Something offshore requires correcting

Key Facts

  • Registering a requirement to correct tax issues regarding offshore matters MUST be done before 30 September to avoid up to 200% penalties;
  • The offshore criminal offence may also apply and does not require to prove an intent – a tax return just needs to be wrong;
  • Offshore could be a bank account, an investment, a trust, a company, an employee benefit trust or remuneration trust etc.

The Finance Act (No. 2) 2017 introduced the Requirement to Correct (RTC) legislation in relation to offshore matters. The legislation has been broadly drafted and will therefore catch most people with offshore interests of any kind. It specifically requires the taxpayer to correct any tax irregularities relating to offshore interest, placing the responsibility to do so on them and imposes significant penalties if the correction is not made.

Many might believe they have correctly treated their offshore assets and investments although in our experience simple mistakes are made frequently. Some may also believe the legislation won’t apply because they sought advice or because HMRC are aware of the offshore asset. This is not true and anyone with an offshore business, asset, investment or who has made a gain in the past twenty years should seek help without delay.

Only tax non-compliance committed before 6 April 2017 falls under the RTC rules. Non-compliance means any of the following:

  • failure to comply with an obligation to notify chargeability
  • failure to comply with an obligation to deliver a return 
  • delivering a return which contained any inaccuracies

RTC only applies if HMRC were able, by 6 April 2017, to raise an assessment to recover the unpaid tax. The time limits for HMRC doing so depends on the behaviour they deem to have led to the underpayment:

  • 20 years where the behaviour was deliberate
  • 6 years where the behaviour was careless
  • 4 years where the behaviour was neither careless nor deliberate

However, under the RTC legislation the time limits are extended to effectively run from 6 April 2017. For example, if the behaviour was careless (6 year time limit) HMRC would have 6 years from 6 April 2017 (6 April 2023) to raise an assessment for the 6 years preceding 6 April 2017 (6 April 2011).

The RTC legislation is not only aimed at purposeful tax evaders or those using sophisticated offshore structures; all irregularities are caught. The objective of the legislation is to enable and incentivise persons with UK tax irregularities relating to offshore interests to regularise their tax affairs. The deadline for making the correction ends on 30 September 2018. After this date, tougher sanctions are being introduced for a failure to correct (FTC).

The maximum penalty for FTC is 200% of the potential lost revenue (PLR). The penalty can be reduced if the taxpayer makes an appropriate disclosure. The amount of the reduction depends on whether the disclosure was prompted or unprompted and should reflect the quality of the disclosure (timing, nature and extent). The penalty cannot be reduced below 100% of the PLR.

Further sanctions for FTC include:

  • A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • Potential “naming and shaming”
  • A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC

The time limit for the RTC falls in line with that of the Common Reporting Standard (CRS), under which over 100 jurisdictions have signed up to automatically exchange information between tax authorities. Accounts held by non-residents must be identified and information relating to account balances, interest earned, dividends received and proceeds of assets sales must all be reported.

Furthermore, the Offshore Criminal Offence (OCO) legislation introduced in FA 2016 applies where a person has failed to declare offshore income or gains. The offence applies to any subsequent loss of tax over a threshold amount which will be defined in the regulations an annually. Crucially the OCO does not prescribe the need to prove intent for failing to declare taxable offshore income and gains.

Despite all these obstacles, those with offshore interests will have many counter positions to help negotiations. Whilst this is useful, a commercial approach is likely to be the most sensible one – what can be done now to achieve tax regularisation, alleviate the risk of penalties and prosecution and be efficient without risk for the future.

If you would like to discuss any concerns you have regarding offshore interests, please call us as soon as possible.