This guide was last updated in August 2018
Who may be affected?
Anyone with offshore income or interests could be affected.
It covers those who have made inadvertent errors as well as those who have deliberately evaded tax so all those with offshore income or assets need to review their tax position urgently before the offshore tax deadline of 30 September 2018.
What is offshore tax non-compliance?
Tax non-compliance means:
- a failure to notify HMRC that you are chargeable to income tax or capital gains tax,
- a failure to comply with an obligation to submit a return, or
- delivering a return containing an inaccuracy leading to an understatement of a liability to tax or a false or inflated statement of a loss or a claim to repayment of tax.
Only offshore non-compliance is covered by the requirement to correct. This occurs when the non-compliance involves either an offshore matter or an offshore transfer.
Tax non-compliance involves an offshore matter if the unpaid tax is charged on or by reference to:
- income arising from a source in a territory outside the UK,
- assets situated 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, 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.
Which tax years are covered?
The requirement to correct only applies if the non-compliance was committed before 6 April 2017.
It will therefore apply to tax returns that were filed, or should have been filed, in the 2015–16 tax year, as well as earlier tax years.
Anyone who has failed to notify chargeability involving offshore matters or transfers for any year up to and including 2015–16 will be caught by the new rules.
How can non-compliance be corrected?
Non-compliance can be corrected by using HMRC's Worldwide Disclosure Facility, which allows online disclosures or by contacting HMRC officers directly if they are already enquiring into your affairs. The non-compliance must be disclosed by 30 September 2018.
The legislation provides that you are required to supply HMRC with the information it needs to be able to calculate the tax due as a result of the non-compliance on or before 30 September 2018. However, HMRC has recently confirmed that it will not charge the enhanced penalties if the fact that an offshore tax irregularity exists is disclosed by 30 September 2018 and the full disclosure is made by 29 December 2018.
What are the sanctions for non-compliance?
In order to 'encourage' disclosures, increased penalties may be charged on those who fail to correct within the time limit. These are in addition to the unpaid tax and interest.
There will be standard penalty equivalent to 200% of the underpaid tax liability which can be reduced to a minimum of 100% of the tax involved depending on:
- the taxpayer's level of co-operation with HMRC
- the quality of the taxpayer's disclosure to HMRC, and
- the seriousness of the taxpayer's failure to correct.
In the most serious cases and where the tax involved exceeds £25,000 in any tax year and the taxpayer knows they have offshore non-compliance and has failed to correct, an asset-based penalty of up to 10% of the value of assets connected to the failure will be charged, in addition to the standard penalty.
Where the taxpayer has moved assets to avoid having details reported to HMRC under international agreements on exchange of information an enhanced penalty of 300% of the tax involved will apply.
In the more serious cases, where one failure to disclose gives rise to a tax charge of at least £25,000 or there are five or more separate failures of whatever amount, HMRC may also 'name and shame' the taxpayer by publishing their details.
Where the taxpayer can satisfy HMRC that they had a ‘reasonable excuse’ for non-compliance, no penalties will be payable. However, the legislation makes it clear that relying on professional advice will not constitute a reasonable excuse in certain circumstances. These include where the advice was provided by a scheme promoter, was not addressed to the individual taxpayer or did not take into account all the individual's circumstances.
HMRC also has longer to assess the tax where non-compliance has not been corrected by 30 September 2018. Any offshore tax that HMRC could have assessed on 6 April 2017 can now be assessed until 5 April 2021. In the case of deliberate non compliance, this means HMRC has until April 2021 to assess tax dating back to 1997.
What about later tax years?
The requirement to correct is intended as a last chance for UK taxpayers to disclose non compliance, without suffering heavy penalties, before HMRC receives information under the Common Reporting Standard (CRS) in September 2018 about accounts held at any time in 2017 by UK residents in around 100 offshore jurisdictions including Switzerland, Singapore and the UAE.
HMRC received the first batch of information in 2017 from around 45 countries and has had information from the Channel Islands and the Isle of Man for a number of years.
CRS means that it is now very likely that HMRC will find out about offshore income and assets that have not been declared by those subject to UK tax.
A new offence for offshore tax evasion has been introduced in relation to tax liabilities for the 2017-18 tax year onwards relating to non-CRS countries. It should make prosecutions for offshore tax evasion easier as prosecutors will just need to prove that the liability was not declared and the underpaid tax is more than £25,000 per tax year. There will no longer be any need to prove that the individual's actions were dishonest.
The government is also going ahead with an extended 12 year time limit for assessment of underpayment of income tax, inheritance tax and capital gains tax relating to an offshore matter where deliberate behaviour is not involved. This will apply to years of assessment from 2013/14 onwards, where there has been careless behaviour and from 2015/16 onwards in all other cases.
Although the requirement to correct does not apply to later years, anyone who has concerns about their tax compliance for later years should also take advice as there are potentially very serious consequences for non compliance.
Anyone with offshore income, assets or other offshore interests should review their UK tax compliance urgently.
Anyone with undeclared offshore income should take professional advice without delay.
Josie Hills is a tax investigations expert and Anne McAdam is a private client tax expert at Pinsent Masons, the law firm behind Out-law.com
For details about how Pinsent Masons' tax investigations team can help you understand the Requirement to Correct process and make any necessary disclosures please visit our Requirement to Correct page or call our dedicated hotline number on +44 207 490 6612.