If your affairs involve income or assets outside the UK and your UK tax filings up to 5 April 2017 in relation to these offshore matters are not 100% perfect then, from 30 September 2018, you face stringent new penalties of up to 200% of the tax due. In the most serious cases the penalty can increase to 300%, together with a further penalty of 10% of the assets in question and potential naming and shaming by HMRC.

You have until 30 September 2018 to put this right.

You should start reviewing this now, as the corrections must be largely completed by 30 September 2018.

Background – the Requirement to Correct

In December 2015, HMRC announced plans for a significantly tougher penalty regime for tax non-compliance involving matters outside the UK. At the same time it announced a final opportunity to put things right (described as a "Requirement to Correct" (RTC)).

Following a consultation in August 2016, the government has now published draft legislation relating to the RTC.

This seems to be the last of various initiatives to encourage taxpayers to come forward voluntarily, and will be followed by a punitive 'crack down' on individuals who continue to hide funds overseas. However, unlike previous initiatives, the new proposals effectively comprise an added 'stick', rather than the promise of a tempting 'carrot'. The relatively lenient terms of the LDF and the Channel Islands Disclosure Facilities (both of which presented packages of encouraging offers, including flexibility in treatment by HMRC, relatively attractive penalty impositions and – in the case of the LDF – immunity from prosecution for disclosed liabilities) are seemingly now a thing of the past

The timings of this are linked to the new Common Reporting Standard (CRS) under which HMRC will automatically gain much more information (from over 100 other jurisdictions) of the offshore income and assets of UK residents.

What is covered?

The RTC covers:

  • offshore matters (broadly income, gains or assets outside the UK)
  • offshore transfers (transfers of UK income, gains or assets out of the UK).

The taxes covered are:

  • Income Tax
  • CGT (but not NRCGT for offshore companies)
  • Inheritance Tax.

Non-compliance – whether deliberate, careless, or even an innocent mistake – includes:

  • errors in a return
  • failure to complete a return
  • failure to notify HMRC that a return should be issued.

When does this apply?

The non-compliance must relate to periods up to and including 5 April 2017.

The non-compliance must be brought up to date by 30 September 2018. If there is an existing enquiry open at 30 September 2018 then you must give HMRC all the relevant facts and information by that date.

If HMRC would have been in time to assess tax at 5 April 2017 then the usual time limits for them to assess you are extended to 5 April 2021.

What are the penalties?

After 30 September 2018, the basic penalty is 200% of the tax due.

This may be reduced, but no lower than 100% of the tax due, by disclosure to HMRC and co-operation with them. The seriousness of the previous behaviour will also affect the reduction in penalty.

In the most serious cases (tax due > £25,000; behaviour was deliberate), a 10% asset penalty may also apply. HMRC may also name and shame those affected.

The basic penalty may also be increased to up to 300% if assets are deliberately moved with a view to hiding them from HMRC.

What if the non-compliance was an innocent mistake?

It is important to realise that, unlike the existing penalty regime, the new penalties after 30 September 2018 will focus less on the taxpayer's motives. HMRC's view is that taxpayers will already:

  • have committed the original failure
  • failed to respond to previous publicity and previous disclosure opportunities (such as the LDF or Worldwide Disclosure Facility)
  • failed to respond to the RTC.

As such the penalties can apply even to innocent mistakes.

However, the penalty will be reduced to zero if the taxpayer has a "reasonable excuse".

What is a reasonable excuse?

While the reasonable excuse defence is welcome, it needs to be appreciated that existing case-law on reasonable excuse indicates that it is a fairly narrow category.

HMRC has further narrowed what is a reasonable excuse in the draft legislation:

  • Insufficiency of funds is only a reasonable excuse if it is outside your control.
  • Relying on someone else to do something (e.g. complete and file your tax return for you) is only a reasonable excuse if you took reasonable care to make sure that that other person did what they were supposed to do.
  • Reliance on professional advice is not a reasonable excuse if the advice was generic advice and not specifically addressed to you.
  • Reliance on professional advice is only a reasonable excuse if you take reasonable steps to find out whether the professional has appropriate expertise and reasonably believe them to do so.

What steps should be taken now?

Any person with UK tax liabilities who has not recently reviewed the taxation of their offshore assets or structures should seek proper professional advice as soon as possible. As seen above, generic advice or advice from non-specialists may not be sufficient.

The terms of the RTC are particularly aimed at individuals and trustees who do not believe themselves to be "tax evaders" and who may therefore have not seriously considered using other disclosure facilities (such as the LDF) despite having out-dated or risky – but arguable – tax planning strategies in place.

It will therefore be important to review:

  • older structures that may have been compliant in the past (but which may not be advisable now)
  • bank accounts held outside the UK
  • your residence and/or domicile position and whether this has been accurately stated
  • benefits received from offshore trusts
  • payments made from offshore assets
  • any other offshore bank account or asset that has not accurately been declared to HMRC.

There is a limited window in which to regularise any outstanding liabilities before taxpayers become subject to the stringent new penalties. It should be noted that the 30 September 2018 deadline is not simply a notification deadline. By that date, the previous non-compliance must either have been brought up to date or (as a minimum) HMRC must be in possession of all the facts necessary to correct the position.