The September Finance Bill 2017 introduces a new Requirement To Correct (RTC) for taxpayers with undeclared UK income tax, capital gains tax (CGT) or inheritance tax (IHT) liabilities in relation to offshore matters. Affected taxpayers have until 30 September 2018 to correct their position or face severe penalties.1
The aim is to encourage taxpayers to settle their affairs before HMRC begin to use the information which they will receive from overseas territories under the Common Reporting Standard (CRS).
What non-compliance does the RTC cover?
The RTC applies to relevant offshore tax non-compliance which is not corrected by 30 September 2018.
Breaking this down, tax non-compliance is defined as:
- Failure to notify chargeability to income tax or CGT,
- Failure to make and deliver a return or other document for income tax, CGT or IHT, or
- Delivering an inaccurate return or other document income tax, CGT and IHT.
Tax non-compliance is offshore if it relates to an:
- Offshore matter (e.g. income, assets or activities overseas), or
- Offshore transfer (broadly where income/assets/proceeds are transferred outside the UK).
Finally, offshore tax non-compliance will be relevant if:
- It was not fully corrected at 5 April 2017,
- It involves a potential loss of tax revenue, and
- HMRC would have been able to assess the tax liability concerned on 6 April 2017 (or the day after the Finance Act is passed for IHT).
It should be noted that the first of these conditions requires the offshore tax non-compliance to be fully corrected: the RTC can still apply if matters were only partially corrected at 5 April 2017.
How can non-compliance be corrected?
Unless relevant offshore tax non-compliance matters are corrected by 30 September 2018, the taxpayer is liable to penalties.
Broadly, correction can be achieved through:
- Delivering to HMRC the document that should have been submitted (e.g. a notification of chargeability or tax return).
- Using a disclosure facility provided by HMRC, such as the worldwide disclosure facility.
- Telling an officer of HMRC in the course of an enquiry, or
- Some other method agreed with HMRC.
Failure to correct relevant offshore tax non-compliance matters by 30 September 2018 can lead to high penalties for taxpayers.
The standard penalty is 200% of the potential lost revenue (PLR) arising from the offshore tax non-compliance.
The only ways in which this penalty can be reduced are as follows:
- HMRC are required to reduce the penalty if the taxpayer discloses the non-compliance and co-operates with HMRC. The amount of the reduction will reflect the quality of disclosure and co-operation, but cannot reduce the penalty below 100% of PLR.
- In special circumstances HMRC have the discretion to reduce or stay a penalty. The legislation doesn’t detail what constitutes special circumstances, other than that they do not include inability to pay or the fact an underpayment by one person is balanced by an overpayment by another.
- No penalty will apply if a taxpayer has a reasonable excuse for their failure. For these purposes the following are not a reasonable excuse:
- Insufficiency of funds (unless attributable to events outside the taxpayer’s control),
- Relying on someone to do something, unless the taxpayer took reasonable care to avoid the failure,
- Reliance on disqualified advice – broadly advice by persons without appropriate expertise, those involved in the arrangements (e.g. promoters and facilitators) and advice which is generic or not addressed to the taxpayer.
Unlike the standard penalties for errors in returns or documents contained in Schedule 24 of Finance Act 2007, no account is taken of whether the taxpayer’s behaviour was deliberate or careless when setting the amount of the penalty. As a result, if a taxpayer has been careless (but does not have a reasonable excuse and there are no special circumstances) then, even if they co-operate fully with HMRC, the minimum penalty will be 100% of PLR.
Deliberate behaviour can however open taxpayers to up to additional asset based penalties.
Double jeopardy provisions ensure taxpayers will not be subject to a RTC penalty if they have already been convicted of an offence or assessed to a penalty for the same conduct under a different penalty provision. The exception is penalties charged under Schedule 55 of Finance Act 2009 where a return is overdue by 6 months or more –an RTC penalty can be charged in addition to such penalties but the aggregate amount cannot exceed 200% of the tax liability.
Taxpayers can appeal against the decision to charge a penalty, or the amount of the penalty charged.
In addition to financial penalties, the RTC provides for HMRC to name and shame taxpayers if:
- They incur one or more RTC penalties and the PLR exceeds £25,000, or
- They incur five or more RTC penalties.
In both cases, the taxpayer must have been aware that they had relevant offshore non-tax compliance during the RTC period and HMRC have to inform a taxpayer of their intention before publishing their information.
Extension of assessment period
Another change introduced by the RTC is to extend the time limit for HMRC to assess tax until 5 April 2021 where:
- At 5 April 2017 a person has relevant offshore tax non-compliance to correct, and
- The time limit for HMRC to assess that tax would otherwise expire between 6 April 2017 and 4 April 2021
What should taxpayers and advisers do?
As the deadline for correcting relevant offshore non-compliance is less than one year away, taxpayers with offshore interests, income or assets and their agents should, as soon as possible review their affairs and either:
- Satisfy themselves that their UK tax position in respect of those overseas income or assets is up to date, or
- Make a disclosure to HMRC.
If you encounter or identify any systemic problems with the RTC please email atttechnical [at] att.org.uk with the subject heading: Requirement To Correct.
- The RTC was one of the many measures dropped from the Finance Act 2017 due to insufficient time for debate. It has now been reintroduced as Clause 67 and Schedule 18 of the Finance Bill published in September 2017. This article is based on the legislation set out in that Finance Bill as at 12 October 2017.