The Requirement to Correct (RTC) deadline of 30 September 2018 is fast approaching. By this date individuals need to have notified HMRC of any undisclosed offshore tax liabilities arising on or before 5 April 2017, or face the risk of HMRC uncovering these and applying a new, extremely harsh, penalty regime.
What this means for those affected
The RTC applies to undeclared income tax, capital gains tax and IHT in relation to offshore matters. This may include overseas rental income or property sales, distributions from trusts or undisclosed overseas bank accounts.
The Common Reporting Standard (CRS) is the mechanism by which HMRC will automatically receive financial information from 102 countries, with more countries expected to sign up in the near future.
With the level of information HMRC will be receiving under the CRS, the likelihood that they will discover previously undisclosed offshore assets and income has never been higher. There have been previous opportunities to disclose offshore tax irregularities, such as the Liechtenstein Disclosure Facility, so the Worldwide Disclosure Facility is seen as the last chance for individuals to bring their tax affairs up to date, ahead of the RTC deadline
The penalty regime – Failure to Correct (FTC)
Under the new rules, failing to correct errors by 30 September 2018 will result in a standard penalty of 200% of the tax. This can be reduced based on the quality of disclosure to HMRC and the level of co-operation with HMRC, to a minimum of 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.
For example; if HMRC discovered an offshore tax loss of £100,000, the minimum standard penalty payable would be £150,000, in addition to the tax due and late payment interest.
In the most serious cases, where the tax exceeds £25,000 in any tax year and the individual knew that they should have corrected this before the RTC deadline, there is also an asset-based penalty. A penalty of up to 10% of the value of the undisclosed offshore assets will be charged and this is in addition to the standard penalty as explained above.
Following on from the example above, if the tax due arose from rental income from an offshore property worth £1m and exceeded £25,000 in any tax year, you would also pay an asset based penalty of £100,000.
There is also an enhanced Offshore Asset Moves Penalty, where assets were moved to avoid having details reported to HMRC under information exchange agreements. This includes changing ownership arrangements, such as transferring to a trust or company. The penalty in this situation is 50% of the standard penalty.
Continuing with the above example if the beneficial owner of the property had transferred it into a trust, the offshore asset move penalty would be £75,000, 50% of the standard penalty.
This means that under the FTC regime a total hypothetical penalty of £325,000 can arise from a tax liability of £100,000.
Under the current penalty rules, if an unprompted disclosure was made in exactly the same circumstances, there would be a minimum deliberate penalty of either 30%, 40% or 50%, depending on the territory involved. Based on the £100,000 tax liability in the example above, a penalty of £30,000, £40,000 or £50,000 would be payable. When compared to the potential £325,000 penalty for the same error, the advantage of disclosing before the RTC deadline is clear.
In addition to the penalties above, HMRC have lowered the bar 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 5 April 2021, an additional four years, to raise assessments for any liability that could have been assessed at 5 April 2017. This means that waiting for the error to ‘fall out of time’ will be an unwise strategy. Is it too late?
There is no need for panic if no action has yet been taken. 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 from the new penalty regime. This will mean that current penalty rules can be applied to disclosures, a much better position when compared to the penalty regime after this date.
If you believe the RTC may apply to you or a client, or you would like to discuss your tax affairs in relation to any of the information above, then please do not hesitate to contact us on our TaxDesk line on 0845 4900 509 and ask for Riocard Hoye or Nathan Ross-Sercombe.
The tax investigations team at Gabelle have considerable experience in offshore matters and making all types of disclosures to HMRC.