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.

UK business is “very relieved” – EMI Share Schemes are back on track!

Have you been thinking of granting Enterprise Management Incentives to your key people? Between 6 April and 16 May the EU approval process for State Aid lapsed and the UK Government was held responsible. Not by design and certainly the EU must be agreeing what a massive positive effect this can have on UK business as the new approval period runs through from 16 May 2018 to 6 April 2023. This “2023” is perhaps a little academic, given that the UK will have left the EU fully before 2022 even allowing for a so called transitional period. However, the UK will need its own “State Aid” system to enable it to carry out trade deals with EU member states. But enough of that – the important question now is …

What might an EMI share scheme do for your business?

The tax advantages for an “EMI Scheme” are, to use current vernacular, “pretty awesome”. If a company share is worth £5 today, your key worker could receive that share, pay no tax on it, then sell it on later when it’s worth perhaps say £25 and make a gain of £20.00. Multiply that up by hundreds or thousands of shares and although they’d pay tax on the gain, the top tax rate would currently be 20%. It could be just 10% even if the worker pays higher rate tax on their income. The worker could qualify for this even if they hold less than 5% of the shares but their option must have been granted at least 12 months before the sale. Of course, there are some quite big “hoops to jump through”, several in fact, and they must be done in the right order, but the procedure for getting this scheme up and running is fairly straightforward. Something you can entrust to us. Some companies will not qualify because of the type of business they are in, for example finance or property related, but many thousands of companies do indeed qualify and a lucky shareholder could be allowed to acquire up to 30% of the shares for up to 10 years after the option to have shares has been granted to them. The value of scheme shares per worker under option carry a maximum value of £250,000 when options are granted -but include any other share scheme values for that worker when looking at total value. If you have key personnel and you have an outlook that is “liberal”, an EMI scheme could deliver incentives where a conventional “bonus” arrangement has run out of steam. An EMI Scheme won’t suit owners who want to retain total ownership of their company but giving new shares doesn’t mean losing control and may be the best way of achieving your goals…

“What if we can’t do an EMI Scheme?”

Are you serious about incentivising your key staff through share ownership? If “yes”, there is another tax efficient route that we will be happy to discuss with you. Just call us, or send an email through our contact us page.