Act now to limit penalties for offshore tax liabilities

Posted on 12 April 2018

Act now to limit penalties for offshore tax liabilities

Now is the time to act if you may have offshore assets or income for which you haven't fully declared your UK income tax, capital gains tax or inheritance tax liabilities. 

With effect from 30 September 2018, under the new Requirement to Correct ("RTC") rules, HMRC will have powers to impose penalties of up to 200% or 300% of unpaid tax where taxpayers have failed to disclose UK tax liabilities which relate to offshore matters or transfers. In certain circumstances, HMRC can also impose an asset-based penalty of up to 10% of the value of an asset to which the liability relates.

When do the rules apply?

The RTC rules apply where a person committed "relevant offshore tax non-compliance" prior to 5 April 2017 and which, in broad terms, resulted in a loss of tax to HMRC. "Relevant offshore tax non-compliance" exists where the taxpayer has:

  • failed to comply with an obligation to notify HMRC of his/her liability to income tax, capital gains tax or inheritance tax;
  • failed to comply with an obligation to file a return or certain other documents to HMRC; or
  • filed an inaccurate return or certain other inaccurate documents with HMRC,

and, in each case, the failure involves an "offshore matter" or an "offshore transfer". These terms are widely defined and include any potential loss of tax charged on or by reference to offshore income, assets, activities or transfers.

The rules can impact UK individuals who sold overseas property, a holiday home for example, and then failed to notify HMRC of the disposal. They can also affect offshore trustees who failed to notify HMRC of a previous 10-year anniversary charge if UK assets were directly held.

How far back do I need to look?

The years HMRC can review will depend on your circumstances. Broadly, it will be the last four years for non-careless behaviour, the last six years for careless behaviour and the last 20 years for deliberate behaviour, failure to notify a liability and failure to notify under DOTAS. To give HMRC additional time to pursue non-compliance, the RTC regime also extends the time limit for HMRC to assess tax until 5 April 2021 in certain circumstances.

Since the RTC has been enacted, HMRC has launched a consultation with a view of extending the time limits to assess tax in cases involving non-deliberate or careless behaviour resulting in taxable offshore income, gains or transfers from four and six years to 12 years. It is proposed that the 20 year time limit will remain.

What penalties apply?

The standard penalty for failure to fully correct the non-compliance by 30 September 2018 is 200% of the potential lost revenue for HMRC (usually the amount of the tax liability in question). HMRC has the power to increase this to 300% if it can be shown that assets were moved between jurisdictions to avoid new reporting requirements. If a taxpayer is aware of "relevant offshore tax non-compliance" and fails to correct it prior to 30 September 2018, HMRC may also issue an asset-based penalty of up to 10% of the value of the relevant asset value (or 10 times the potential lost revenue if lower). In certain circumstances, HMRC can also engage its naming and shaming penalties.

Is there a defence?

The only defence is to establish that the taxpayer has a "reasonable excuse" for the failure to correct the non-compliance, although this defence is very restricted. One possible excuse is reliance on professional advice. However, this will not provide a defence against penalties if the adviser did not have the appropriate expertise or consider all of the relevant facts.

Taxpayers with potential undeclared UK tax liabilities (including trustees of offshore trusts) should review their historic UK tax position as soon as possible. Where they may have relied on professional advice without disclosing all of the relevant circumstances, such advice should be reviewed and renewed, if appropriate.

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