taxpayers.
If readers have any clients with offshore interests, or indeed are themselves individuals with offshore interests, and they have not undertaken a review to ensure UK tax compliance, this is the last chance to do it. Auxilium Tax can assist with any such reviews and undertake any disclosure needed in the event of irregularities.
The government released a consultation document on 24 August 2016 seeking feedback on its proposal to introduce legislation targeting offshore tax evasion. This was set against the backdrop of the Common Reporting Standard (‘CRS’). Historically HMRC had found it difficult to detect offshore tax evasion or non-compliance. In theory, with the introduction of the CRS (to which over 100 countries are signatories) and the automatic exchange of information that results, HMRC should find it significantly easier to pick up on offshore evasion going forward. With this powerful anti-evasion ‘weapon’ in the CRS as part of its armoury, the government introduced ‘The Requirement to Correct Certain Offshore Tax Non-Compliance’ legislation in the Finance No2 Act 2017 (‘F2A 17’) (Schedule 18) with a view to encouraging delinquent taxpayers to come forward and regularise offshore tax liabilities before 30 September 2018, when punitive penalties take effect.
The early adopters to CRS (54 countries including the UK) have already started to exchange information. The majority of the remaining signatories have committed to exchanging information in 2018. Schedule 18 to F2A 17 was introduced to allow persons who remain non-compliant to regularise their affairs before the last remaining signatories to CRS begin to exchange information. It is clearly easier for HMRC to allow individuals to come forward to correct historic tax filings than it is for HMRC to trawl through the reams of information that will flow to it with a view to finding delinquent taxpayers. A carrot and stick approach has therefore been adopted. The carrot being if a non-compliant taxpayer comes forward before 30 September HMRC will impose punitive penalties (see below for details of the current penalty regime – and yes, this is the carrot). However, if the taxpayer waits until after 30 September 2018 even more punitive penalties will be imposed (not forgetting that there is more likely to be criminal consequences if a taxpayer fails to voluntarily disclose to HMRC). This carrot maybe as appetising as one that has grown in the fields around Chernobyl, but the alternative is even less appealing, a stick that resembles Prince Marko’s mace. The point that is being driven home by HMRC is that it is in a very powerful position. If a taxpayer does not come forward now and accept the already punitive penalties under the standard offshore penalty regime, then as a result of the CRS, HMRC will eventually find all taxpayers with offshore non-compliance issues. If HMRC comes knocking at the door of people with offshore secrets after 30 September, those individuals will feel the full weight of the penalty regime available to HMRC. After 30 September (and arguably now) HMRC will no longer need to offer incentives to correct offshore irregularities. Offshore disclosure facilities are a relic of a pre-CRS age.
As an aside, there is a significant question mark over whether the CRS is compliant with GDPR and European human rights laws. Filippo Noseda (partner at Mishcon de Reya) is currently leading a challenge against the CRS on precisely these points. He has written extensively on the issue but I recommend reading this article (https://www.ft.com/content/679e65a8-94a9-11e8-b67b-b8205561c3fe) in the FT if this topic is of interest to you.
2. A summary of the RTC provisions
As noted above the RTC legislation is set out in schedule 18 to F2A 17. This article is not intended to be a detailed analysis of the legislation, but simply aimed at highlighting what I consider to be the most important points. If advice is being given on this, reference should of course be made to the legislation.
References to paragraphs are paragraphs under Schedule 18 F2A 17.
a. Offshore non-compliance
Failure to correct ‘relevant offshore non-compliance’ relating to 2016/17 or prior years by 30 September 2018 will result in a penalty becoming payable (paragraph 1).
‘Relevant offshore non-compliance’ is defined in paragraphs 3-6. In short, it is where the taxpayer has offshore non-compliance which has not been corrected by 5 April 2017 and at the relevant time (i.e. 6 April 2017 for income tax/CGT purposes) HMRC could have assessed the individual to tax on the liability that should have been disclosed.
Offshore tax non-compliance is defined in paragraph 7 – ‘tax non-compliance which involves an offshore matter or an offshore transfer, whether or not it also involves an onshore matter’.
Tax non-compliance (paragraph 8) includes:
Failure to give notice of liability to income tax and capital gains tax under section 7 Taxes Management Act 1970;
Failure to comply with the obligation to file the following by the required filing date (or filing incorrect information which leads to the understatement of tax, an inflated statement of loss or inflated claim to reclaim tax):
Partnership return under s 8A(1) TMA 1970
Pension scheme return under s 254 Finance Act 204
Information required under SI 995/3101 in respect of pension schemes
A non-resident CGT return under 12ZB TMA 1970
IHT return under s 216 or 217 IHTA 1984.
Paragraph 9 details when the ‘non-compliance’ involves an offshore matter. This would be
the case where the loss of revenue 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; or
Anything that has the effect of the above.
Tax non-compliance involves an ‘offshore transfer’ if the tax non-compliance does not involve an offshore matter and the income/gains were received in a territory outside the UK or transferred to a territory outside of the UK before 5 April 2017.
To put this into layman’s terms, if a UK taxpayer has any undeclared offshore income or gains, which should have been declared in the UK, then the taxpayer needs to correct any irregularity by 30 September, or potentially face severe consequences if he fails to do so.
Paragraph 13 details how to correct the offshore tax non-compliance. This can be done by providing HMRC with the relevant information, either by:
Making and delivering a tax return;
Using the digital disclosure service (or any other available disclosure service);
Informing HMRC in the course of an enquiry; or
Using any other method agreed with HMRC.
c. Penalties if the taxpayer corrects before 30 September 2018
The existing offshore penalty regime imposes penalties based on a jurisdiction and culpability matrix. The offshore jurisdiction involved in the non-compliance and the level of culpability of the taxpayer will impact the level of penalty imposed. Jurisdictions are divided into 3 categories (1-3). Category 1 penalties are equivalent to domestic penalty levels. Most EU countries are category 1 jurisdictions for example. Category 2 jurisdictions are jurisdictions not listed in either category 1 or category 3. Category 3 jurisdictions are essentially those that the Treasury deems the most nefarious jurisdictions and includes, inter alia, Nauru and Suriname.
Once the jurisdiction is established, HMRC look to the culpability of the individual. There are three levels of culpability:
Careless act or omission (i.e. the individual failed to take reasonable care);
Deliberate but not concealed act or omission.;
Deliberate and concealed act or omission.
The potential penalties for non-compliance are:
It is within HMRC’s power to reduce these penalties if a disclosure is made. The level of reduction will depend on whether the disclosure is prompted or unprompted and will also be dependent on the quality of that disclosure (percentages in brackets represent the levels applicable prior to 2016/17).
This penalty regime is still relevant if a disclosure of undeclared offshore income or gains is made prior to 30 September 2018. It is important that this fact is not overlooked when discussing the requirement to correct with clients.
d. Penalties for failure to correct
The penalty payable for failing to correct by 30 September 2018 is stipulated in Part 2 to Schedule 18.
Paragraph 14 states that the penalty payable is 200% of the offshore PLR (potential loss of revenue) attributable to the offshore non-compliance not corrected by 30 September 2018.
Under paragraph 16 HMRC ‘must’ reduce the penalty to one that ‘reflects the quality of the disclosure’. ‘Quality’ includes timing, nature and extent. Although the reduction cannot be to below 100%. There is therefore still a way of mitigating the penalty if a disclosure is made after 30 September and the taxpayer provides clear and detailed information about the offshore non-compliance in a timely fashion. However, this mitigation will at best be 100% of the tax unpaid – hardly attractive.
In ‘special circumstances’ (not defined – although ability to pay and the loss of revenue balanced by the overpayment by another taxpayer are specifically excluded), HMRC may reduce the penalty. This includes staying a penalty or agreeing a compromise in relation to proceedings for a penalty.
In the most serious cases, HMRC may impose an asset-based penalty of up to 10% of the value of the relevant offshore asset or 10 times the amount of the offshore PLR (whichever is the lower) (paragraph 27). Paragraph 30 also gives HMRC the power to name and shame.
e. Reasonable excuse
Paragraph 23 provides that if the taxpayer satisfies either HMRC or the tribunal that there is a reasonable excuse for the offshore non-compliance, then no penalty arises.
Insufficient funds is not a reasonable excuse (unless attributable to events outside the taxpayer’s control);
Reliance on a third party to do anything is not a reasonable excuse unless reasonable care was taken to avoid the failure;
Reliance on advice given to a taxpayer is automatically not a reasonable excuse, where the advice:
Is given by an interested person (i.e. a person who participated in avoidance arrangements or who for consideration facilitated the taxpayer’s entering into avoidance arrangements);
Is given as a result of arrangements between an interested person and the person who gave the advice;
Is provided by a person who does not have the proper expertise;
fails to consider all of the taxpayer’s relevant circumstances;
was given to a person other than the taxpayer.
The options for taxpayers with undeclared offshore income/gains are not attractive. The current penalty regime is still punitive, but it is less punitive than the one that will take effect on 30 September. There is at least some scope to try to mitigate penalties under the existing regime. Applicable penalties could still be significantly less onerous if, for example, the tax irregularity originates from a category 1 jurisdiction. The FTC regime that takes effect from 30 September has appreciably fewer opportunities to mitigate penalties. Unless there is a reasonable excuse, the applicable penalty will be 200%, with scope to reduce the penalty depending on the ‘quality’ of the disclosure, to no less than a 100% penalty.
It is imperative that anyone with an offshore interest undertake a review of their holdings to ensure that they are compliant with their UK tax responsibilities. If anything is found that needs to be regularised, this needs to be done by 30 September.