Once upon a time, HMRC’s effective powers to find out about undisclosed offshore accounts were in many cases pretty limited. In an unusual display of pragmatism, HMRC recognised that the carrot was more likely to be effective than the stick in securing compliance and introduced a series of more or less favourable disclosure facilities, badged successively as the Offshore Disclosure Facility (“ODF”), the New Disclosure Opportunity (“NDO”) and the Liechtenstein Disclosure Facility (“LDF”), which finally ended on 31 December 2015.
Whilst these brought in significant sums in unpaid taxes, interest and penalties (with the LDF alone raising over £1bn), some felt that the settlement terms were a little too lenient. And the introduction of enhanced information exchange provisions under the Common Reporting Standard meant that HMRC could start to rely less heavily on the carrot and use the stick instead.
Hence Finance (No 2) Act 2017 sees HMRC as, frankly, pretty much ditching the carrot altogether and replacing it with a rather large stick. But they will desist from using it until 30 September 2018 (which is the date the Common Reporting Standard comes fully into effect).
There is thus a window of opportunity to correct offshore tax irregularities before then: from 1 October 2018, historic offshore tax irregularities that come to light – whether disclosed voluntarily or by HMRC action – will bear penalties of at least 100% of the tax at stake and sometimes very much more.
Requirement to Correct
The so-called “requirement to correct” does not impose any additional requirement to do anything that you are not already required to do under the existing law: rather, it imposes an additional, particularly harsh, penalty regime if historic failures are not corrected by 30 September 2018.
Broadly speaking, if you have any undeclared tax liabilities as at 6 April 2017 (Income Tax, Capital Gains Tax or Inheritance Tax) which relate to offshore matters or offshore transfers, the new legislation requires you to disclose them to HMRC before 30 September 2018.
The only exception is where, because of existing time limits, it is already too late for HMRC to assess the liabilities as at 6 April 2017. Essentially, that exception will cover liabilities for years up to 2010/11 where your previous failure to tell HMRC has been merely careless on your part rather than deliberate. If you are considering relying on that exception, we strongly advise that you take professional advice.
Where you have “something to declare” it will need to be done through the usual channels – that is, by submitting outstanding tax returns, providing information to HMRC when under investigation, or by utilising the currently available disclosure facilities – the Contractual Disclosure Facility (“CDF”) or the Worldwide Disclosure Facility (“WDF”). Disclosures will be subject to the usual provisions for HMRC to charge tax, interest and penalties (which can be mitigated in the usual way).
It’s important to appreciate that the rules go far wider than just interest arising on an offshore bank account. In principle they apply to any unpaid tax charged on or by reference to income arising from a source outside the UK, assets situated outside the UK or activities carried on wholly or mainly outside the UK; or where assets have been transferred outside the UK.
For example, where undisclosed profits from a UK trade have been paid into an offshore bank account, the new rules apply both to any interest on the account and to the trading profits themselves. And in the context of Inheritance Tax, a “periodic charge” arising to an overseas discretionary trust in relation to assets located in the UK is within the new rules.
Failure to Correct: the consequences
If you fail to correct historic offshore tax irregularities by the cut-off date of 30 September 2018, any related understatements of tax subsequently coming to light (regardless of whether you disclose them voluntarily after 30 September 2018 or HMRC discover them) will bear penalties under the new “Failure to Correct” (“FTC”) regime.
The new FTC penalties include:
- A “standard penalty” of 200% of the tax that has not been corrected. This penalty can be reduced by reference to the level of co-operation with HMRC, the seriousness of the failure and the quality of disclosure to HMRC: but will never be less than 100% of the tax.
- A penalty of up to 10% of the value of the assets involved where tax underpaid in a tax year is more than £25,000. This is in addition to the “standard penalty”.
- An enhanced penalty of 50% of the “standard penalty” amount, if HMRC can show that assets or funds have been moved in an attempt to avoid having details reported to HMRC under international agreements on exchange of information.
- Naming of taxpayers ‘in the most serious cases’ (total loss of tax greater than £25,000).
No FTC penalty will be due if you had a “reasonable excuse” for the failure to correct. Existing case law will be relevant; but it’s important to note that relying on professional advice that you had “nothing to declare” won’t always be a “reasonable excuse”.
The new rules bring in the concept of “disqualified advice”. In a nutshell, this means that relying on advice can be a reasonable excuse but only if:
- The person giving the advice had appropriate professional expertise;
- The advice was given to you personally and took account of all of your individual circumstances; and
- The advice was given to you by, broadly, an independent person (that is, someone who didn’t participate in or facilitate your participation in tax avoidance arrangements).
Note also that, even if a penalty is not due under the FTC regime, penalties may still be due under the normal rules in respect of the original tax irregularity.
What you should do next
The penalties for failing to correct by the 30 September 2018 are extremely harsh, particularly if the asset based penalty applies. It is therefore vital that you consider your tax affairs to ensure that they are up to date. Where irregularities arise, these need to be disclosed to HMRC as a matter of urgency but certainly before 30 September 2018.
For more on the “requirement to correct” – and in particular if you are unsure as to your obligations or how to meet them – please get in touch with your usual BKL contact or use our enquiry form.