If you own assets abroad, for example, land or buildings, or you receive or are assessed on income from a foreign source, for example, dividends from non-UK companies, or distributions from offshore trusts, you may be affected by the Requirement to Correct (RTC) rules. The RTC rules oblige taxpayers to correct past non-compliance with their UK tax obligations by 30 September 2018. After this deadline, a new, higher penalty regime will apply.
It is important to comply with these provisions, as from 30 September 2018 HMRC will be receiving vast quantities of data on financial accounts from over 100 countries under the Common Reporting Standard. HMRC sees this as a ‘game changer’ as it will significantly enhance its ability to identify offshore non-compliance after that date.
This article provides an overview of the RTC rules and the new penalty regime.
Scope of the RTC rules
Under legislation contained in the Finance (No 2) Act 2017, persons, ie individuals, partnerships, trustees or non-resident landlord companies, with undeclared offshore tax liabilities relating to UK income tax, capital gains tax or inheritance tax are required to disclose these to HMRC on or before 30 September 2018.
Timing and time limits
The RTC rules cover acts of non-compliance which arose before 6 April 2017 and will apply to tax returns that were filed, or should have been filed, in the 2015/2016 tax year, as well as earlier tax years.
The RTC rules only apply if HMRC is able to raise an assessment to recover the relevant unpaid tax on 6 April 2017. Normal assessment rules apply to decide whether HMRC is able to raise an assessment. Generally, these are as follows:
- where the loss of tax is not due to careless or deliberate behaviour, HMRC has four years from the end of the tax year of assessment;
- where the loss of tax is due to careless behaviour, HMRC has six years from the end of the tax year of assessment; and
- where the loss of tax is due to deliberate behaviour, HMRC has 20 years from the end of the tax year of assessment.
This means that a review into how the non-compliance arose will be needed in order to consider the period for which correction is required.
The draft Finance Bill 2018/19 includes provisions to propose an extension of time limits regarding offshore matters to at least 12 years.
Offshore non-compliance - offshore matters and transfers
The RTC applies if a taxpayer has undeclared UK tax liabilities that involve offshore matters or transfers.
An offshore matter is one where the unpaid tax is charged on or by reference to:
- 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; or
- anything having effect as if it were income, assets or activities of a kind described above.
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.
HMRC gives the example of an individual who receives cash payments in the course of his business, which is run in the UK. He fails to declare the cash and instead pays the money into an overseas bank account. He receives interest on the funds in the overseas bank account and also fails to declare that income. The failure to declare the cash receipts is an ‘offshore transfer‘ because the money was transferred abroad. The failure to declare the interest on the overseas bank account is an ‘offshore matter’ as it is income arising from a source in a territory outside the UK.
In relation to inheritance tax, HMRC gives the example of an executor who fails to disclose cash of a deceased UK domiciled individual, which is held in an overseas bank account. This is an ‘offshore matter’ because it involves property held in a territory outside the UK.
Tax non-compliance means any of the following:
- a failure to comply with an obligation to give notice of chargeability to income tax or capital gains tax;
- a failure to comply with an obligation to file a return;
- filing a return that contains an inaccuracy which amounts to, or leads to (i) an understatement of a liability to tax; (ii) a false or inflated statement of a loss; or (iii) a false or inflated claim to repayment of tax.
How to correct non-compliance
Non-compliance may be corrected on or before 30 September 2018 in the following ways:
- by making and delivering a tax return;
- using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility;
- telling an officer of HMRC in the course of an enquiry into your tax affairs; or
- any other method agreed with HMRC.
Penalties for not correcting on or before 30 September 2018
Where a taxpayer corrects their position by 30 September 2018, the tax and interest will be collected and the existing penalty rules will apply.
If a taxpayer fails to disclose their offshore tax non-compliance on or before 30 September 2018, they will be liable to new penalties because of their failure to correct (FTC). The new FTC penalties are as follows:
- A standard penalty of equivalent to 200% of the tax liability which should have been disclosed to HMRC under the RTC but was not. This may be reduced in certain circumstances, for example where the non-compliance has been disclosed to HMRC and there is co-operation with HMRC. However, it will not be reduced to less than 100% of the tax involved.
- A further penalty for offshore asset moves. If assets were moved offshore to avoid their details being reported to HMRC, there will be a further penalty in addition to the standard penalty. This is set at 50% of the standard penalty.
- An asset-based penalty of 10% of the offshore asset's value may be charged if the tax exceeds £25,000 in any one year.
This means that penalties could be up to 300% of the tax involved plus an additional 10% of the offshore asset's value.
Penalties may not be purely financial, however, as HMRC also has the power to publish the details of individuals who are subjected to the FTC penalties.
Defences to FTC
Penalties will not be chargeable for a FTC where the taxpayer can demonstrate a reasonable excuse for the failure. However, even where the taxpayer can demonstrate a reasonable excuse, any tax will still have to be paid along with any interest. Penalties may also apply under the existing penalty regime.
HMRC will follow established principles from case law on what amounts to a reasonable excuse. However, the legislation expressly provides for circumstances that do not provide such an excuse. In particular, reliance on professional advice does not always provide a reasonable excuse.
Relying on professional advice
A taxpayer may wish to cite as their reasonable excuse for tax non-compliance the fact that they took advice in good faith, but the advice was incorrect. However, the RTC rules specifically deal with this. Taking advice, and relying on it, is automatically not a reasonable excuse if it is disqualified advice. Disqualified advice is where:
- the advice was given by an interested person (see below);
- the advice was given as a result of arrangements made between an interested person and the person who gave the advice;
- the person who gave the advice did not have appropriate expertise for giving the advice;
- the advice failed to take account of all the individual circumstances (so far as relevant to the matters to which the advice relates); or
- the advice was addressed to, or was given to, a person other than the person who relied on the advice.
An 'interested person' is someone who participated in an arrangement or received consideration for facilitating entry into an arrangement, where it would be reasonable to conclude in all the circumstances that the main purpose (or one of the main purposes) was to obtain a tax advantage. This does not include established practices which HMRC has indicated that it will accept.
Ultimately, it is likely that a taxpayer who takes professional advice from a suitably qualified, independent professional, who takes into account all the relevant circumstances, will be able to rely on the reasonable excuse defence. HMRC states that taxpayers can claim to have a reasonable excuse if they have relied on and followed advice that is not disqualified and it does not matter whether this advice was given when the original non-compliance took place or as part of a review when considering whether a correction needs to be made.
However, taxpayers should take care when seeking further advice to ensure that the advice is not provided by an advisor who has previously provided disqualified advice to that taxpayer.
What action should be taken now?
Taxpayers who know or suspect they are not fully compliant with their UK tax obligations with regard to their non-UK assets or income should take professional advice to assist them to become compliant by 30 September 2018, for example by using the Worldwide Disclosure Facility. Similarly, taxpayers who are unsure whether they are fully compliant should seek advice to review their historical position to check whether disclosure of past non-compliance is needed.