Requirement to Correct: Out of Mind but not Out of Sight
HMRC is gearing up for a seriously new hard penalty regime that comes in to force from 1st October 2018. It will impact anyone who has not by then, told HMRC they owe UK tax up to 5th April 2017 relating to offshore interests.
Some people refer to this deadline as Requirement to Correct, or “RTC” for short. The object is to tell HMRC as soon as practical, lest they find out before being informed.
This RTC applies to undeclared
Income Tax, Capital Gains Tax and Inheritance Tax if it stems from offshore finance. This might be overseas rental income, or property sales, distributions from trusts or undisclosed overseas bank accounts.
HMRC will be receiving information from at least 102 countries, and this is an information sharing facility that will grow as more countries join in.
The Impact of the Worldwide Disclosure Facility
The
Worldwide Disclosure Facility is the last chance saloon for individuals to bring their tax affairs up to date before the “old penalty rules” expire on 30 September 2018.
The costs of inaction are pretty massive because under the new rules, failing to notify about errors by 30 September 2018 will result in a starting figure of 200% of the tax.
This can be reduced, based on the quality of disclosure to HMRC, and the level of co-operation. But the minimum is 100% of the tax. This full reduction can only be given in cases where an unprompted, voluntary disclosure to HMRC is made.
If a voluntary disclosure has not been made, the minimum standard penalty is 150%. This means if you were subject to a HMRC enquiry relating to offshore matters, the penalty range will be 150-200% of the tax liability.
Some Illustrations of The Potential Impact
For example, if HMRC discovered an offshore tax loss of £40,000 for 2016-17, the minimum standard penalty payable would be £60,000, in addition to the tax due and late payment interest.
In the most serious cases, if the individual knew that they should have corrected this before the RTC deadline, there is also an asset-based penalty. This occurs where tax exceeds £25,000 in any tax year. A penalty of up to 10% of the value of the undisclosed offshore assets will be charged, in addition to the standard penalty.
Following on from this example, if the tax due arose from rental income you would also pay an asset based penalty. Say you had an offshore property worth £1m and exceeded £25,000 in any tax year, the penalty would be £500,000. In this instance you’d probably have to sell the asset to pay the tax, unless you have additional capital available. And selling an asset may trigger capital gains tax.
There is also an enhanced
Offshore Asset Moves Penalty, where assets have been moved to avoid declaring to HMRC under information exchange agreements. For example, some may move assets to a country that isn’t yet sharing information with the UK. This can include change of ownership, such as transferring to a trust or company. The penalty in this situation is 50% of the standard penalty.
This means that under the new hard penalty regime a total hypothetical penalty of £590,000 (£60k + £500k + £30k) can arise from a tax liability of say £40,000.
The advantage of disclosing before the RTC deadline should be clear even to the most stubborn of ‘ostriches’. It’s time to take your head out of the sand.
Still Trying to Avoid Tax? Your Deeds May be Broadcast
In addition to the penalties above, HMRC have reduced the criteria for their policy on publishing the Details of Deliberate Defaulters in relation to offshore matters. They will now consider publishing an individual’s details as a tax defaulter if the total tax is over £25,000 and the tax liability was known about at the RTC deadline. Regardless of whether there has been full cooperation.
There are different time limits for HMRC to raise assessments depending on the error which has led to the tax loss. The RTC rules introduce extended time limits for these matters. HMRC will have until 5th April 2021, an additional four years, to raise assessments for any liability that could have been assessed at 5th April 2017. This means that waiting for the error to ‘fall out of time’ is not a clever move.
What if have been an ostrich so far? Don’t panic, because it is not necessary to have made a full disclosure by 30 September. Provided an individual has notified HMRC of the intention to correct their tax affairs, they will be protected. This will mean that current penalty rules can be applied to disclosures, which is a much better position.
Even if you do read this after September, it isn’t too late to still save yourself a whole lot of money.
Unless You’ve Already Been Discovered, You can Act Now
If, having read this, you are feeling a bit like our ostrich friend,
contact us immediately to see what can be done. Even for sound advice.
We are never judgemental and our senior tax investigations expert will have “seen it all before”. Everyone deserves to be represented robustly and professionally when dealing with HMRC.
