In the April issue of Tax Aware, we talked about the Requirement to Correct (RTC). With time now running out, taxpayers should take advantage of the existing opportunity to pay reduced tax penalties.
The RTC legislation contains a statutory obligation for taxpayers with overseas assets to correct any issues with their historic UK tax position. Those who fail to do so, regardless of whether the error was a result of genuine mistake, carelessness or deliberate action, will face draconian penalties and other sanctions.
The provisions are wide-reaching and apply to persons who may have an undeclared UK income tax, capital gains tax or inheritance tax liability. This includes individuals, partnerships and trustees.
With the advent of the Common Reporting Standard and other measures which allow for the automatic exchange of tax and financial information, it is anticipated that HMRC will be able to identify non-compliance much more easily.
In what circumstances could the RTC apply?
The following are examples of where the RTC rules could apply:
- a UK person sold an overseas holiday home or other overseas investment and did not notify HMRC of the sale; or
- a UK beneficiary of an offshore trust received a distribution from the trust in the UK and did not declare the distribution in their tax return; or
- offshore trustees failed to notify HMRC of an earlier 10-yearly inheritance tax charge in respect of UK assets; or
- rental income from a foreign holiday home was not declared on the UK owner's tax return.
What is the deadline to correct?
Taxpayers have until 30 September 2018 to correct their UK tax position if they want to limit penalties for undeclared tax on offshore matters.
What are the consequences for failing to correct by 30 September 2018?
If a taxpayer does not disclose their non-compliant tax position to HMRC by 30 September 2018, HMRC will impose much harsher penalties than they can at present. The penalties have increased to:
- a standard penalty of 200% of the undisclosed tax liability (this could be reduced to 100%, depending on the quality of the disclosure made to HMRC and whether the taxpayer volunteered the information);
- a potential penalty of up to 10% of the value of the assets connected to the disclosure where the asset value is over £25,000;
- possible naming and shaming on HMRC's website; and
- a potential further penalty of 50% of the standard penalty if HMRC can establish that funds or assets were moved in an attempt to avoid the RTC.
Under current rules and until 30 September, the penalty could be as low as 0%.
Is there a defence?
There is a defence against the penalties if the taxpayer can establish that they have a "reasonable excuse" for failing to correct the non-compliance, but this defence is very restricted. Notably, reliance on professional advice that stated there was no reporting responsibility or tax liability will not be a defence for the taxpayer if that advice was given by "interested persons". This is widely defined and includes anyone who advised on and facilitated the offshore arrangement.
What can taxpayers do now?
The deadline of 30 September 2018 is fast approaching, so taxpayers must act now. Taxpayers should review their historic UK tax position as soon as possible. Where they have relied on professional advice to enter into an arrangement, such advice should also be reviewed, particularly where it was provided by "interested persons".
If there is an undeclared tax liability, you should act now to mitigate the potential penalties by filing the relevant tax return or at least initiating dialogue with HMRC before the deadline. In some circumstances, it may be appropriate to submit disclosures to HMRC to protect against the failure to correct sanctions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.