The deadline for registering with HM Revenue & Customs (HMRC) to make a tax disclosure under the Requirement to Correct (RTC) has expired. The RTC rules required any person with historic offshore irregularities as at 5 April 2017 or earlier, to correct them by 30 September 2018. The Failure to Correct [FTC] penalty regime applies from 1 October 2018.
The FTC penalty legislation is a clear message from HMRC that it is no longer prepared to offer UK taxpayers inducements, either in terms of mitigated penalties or reduced periods of assessment, to come forward and regularise their tax affairs. FTC penalties are designed to demonstrate to UK taxpayers who have tax issues relating to offshore matters that it now means business and significant penalties will apply to non-compliant taxpayers.
The Failure to Correct (FTC) penalties apply were income tax, capital gains tax or inheritance tax is due relating to an offshore interest. By requiring people to correct undeclared offshore tax liabilities by a set date HMRC has drawn a “line in the sand”, one which it is using to trigger the new penalties applicable. These penalties were initially touted as being simpler to administer in comparison to the behaviour-based regime. However, it is clear that the FTC penalty regime has been designed to provide HMRC with the legislation to impose punitive levels of penalties.
The Common Reporting Standard (CRS) underpins the current international information exchange agreements, providing for over 100 jurisdictions to share financial information with one another annually. This enhances HMRC’s ability to detect offshore non-compliance or at least identify offshore tax “footprints” for people where HMRC previously had no such knowledge.
The central features of the FTC legislation are as follows:
The new tax-geared (financial) penalty
Should HMRC be in a position to assess any person for additional taxes arising as a result of offshore irregularities in the period up to and including 2016/17, the new standard penalty applicable is 200% (of the previously uncorrected tax due). This is regardless of the ‘behaviour’ or ‘jurisdiction’ involved.
Reasonable Excuse
If a person can demonstrate that they had a ‘reasonable excuse’ for their failure to correct then no FTC penalty will be chargeable. Previously, it was possible to successfully demonstrate to HMRC that a taxpayer had taken ‘reasonable care’ with their UK tax affairs or had perhaps merely been careless. This helped negotiate penalties down to nil or secure considerably lower penalties. There were also opportunities to suspend some penalties where mistakes had been made in tax returns due to reasonable care not having been taken.
Whilst HMRC has set out the theoretical circumstances whereby a “reasonable excuse” argument could be advanced, the experience on the ground suggests that it will be an uphill battle and almost impossible for such arguments to be formulated to satisfy HMRC.
The new legislation specifically rules out ‘insufficient funds’ as a ‘reasonable excuse’ for not meeting reporting obligations, unless this is attributable to an event outside of the person’s control. This concept of events being beyond a person’s control and them taking corrective steps without unreasonable delay remains important, because it’s the only safeguard against the new FTC penalty. If demonstrated successfully, there will be no penalty payable.
Notably, the concept of having taken ‘reasonable care’ does not apply to FTC penalties, and more importantly the ‘reasonable excuse’ safeguard itself has been heavily tightened so that it does not apply as easily. Reliance on professional advice is not a reasonable excuse if that advice was provided by an ‘interested party’ – i.e. someone who participated in or stood to benefit from the person’s participation in a tax avoidance scheme. This would include promoters of tax avoidance schemes relying on generic advice in relation to the scheme.
HMRC will argue (and the courts will likely agree) that the advice was not specific to the person concerned and that instead it was provided to the promoters. Typically the promoters will in turn have passed the advice on to numerous people and will themselves be the ‘interested parties’, as they had an incentive to encourage people to use the scheme.
If advice was provided by someone with insufficient expertise or they did not take into account the person’s specific circumstances, then there is no reasonable excuse. If however, the adviser had held themselves out to have been suitably qualified, then on the basis of good faith the person is more likely to have a reasonable excuse.
Reductions in Penalties
One of the main ways to secure a reduction in the FTC penalty level is for the person to ‘come forward voluntarily’ and disclose the failure(s) to HMRC. In doing so, the penalty level can be reduced from 200%, to the new “minimum” of 100%. This could amount to a significant saving.
Conversely, if the person does not make a voluntary disclosure and is prompted by HMRC to make a disclosure then the penalty will not be reduced below 150%.
Within this new climate of FTC penalties, WLH Tax has considerable experience of assisting clients in making managed voluntary disclosures of offshore tax issues and achieving the maximum mitigated penalty of 100%.
The new asset-value based (financial) penalty
This additional penalty of 10% of the offshore assets may also be applicable if the person was aware at 5 April 2017 that they had offshore non-compliance to correct. HMRC are aiming this at the most serious cases. For this penalty to apply, the tax due needs to be in excess of £25,000 in any tax year and the person’s behaviour has to have been deliberate.
The new naming and shaming (non-financial) penalty
HMRC wants to publish details of those subject to FTC penalties, so it has gone beyond the standard Publishing Details of Deliberate Defaulters (PDDD) regime.
The new legislation states that HMRC may publish information about a person if:
- they have incurred at least one new FTC tax-geared penalty and the corresponding total offshore potential lost revenue exceeds £25,000, or
- they have incurred 5 or more such FTC penalties (irrespective of whether the financial threshold has been met).
While HMRC could cause reputational damage far more easily for certain people now, this penalty is discretionary and is therefore likely to be politically motivated and used in cases where it can generate maximum publicity. Also, similar to the PDDD regime, information may not be published if the amount of the corresponding FTC penalty is reduced to the minimum permitted amount of 100% or to nil or where special circumstances exist.
The offshore asset moves (financial) penalty
A new enhanced penalty regime for cases where a person is found to have moved certain (hidden) offshore assets, from one jurisdiction (committed to exchanging financial information automatically under the Common Reporting Standard) to another jurisdiction (comparatively secret) to avoid detection. This penalty would be applied if HMRC could show that funds were deliberately moved to avoid being reported to HMRC.
This penalty is equivalent to 50% of the amount of any standard/other penalties being charged and is charged in addition to those penalties. It is possible that a 200% penalty could therefore become a 300% penalty.
The new FTC penalty regime is extremely punitive and extreme care needs to be taken in relation to this new penalty landscape.
How can WLH Tax help
If you have any offshore assets where there is a potential UK tax issue, please contact us for a free, confidential and no obligation discussion. We are happy to have an initial free of charge meeting with prospective clients.