As part of a package of moves to tackle offshore tax evasion, HMRC is consulting on plans to introduce a ‘Requirement to Correct’ (RTC) obligation compelling those with offshore interests who have yet to put their UK tax affairs in order to do so by September 2018, ahead of the widespread adoption of the Common Reporting Standard (CRS)
There will be new sanctions for those who ‘fail to correct’ within the defined window, which will apply to all relevant years that have not been corrected.
Following the end of the RTC period, which runs until 30 September 2018, there would be a single, simplified and tougher set of sanctions for offshore tax evasion.
The consultation document states that in the past it was very difficult for HMRC to detect offshore evasion or other forms of offshore non-compliance, and so it was therefore appropriate that some previous disclosure facilities offered incentives to taxpayers to disclose.
However, the consultation notes: ‘This situation is changing dramatically as HMRC will have access to greater levels of information about offshore accounts, trusts and shell companies held offshore by UK resident taxpayers than ever before and will be able to use that data to detect irregularities with offshore income or gains.
‘The implementation of Common Reporting Standard (CRS) is a sea change with over 100 countries currently committed to the standard to automatically exchange taxpayer information.’
As a result, HMRC is adopting a tougher stance with the RTC initiative providing a final opportunity for taxpayers to put their affairs in order before they are subject to significantly higher penalties.
HMRC is proposing the scope of the RTC should be based around the legislative definitions of an offshore matter as outlined in Schedule 24 of Finance Act 2007, but is also proposing to expand the definition of transfers so that there is no restriction as to the timeframe in which the money was moved offshore. The taxes within scope are given as income tax, Capital Gains Tax (CGT) and inheritance tax (IHT).
The intention is for the RTC to be introduced in Finance Bill 2017 and it will provide for a window during which taxpayers must correct their affairs before they are subject to the new FTC penalties, which HMRC suggests should be 18 months.
HMRC says it expects any ‘correction’ made under the new scheme to cover any outstanding UK tax liabilities that are ‘in date’ for assessment under the normal rules for tax assessment. However, having a window to correct that runs from April 2017 to 30 September 2018 means that some years will go ‘out of date’ as regards assessing time limits during the window.
To remove the incentive to delay correcting until the end of the defined window, HMRC is proposing to measure the assessment time limits for the requirement from the date at which the window opens (6 April 2017) and fix it at that point.
HMRC is also considering a one off extension to the assessment periods for tax and penalties following the RTC to allow HMRC to review new data provided under the automatic exchange of information rules which will then be operation and challenge those who have not corrected. It suggests this extension should be five years.
The penalties applicable where the taxpayer meets their obligation to correct under the new RTC requirement would be those, if any, currently set out in statute for the relevant behaviour and tax year.
The consultation also considers a new penalty regime, which would apply to taxpayers who fail to meet the RTC by the end of the defined period. These sanctions would apply to any relevant years which have not been corrected, and are noticeably higher compared with the standard penalties as they stand at the moment.
HMRC is proposing two approaches. The first is based on a minimum penalty of 100% and a maximum penalty of 200% of the tax that has not been corrected. Penalties would start at the maximum of the range and would be reduced within the range based on the extent of disclosure and cooperation provided by the taxpayer.
In addition to tax geared penalties, an asset based penalty of up to 10% would be applicable for any FTC with a potential loss of revenue (PLR) of over £25,000 that had not been corrected. An enhanced penalty of 50% of the amount of the standard penalty would apply if HMRC could show that assets or funds had been moved to attempt to avoid either reporting under the CRS, or under the RTC rules.
The second model proposes penalties should be charged at three levels (lower, standard and higher) with the categories defined in legislation. Penalties would vary depending on whether the disclosure was prompted or unprompted, with a fixed penalty for unprompted disclosure and disclosure made while under enquiry considered to be prompted.
Penalties for each category would be set in ranges with reductions from the maximum to apply to take account of co-operation from the taxpayer. Any FTC would be automatically subject to a penalty at the ‘standard’ level.
HMRC states in the consultation: ‘Taxpayers in this situation will have committed an original offence, they will have failed to come forward under any previous disclosure facility and will now also have failed to correct under the new legal obligation.
‘This is a significant failure on the taxpayer's’ part and we feel it should therefore attract increased rates of penalty compared with the standard penalties for offshore evasion. This makes it very clear that correcting before the end of the requirement window is the best option.’
The consultation closes on 19 October 2016.
Details of Tackling offshore tax evasion: A Requirement to Correct are here.