Offshore tax evasion and disclosure have been priorities for HMRC in recent years. HM Revenue & Customs (HMRC) have offered a number of one-off, time-limited campaigns, such as the Worldwide Disclosure Facility to encourage taxpayers to disclose offshore tax evasion in return for lower penalties. A new HMRC proposal called the Requirement to Correct, will take effect from 1 October 2018 and will increase the time limit of investigations and dramatically increase penalties.
The purpose of the RTC legislation is to require taxpayers with undeclared tax liabilities to voluntary disclose them before 30 September 2018 as after this date, they become liable to the new Failure to Correct penalties (FTC). Moreover, on this date, HMRC’s ability to find undeclared assets significantly increases as the Common Reporting Standard (CRS) will be effective. This is an international initiative involving over 100 countries committing to exchange information on a multilateral basis to significantly increase international tax transparency and toughen the approach to offshore non-compliance.
If HMRC have accused you of offshore tax avoidance or tax evasion, or you are worried that HMRC may do so in the future, contact our expert Offshore Tax Evasion Lawyers. We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results.
It is essential to contact our expert tax team as soon as possible, as you only have until 30 September 2018 before the new tougher FTC penalties come into law. Just call us on 0207 1830 529, or email
What is “offshore income”?
HMRC considers offshore income as any asset which comes from a territory outside the UK. This includes:
- interest from overseas bank or building society accounts;
- dividends and interest from overseas companies;
- rent from overseas properties; and/or
- wages, benefits or royalties earned outside the UK.
What is the Requirement to Correct?
The Requirement to Correct is part of HMRC’s crackdown on taxpayers failing to disclose offshore income. The Requirement to Correct will increase the penalties for those who have not declared offshore tax liabilities or have declared the wrong amount of tax. A penalty could be double the tax that is owed.
“Schedule 18 makes provision for and in connection with requiring persons to correct any offshore tax non-compliance subsisting on 6 April 2017.”
The two provisions create an obligation on any taxpayer with undeclared UK tax liabilities involving offshore matters to disclose this information to HMRC before 30 September 2018. A failure to disclose before 30 September 2018 will result in a person becoming liable to a failure to correct penalty (FTC).
The scope of the RTC rule
- The Requirement to correct applies to liabilities to:
- Only non-compliance committed before 6 April 2017 falls within the RTC.
- HMRC must have been able to make an assessment to recover the income tax or capital gains tax in question on 6 April 2017 or make a determination to recover the Inheritance Tax in question on the day after Royal Assent is received for the new provisions.
These rules are subject to a small number of exceptions.
What is offshore non-compliance?
This occurs where HMRC are owed tax because of tax non-compliance and this non-compliance involves an offshore matter. Offshore issues include unpaid or omitted tax on:
- income arising from a source in a territory outside the UK;
- assets situated or held in a territory outside the UK;
- activities carried on wholly or mainly in a territory outside the UK; and
- anything having effect as if it were income, assets or activities of a kind described above
According to HMRC, the tax non-compliance involves an offshore transfer if it is not an offshore matter, but the income (or sale proceeds in the case of a capital gain), or any part of the income, was either received abroad or was transferred abroad before 6 April 2017.
Moreover, HMRC advice that for inheritance tax, the tax non-compliance involves an offshore transfer if it is not an offshore matter, but the disposition that gives rise to the transfer of value involves a transfer of assets, and after that disposition, but on or before 5 April 2017, the assets, or any part of the assets, are transferred to a territory outside the UK.
In all cases, references to the income, proceeds or assets transferred includes any assets derived from or representing the income, proceeds or assets.
If non-compliance meets the above definitions, then the RTC rule applies and a failure to correct by 30 September 2018 will result in tougher FTC penalties on 1 October 2018.
Examples of off-shore non-compliance
Off-shore non-compliance for Income tax
According to HMRC, an example could include a taxpayer receiving cash payments in the UK. They have failed to declare these cash payments and instead opened and paid these into an overseas account. They have received interest on this overseas account but not declared this to HMRC and has submitted inaccurate tax returns.
Both the failure to declare cash receipts (as an offshore transfer) and the overseas bank interest (as an offshore matter) should be corrected under the RTC rule.
Off-shore non-compliance for Income tax and capital gains tax
Pursuant to HMRC’s requirements, an example could include taxpayer owning and renting a holiday home abroad with the rental income not being declared to HMRC. The property could be sold and the profit from the sale was not declared to HMRC either.
Both the failure to declare rental income (as an offshore income tax matter) and the gain from the sale (as an offshore capital gains tax matter) should be corrected under the RTC rule.
Off-shore non-compliance for Inheritance tax
There are situations where a taxpayer is domiciled in the UK at the time of their death and their heir inherits the estate which includes monies in an overseas bank account. An heir may take control of the overseas account but fail to disclose this to HMRC.
The failure of an executor to disclose the overseas assets of an estate (as an oversea matter) should be corrected under the RTC, according to HMRC.
What are the FTC penalties?
If a taxpayer fails to correct on or before 30 September 2018, you will be liable to the new and tougher FTC penalties. Penalties start at 200% of the tax liability. In serious cases over £25,000, an additional penalty of up to 10% of the asset may apply as well as being “named and shamed” on the Government’s website.
According to HMRC, whenever a penalty applies, there will be a standard penalty equivalent to 200% of the tax liability which should have been disclosed to HMRC under the RTC but was not. This penalty can be reduced to reflect any combination of the following factors:
- your level of co-operation with HMRC;
- the quality of your disclosure to HMRC (including telling HMRC of anyone who helped enable your non-compliance);
- the seriousness of your failure to correct.
The reduction will take account of whether you came forward voluntarily to tell HMRC of your failure but the reduction cannot reduce the penalty to less than 100% of the tax involved.
It is essential to seek advice from our expert Tax lawyers to deal with HMRC. We deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability. Our lawyers specialises in submitting disclosure reports and negotiating potential penalties with HMRC
Asset based penalty
In more serious cases, involving non-disclosure of tax exceeding £25,000 annually and a taxpayer knew they had relevant offshore non-compliance and didn’t correct it, a penalty of up to 10% of the value of assets connected to the failure will be charged. This is in addition to the standard penalty.
Offshore Asset Moves penalty
A new penalty has been introduced for cases where assets have been moved to avoid details being reported to HMRC under international agreements on the exchange of information under Schedule 21 to Finance Act 2015.
The penalty is equivalent to 50% of the amount of the standard penalty and is charged in addition to the standard penalty. In more serious cases involving sums over £25,000 and you knew about the offshore non-compliance, then HMRC are entitled to publish your details.
“Reasonable excuses” for not meeting the RTC rule
If you fail to correct under the RTC rule, FTC penalties will ordinarily apply. However, if you have a reasonable excuse for not correcting the non-compliance, then FTC penalties will not apply (but tax will still be owed plus interest).
It is essential to consult our expert Offshore Tax Lawyers for advice because HMRC will follow existing models and established principles from case law to establish whether a reasonable excuse exists. We have experience in preparing correspondence with HMRC that can demonstrate a reasonable excuse if the facts apply.
The RTC legislation states circumstances where a reasonable excuse cannot apply:
- an insufficiency of funds is not a reasonable excuse, unless attributable to events outside your control;
- where you relied on any other person to do anything, that cannot be a reasonable excuse unless you took reasonable care to avoid the failure;
- where you had a reasonable excuse but the excuse has ceased, you are only to be treated as continuing to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased; and
- relying on advice in certain circumstances.
What extra information will HMRC have to find undeclared offshore tax after 30 September 2018?
Under the Common Reporting Standard, the UK has made Automatic Exchange of Information Agreements with over 100 countries. These agreements allow the exchange of information between HMRC and the tax authorities of different countries about financial accounts and investments. A list of the countries that have agreed to exchange information can be found here. The extra information HMRC will have is extensive and is drawn from the following sources:
- Crown Dependencies and Overseas Territories agreement ensures reporting on tax residents in one territory and holding an account in another will be done between the UK and its overseas territory.
- Common Reporting Standard information sharing which has been in use since 2017, but can be utilised by HMRC in October 2018.
- Data leaks eg Panama Papers in 2016 and Paradise Papers in 2017
- Long term non-doms in the UK will have their offshore assets visible to HMRC for the first time from 2017/18.
How can you avoid higher penalties for undeclared tax liabilities?
HMRC advise that you can avoid being charged the higher penalties by making a disclosure of all undeclared tax liabilities and correcting the non-compliance.
We will provide expert advice tailored to your situation on whether you need to make a disclosure, and if so, the scope required for each type of disclosure. A disclosure can be made in the following ways:
- using HMRC’s digital disclosure serviceas part of the Worldwide Disclosure Facility or any other service provided by HMRC as a means of correcting tax non-compliance;
- telling an officer of HMRC in the course of an enquiry into your affairs or
- any other method agreed with HMRC.
Before you make any kind of disclosure to HMRC, it would be wise to consult our expert Offshore Tax solicitors and barristers.
More information on HMRC voluntary disclosures can be found here.
Expert City of London Offshore Tax Disclosure Lawyers
If you need advice on undeclared income, voluntary disclosure, the Worldwide Disclosure Facility or HMRC campaigns advice, we are available to aid you at every stage of the HMRC disclosure and negotiation process. Members of our legal team have first-hand experience and knowledge of the internal workings of HMRC. We can provide you with the very best representation in negotiations with HMRC. Our team specialises in submitting disclosure reports and negotiating potential penalties with HMRC.
Our specialist Tax Solicitors and Barristers deliver expert technical knowledge, strong negotiation skills and respected advice, which can make a pronounced difference to eventual tax penalties, charges and liability. We provide urgent advice and representation to clients from our unique expert team of established Tax and Duties specialist solicitors and barristers with a proven track record of delivering authoritative results.
Our Tax Disputes professionals are available to give information and advice in negotiating penalties with HMRC. To contact one of our specialist Tax Lawyers please click here or call 02071830529.