The Finance (No 2) Act 2017 contains provisions requiring the disclosure of historic non-compliance to Her Majesty's Revenue and Customs (HMRC) by September 30 2018 (ie, the requirement to correct rule). This is part of a range of legislation targeting offshore tax evasion.
HMRC expects that the data exchange which will shortly take place as a consequence of the Common Reporting Standard (CRS) and other information exchange programmes will provide it with the details required to establish non-compliance.
Defences for failing to comply with the requirement to correct rule are limited and it may be insufficient to have relied on legal or tax advice. Prompt action is required to potentially avoid very significant penalties.
This update discusses the scope of the rule and what action should be taken in this regard.
The rule applies when there has been a failure to comply with an outstanding offshore tax obligation. The disclosure requirement applies to the following taxes:
- income tax;
- capital gains tax (including non-resident capital gains tax); and
- inheritance tax.
It applies to:
- partnerships; and
For the purposes of the rule, non-compliance is defined extremely broadly. It can relate to any non-UK income, assets (again defined broadly and including cash, land, intellectual property and pensions) and activities. The requirement can be breached by failing to file a tax return with HMRC or filing a return that contains an inaccuracy which reduces tax liability or inflates a tax loss or repayment.
HMRC's guidance provides many examples of how non-compliance may arise, including:
- renting out property in Spain without declaring the rent; and
- receiving business profits in a non-UK bank account that is not declared.
For inheritance tax purposes, non-compliance may result from failing to declare non-UK assets which formed part of the death estate of a UK-domiciled individual or failure by trustees to report and pay a 10-year anniversary charge.
Action should be taken on or before September 30 2018 (and the earlier the better in case other penalties are accruing).
The requirement to correct covers acts of non-compliance committed before April 6 2017 and will therefore apply to tax returns that were filed, or should have been filed, in the 2015/2016 tax year, as well as earlier tax years.
Further, where the requirement relates to an unpaid liability, HMRC must be able to raise an assessment to recover the relevant unpaid tax, taking into account the usual correction periods. For instance, if there has been no careless or deliberate behaviour, the applicable timeframe is four years from the end of the relevant tax year of assessment. However, if the tax loss is the result of careless or deliberate behaviour, the relevant deadlines are six and 20 years respectively from the end of the relevant tax year. Therefore, a review into how non-compliance may have arisen will be needed in order to consider the period for which correction may be required.
There are many ways in which non-compliance may be corrected. These include:
- the Worldwide Disclosure Facility (via HMRC's digital service);
- notifying a HMRC officer in the course of an enquiry; and
- any other method agreed with HMRC.
Failure to disclose by September 30 2018 will result in a minimum penalty of 100% of the tax at stake, in addition to the tax due and any interest accruing as a consequence.
For serious cases of non-compliance, HMRC may also 'name and shame' the culprit.
Standard penalty HMRC's starting point is to apply a penalty of 200% of the relevant liability (in contrast, the current penalty for a deliberate and concealed (ie, a very serious) error is 30% to 100% of the additional tax due). HMRC may then apply a reduction in view of the relevant criteria as follows:
- whether HMRC was voluntarily notified of the failure to comply;
- the extent of any cooperation with HMRC;
- the quality of the disclosure provided to HMRC (according to HMRC guidance, this can involve notifying it of the parties that enabled non-compliance); and
- the seriousness of the failure to comply.
The penalty cannot be reduced below 100% of the liability.
Asset-based penalty In serious cases, HMRC may also apply a penalty of up to 10% of the value of the assets connected to the non-compliance (in addition to the standard penalty). This additional penalty may apply when the tax at stake exceeds £25,000 in any tax year and the defaulting party was aware of its non-compliance.
Assets moved abroad to avoid reporting 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 which is set at 50% of the standard penalty.
Parties with a reasonable excuse for failing to make a required correction will face no penalty (but will need to settle any tax due and applicable interest). However, this does not necessarily mean that a penalty will not arise as a consequence of other compliance regimes.
In practice, it may be difficult to rely on this defence. Relying on a third party, without taking reasonable care, will not be a valid defence. Neither will having insufficient assets to meet the tax liability. Whilst HMRC's guidance states that this is the case unless it is a consequence of events outside the person's control, it is unclear what will be considered such an event.
In certain cases, it will be possible to rely on a defence of reasonable excuse, after having relied in good faith on incorrect advice. However, this will not be possible where:
- the person giving the advice did not have the required expertise (HMRC has indicated that anyone who belongs to a UK-recognised legal, accountancy or tax advisory body will be considered to have sufficient expertise on UK tax matters);
- the advice did not consider all relevant circumstances (in particular, the adviser must have been given full and accurate details of all relevant matters and care should have been taken in case the actual circumstances have changed by the time that the advice is implemented);
- the advice was not given to the person seeking to rely on it; or
- the advice was given by an interested person or an interested person was involved in the arrangements (this includes where the advice is given to the taxpayer as a result of arrangements between an interested person and the person who gave the advice).
Provided that the advice does not fall within the scope of the above points, it should not matter whether it was given when the non-compliance occurred or as part of a subsequent review.
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 circumstances that the main purpose (or one of the main purposes) was to obtain a tax advantage. This should not catch established practices which HMRC has indicated that it will accept.
HMRC's guidance sets out how a taxpayer should proceed when there is uncertainty about whether a correction should be made following the receipt of advice. This may include taking further professional advice. HMRC also notes that where the matter is not clear cut, it will be possible to provide HMRC with the relevant details without accepting that there is liability. This will be a valid correction and therefore the requirement to correct penalty regime will not apply.
Parties that are potentially affected by the new requirement to correct should take advice urgently due to the imminent deadline. The rule applies broadly and HMRC will shortly have copious information that will enable enforcement.
Steps should be taken to review any potential instances of non-compliance – for instance, failure to file returns as required. Trustees should review their files to ensure that they have not failed to comply as required (particularly bearing in mind the new naming and shaming provisions, which apply in addition to the penalty regime). Historic advice should be reviewed to confirm that it can be properly relied on in case there is potential non-compliance (eg, to check that it considered all relevant factors and was properly implemented).
A comprehensive review of historic actions may be required, but this is likely to be a worthwhile exercise in view of the scale of the potential penalties.
For further information on this topic please contact Anthony Thompson or Robert Payne at Forsters LLP by telephone (+44 20 7863 8333) or email (firstname.lastname@example.org or email@example.com). The Forsters LLP website can be accessed at www.forsters.co.uk.
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