For some years now, the UK tax legislation has tended to treat offshore non-compliance by UK taxpayers more harshly than non-compliance in relation to UK income or assets. This war on offshore is intensifying. HMRC now have a nuclear legislative weapon against offshore non-compliance, in the form of the ‘requirement to correct’ (RTC) legislation.
This legislation has set a deadline of 30 September 2018 for taxpayers to ensure that their tax reporting in relation to offshore assets or income is beyond reproach. If a taxpayer allows this deadline to pass and errors in reporting are subsequently identified, relating to non-UK income or assets, draconian penalties may be imposed, on top of the tax which is due.
The new legislation is likely to have wide application, as most wealthy taxpayers hold non-UK situated assets, even if they are not aware of it. The use of the word ‘offshore’ is potentially misleading, as this might suggest that the legislation only applies to taxpayers with connections to ‘tax havens’, but that is far from the truth. Commonplace investments such as shares in US listed companies or in Luxembourg collective investment schemes are ‘offshore’ assets for these purposes. So too is a holiday villa rented out in France or a bank account in the US, even if foreign taxes have already been paid. And the remarkable complexity of the UK tax code means that inadvertent non-compliance is likely to be widespread, even amongst taxpayers who have been professionally advised.
Where non-compliance is identified, which has not been corrected as required by the RTC legislation, the potential sanctions are alarming. The default penalty will be 200% of the tax due, although this may be reduced to reflect taxpayer cooperation. In cases where taxpayer fault is found to have been deliberate, HMRC will have power to impose a 300% penalty instead of the 200% referred to above. And as if that were not enough, in some situations HMRC will have the right to impose a so-called asset-based penalty, on top of the tax-based penalty, of up to 10% of the value of the relevant asset. Any such penalties will be charged in addition to the tax that is due and interest for late payment.
To add insult to injury, in some situations HMRC will have power to ‘name and shame’ taxpayers who have failed to correct offshore non-compliance, which will have obvious reputational consequences and may result in banking or other services being withdrawn.
As explained below, there are few excuses which will provide a defence to such sanctions. One is that the taxpayer has received, and relied on, competent professional advice. But even this is subject to conditions, and in some situations the advice may be ‘disqualified’, with the result that it cannot be relied on to prevent penalties under the new regime. In such cases further, non-‘disqualified’, advice should be sought as a matter of urgency.
Who is affected?
The RTC applies to individuals, trustees and companies with non-UK income or assets.
Individuals that have been, or may be, exposed by public disclosures in the media should be extra careful as they will be easy targets for HMRC investigators.
What is covered?
The RTC covers tax non-compliance in the tax year 2016/17 or earlier, involving an offshore matter (non-UK income, non-UK assets or non-UK activities) or what the legislation calls an offshore transfer. The concept of an offshore transfer includes the situation where an asset representing or deriving from a transaction that has given rise to tax has been transferred outside the UK. However, the legislation also deems there to have been an offshore transfer where income has been received outside the UK (even if, strictly, nothing has been transferred).
Regardless of whether the non-compliance is deliberate, careless or a result of non-careless error, it will still be caught by the RTC legislation (subject to limited defences, as discussed below). Examples include:
- false reporting in a UK tax return;
- omissions or other inaccuracies in a UK tax return;
- failure to complete a UK tax return; and
- failure to notify HMRC that a tax return should be issued.
A small crumb of comfort for those potentially affected by the RTC legislation is that it does not apply to all taxes. The taxes covered are:
- income tax;
- capital gains tax (CGT) payable by individuals and trustees; and
- inheritance tax (IHT).
Non-resident CGT is covered insofar as such tax is payable by individuals and trustees, but not by companies.
When assessing any unpaid taxes, HMRC will be bound by various limitation periods. Ordinarily, HMRC will be able to investigate any taxes that have arisen since 6 April 2013. However, in cases involving careless behaviour, this time limit is extended to 6 April 2011. Where the taxpayer has acted deliberately, this is extended even further to 6 April 1998.
Why is the treatment of offshore non-compliance becoming harsher?
After 30 September 2018, HMRC will be receiving the first reports from most of the 100 countries that have signed up to the Common Reporting Standard, which provides for automatic exchange between tax authorities of bank and other financial account information where the financial institution has recorded the beneficial account holder as being UK resident. The reporting mechanism applies not only to individually held accounts but also looks through accounts held by entities such as companies or trusts. With the help of their super-computer, Connect, which already holds significant information on UK taxpayers and residents, HMRC have the means to assimilate and process the vast amount of data they will be receiving and will be able to identify actual or potential non-compliance much more easily than in the past.
Are there any defences?
It is important to be aware that even innocent mistakes are unlikely to be forgiven. HMRC’s view is that a taxpayer will have already committed the original mistake and:
- failed to respond to previous opportunities to correct non-compliance under the Liechtenstein Disclosure Facility and Worldwide Disclosure Facility; and
- failed to respond to the RTC.
The penalties will therefore be chargeable if any taxpayer fails to correct their tax affairs, unless they can demonstrate a ‘reasonable excuse’.
HMRC will follow established principles from case law that provide guidance on the concept of a ‘reasonable excuse’. The concept is narrow in scope. The RTC legislation specifically states that circumstances which cannot be taken to be a ‘reasonable excuse’ include:
- an insufficiency of funds, unless it is attributable to events outside taxpayer control;
- reliance on another person to do something (e.g. complete a UK tax return), unless the taxpayer took reasonable care to ensure that the other person did what they were meant to do and all relevant information was provided by the taxpayer; and
- reliance on ‘disqualified advice’ (see below).
Under existing case law on penalties for non-compliance, reliance on professional advice has generally been accepted as forming a reasonable excuse. This is on the basis that it is unrealistic to expect taxpayers to understand and apply many aspects of the UK tax code, and it is reasonable for them to rely on professional advice which appears to be competent and given by someone who appears to have appropriate experience and expertise.
For the purposes of the RTC, reliance on professional advice can only provide a reasonable excuse if the advice was not disqualified. Advice can be disqualified if:
- it was given by an ‘interested person’ – very broadly, someone who was involved with or facilitated steps taken by the taxpayer which generated or might be expected to have generated a tax advantage;
- it was not specifically addressed to the taxpayer in question;
- it was generic in nature or otherwise failed to take the taxpayer’s specific circumstances into account; or
- the adviser did not have the appropriate level of expertise.
These carve-outs are clearly intended to prevent taxpayers from relying on so-called ‘advice’ provided by, or procured by, companies which have marketed tax avoidance schemes. Such ‘advice’ is very often far from professional, and generally not worth the paper it is written on; and it is questionable whether reliance on a generic tax opinion should in any event provide a reasonable excuse.
However, the exclusions go much further than this, and can cause perfectly valid advice provided by appropriately skilled professionals to be disqualified for the purposes of the RTC – creating a risk of severe penalties in the event that HMRC disagree with the analysis, or subsequent case law shows the advice to be wrong.
What should taxpayers do?
Individual UK resident taxpayers who have non-UK assets or are connected with non-UK structures should seek appropriate, independent professional advice as soon as possible, unless they are completely sure, having already taken advice, that it could not be considered to be disqualified advice, and that their tax reporting is beyond reproach.
Similarly, non-UK resident persons who might have undisclosed UK tax liabilities for prior years should seek advice urgently. This includes non-UK resident trustees who might have undisclosed liabilities to tax on UK income or in respect of UK assets, and non-UK resident companies which might have undisclosed liabilities to tax on UK income.
The RTC is particularly aimed at individuals and trustees who do not consider themselves to be ‘tax evaders’ and who may therefore have not properly considered using other disclosure facilities in the past.
If non-compliance is not notified to HMRC by 30 September 2018, the weighty failure to correct penalties will bite. HMRC have granted a short extension to the disclosure deadline of 90 days for disclosures via HMRC's Worldwide Disclosure Facility, and 60 days for disclosures of deliberate tax fraud via HMRC’s Contractual Disclosure Facility; however, in each case, an intention to notify HMRC must be made by 30 September 2018. The sooner taxpayers seek advice the better, as little time remains to analyse any problem.
Mr Grey, who is UK resident and domiciled, on the advice of a local U.S. lawyer purchased a US$1m Florida holiday home on 1 January 2005 using a U.S. discretionary trust of which he and the lawyer were trustees. Mr Grey did not report the funding of the trust to HMRC.
The holiday home was rented for part of the year and Mr Grey paid US income tax on the rent but, as the property was in Florida, incorrectly believed no UK tax would be due. The property was sold on 1 January 2017 for US$1.8m with the U.S. Dollar having appreciated 36% against Sterling since the purchase. Mr Grey paid U.S. income tax on the gain but again mistakenly failed to report and pay tax in the UK. He then terminated the trust immediately after the sale and did not report the Inheritance Tax exit charge nor the 10 year charge missed in 2015.
Even allowing credit for U.S. income tax paid by Mr Grey there is UK income tax, CGT and IHT that has not been paid by Mr Grey and/or the trustees totaling approximately £165,000. In addition, Mr Grey and the trustees would have been penalised further for their failure to submit UK tax returns in the relevant years where UK tax liabilities arise. The trustees have also failed to register the trust on the UK Trust Register by the 5 March 2018 deadline.
The difference in the timing of a disclosure is stark in pure financial terms: potentially as little as £240,000 before 30 September 2018 as against a maximum of £670,000 if HMRC can establish Mr Grey’s conduct as deliberate and he comes forward or is caught after that date. In the latter case reputational damage and criminal charges are also possible.