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The requirement to correct and new penalties

Tax investigations expert John Cassidy explains the latest sanctions for offshore non-compliance and the importance of the 30 September 2018 deadline.

The requirement to correct and new penaltiesA new statutory ‘requirement to correct’ (RtC) for any person (including trusts) with undeclared taxes from overseas assets was enacted in last year’s second Finance Act (s67 and Sch 18). The RtC covers income tax, capital gains tax and inheritance tax and requires a person to correct anything which HMRC could lawfully assess as at 6 April 2017.

Coupled with this, tough new penalties introduced from 1 October 2018 will apply to errors in UK tax returns relating to offshore matters.

Making a disclosure

An opportunity still exists – but only until 30 September 2018 – to advise HMRC of any unpaid taxes arising from overseas assets.

The Worldwide Disclosure Facility (WDF) or any other appropriate disclosure route can be used to facilitate disclosures of undeclared tax liabilities arising from, broadly, offshore income, assets, activities or transfers, with the addition of statutory interest and ‘normal’ penalties.

For careless, unprompted disclosures, this is likely to result in a low penalty of around 0–10% in circumstances where full disclosure and cooperation are offered. In deliberate behaviour cases, a penalty of around 20–30% of the unpaid taxes is likely to be exigible where a proper, timely and unprompted disclosure is made.

These disclosures are far from straightforward and will generally require specialist help to assess behaviours which will impact on the number of years assessable and on penalty levels. Great care should be taken where deliberate behaviour is involved, as the WDF offers no immunity from prosecution for tax offences. Where fraud is in point, an individual should instead consider applying for the Contractual Disclosure Facility (otherwise known as Code of Practice 9).

Failure to correct penalties

Where taxpayers fail to disclose overseas liabilities by the 30 September 2018 deadline, strict penalties for failing to correct (FtC) will apply. These start at 200% of the underpaid taxes, but may be mitigated down to a minimum of 100% with full cooperation and disclosure. It will not matter whether the historic liabilities arose as a result of human error, careless behaviour or tax fraud, since the penalty imposition applies to the failure to correct rather than the original offence(s).

‘Reasonable excuse’ may be claimed, but tax authorities are likely to resist any such claim and will only entertain such a defence in very limited circumstances as has been the case in the past.

The FtC legislation has made this even more difficult by prescribing situations which do not amount to a reasonable excuse. For example, it will no longer be possible to rely on the fact that professional advice relating to the offshore planning was taken, as reliance on such ‘paid’ advice is specifically excluded. Each case will depend on its own merits; there are rights of appeal and, ultimately, it will be for the tribunal to decide.

The basic penalty may also be supplemented by a second penalty of up to 50% of the FtC penalty, where the tax authorities demonstrate that taxes remained unpaid as a result of an individual, trust or company trying to deliberately evade taxes by moving assets between jurisdictions.

There is a new ‘asset based’ penalty, too, for the most serious cases of tax fraud arising from overseas assets. The penalty may be up to 10% of the asset value. Where taxes amount to more than £25,000, an individual may also be ‘named and shamed’.

Examples of the impact of penalties

The new ‘super penalties’ will apply retrospectively, ie, to all past tax, not just tax years falling after the new RtC legislation was enacted. Any individual who has undisclosed historic tax liabilities is strongly advised to take independent specialist advice in order that a tax review of their affairs and a disclosure if needed may be made prior to 30 September 2018.

Accountants, trustees, private bankers, independent financial advisers or corporate service providers should now be advising their clients to take independent tax health checks, so that matters may be put right in advance of the new penalties which could, if levied, potentially wipe out overseas investments, as illustrated in the examples.

Assessment periods

Anyone hoping to ‘hang on’ so old years fall out of HMRC’s window to raise assessments should beware. The new rules also effectively freeze the time limits at 6 April 2017, meaning that anything assessable on that date remains assessable for another four years – so HMRC has until 5 April 2021 to issue assessments.

This means that tax due as a result of, say, careless behaviour can be assessed for up to 10 years rather than the usual six, with assessments for deliberate or non-careless behaviour increasing to 24 years (normally 20) and eight years (normally four) respectively. For example, on 5 April 2021, HMRC could still assess all tax years from 2011/12 onwards if careless behaviour exists.

With so much data being supplied to HMRC under the Common Reporting Standard (CRS) before 30 September 2018, it would be staggering if those with offshore interests were not contacted or challenged by HMRC long before this extended deadline.

To recap, the CRS is a mechanism embraced by over 100 countries worldwide whereby offshore institutions such as banks and trust companies will automatically provide HMRC with details of assets held by their clients who have a UK address. This includes jurisdictions with traditionally high levels of banking secrecy, such as Switzerland and Liechtenstein.

HMRC is already acting on CRS data by issuing letters to taxpayers now known to hold offshore assets. Some of those letters ask the recipient to formally certify that they are fully compliant in respect of all tax in relation to all offshore matters or commit to making a WDF disclosure.

The certificate requested is an extremely onerous (and prosecutable) document which must not be taken lightly, so, again, specialist professional advice should be sought before making any decision.

In addition to freezing the assessing time limits under RtC, HMRC is consulting on proposals to increase the time limits to assess offshore matters to a minimum of 12 years. This means that the current time limits of only four or six years in cases of human error or carelessness respectively will automatically increase to 12 years, with assessments for deliberate behaviour remaining at 20.

Start the conversation now

The message is clear: now is the time to talk to your clients. After 30 September 2018, HMRC will no doubt be contacting taxpayers known (because of CRS) to have offshore interests, en masse. Anyone found to be less than totally compliant – whether their actions were deliberate, careless or due to human error – will face a higher tax bill and a massively increased penalty than if they come forward now.

About the author
John Cassidy is a partner at Crowe Clark Whitehill and member of the Enquiries and Appeals Committee and Tax Investigation Practitioners Group