HMRC tackles offshore tax evasion: A requirement to correct

The Requirement to Correct (RTC) is new legislation that requires taxpayers with outstanding tax liabilities relating to offshore interests to come forward and correct those liabilities by 30 September 2018 or face significant penalties.

It is not confined to tax evasion, so includes both negligent and careless behaviour. The non-compliance or “failure to correct” can result in the taxpayer being subjected to a new set of legal sanctions and HMRC can assess back to the 1997/98 tax year and has until 5 April 2021 to do so.

The time limits are important. For example, if there is evidence of careless behaviour and the individual has filed returns, then HMRC may be limited to assess the last six years only, though this is likely to be increased to twelve years from 6 April 2018, following the announcement in the Budget. If the taxpayer has not filed return or has committed tax evasion then the time limit is 20 years for any negligent behaviour.

A topical issue

Offshore interests and tax evasion and avoidance have been in the news of late: initially, through the Paradise Papers and the revelations about tax schemes, followed by Chancellor Philip Hammond in the Autumn Budget 2017.

According to the Budget, companies will in future be compelled to inform HMRC of any offshore structure they are involved with and the clients using them. HMRC will receive an injection of £300m to beef up its staff and technology to detect infringements better.

There were also suggestions that HMRC would gain greater power to assess an individual’s offshore history, which could be a significant change.

What is the size of penalty?

The starting point for a penalty under the RTC is 200% of potential lost revenue, increased by 50% if funds have been “moved” post-April 2015. The penalty can be reduced to 100% of potential lost revenue, depending on the quality of the disclosure. Where certain circumstances exist, there is scope to levy an asset-based penalty of 10% of the value of the offshore assets or ten times the tax due.

The penalties can be substantial, in the worst cases up to 1300% of the tax due.

It’s interesting to note that a taxpayer may be able to claim that a penalty should not apply due to there being a “reasonable excuse” for the error. Whilst this might include the fact they took professional advice, this is not a valid excuse if any of the following applies:

1. Advice was not addressed to the taxpayer specifically;
2. Advice took no account of the individual’s circumstances;
3. The person giving the advice did not have the appropriate expertise to do so; or
4. The advice was given by an “interested person”.

This could impact on structures even where taxpayers believe they took reasonable care; they may find they fall foul of the above list.

Next steps

It is important to note that the penalty regime does not apply if the matter is corrected by 30 September 2018. Trustees and banks with clients with offshore structures will need to review their structures.

We have extensive experience in dealing with enquiries from HMRC, with whom we have an excellent working relationship, as well as disclosures. We are currently working with trust companies and banks, reviewing their structures to ensure they are compliant for UK taxation purposes.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.