Time Running out to Declare Tax on Offshore Interests
The crackdown on offshore tax evasion continues with the introduction of the “Requirement to Correct” (RTC) legislation. Under RTC taxpayers who don't put their offshore tax affairs into order by 30 September 2018 will be subject to punitive financial penalties.
RTC coincides with the introduction of the Common Reporting Standard (CRS) under which HMRC will automatically receive details of offshore income and gains from over 100 overseas jurisdictions.
The key features of the legislation are:
- Individuals, trustees and companies with offshore interests who have a UK tax liability arising on or before 5 April 2017 must review their affairs to ensure they are compliant.
- RTC covers liability to income tax, capital gains tax (including non-resident CGT) and inheritance tax.
- Non-compliance covers any situation where there has been a loss of tax whether this has arisen in relation to an error in a return, failure to notify chargeability or failure to file a return. This could range from failure to disclose interest on a bank account or applying the incorrect tax treatment to complex planning involving offshore trusts and companies.
- Existing time limits for assessing tax (four, six and 20 years depending on whether the error is innocent, careless or deliberate respectively) that would normally expire after 5 April 2017 will be extended to 5 April 2021 to give HMRC sufficient time to review information received.
- It's the failure to correct that is penalised and not the behaviour behind the error that is penalised. FTC therefore applies equally to innocent errors as it does to tax evasion.
- If errors are not corrected by 30 September 2017 a penalty of between 100% and to 200% of the tax liability can be charged.
- Depending on the circumstances taxpayers could also face a further penalty of up to 10% of the value of the offshore asset and being named and shamed on a public website.
- The only defence against a RTC penalty is having a “reasonable excuse”. This is narrowly drawn.
Mrs X inherited an overseas investment portfolio worth £3 million on the death of her Aunt in 2013. Mrs X failed to take advice on inheriting the portfolio and only after a period of four years has passed does she discover that the income should have been reported to HMRC. Mrs X makes a voluntary disclosure to HMRC and pays the tax due of £100,000.
Assuming the funds are held in a transparent offshore jurisdiction if Mrs X makes the disclosure in July 2018 and HMRC agree that the failure to disclose is careless, as the disclosure is voluntary, no penalty is charged. Mrs X is liable only for the tax of £100,000 and interest for late payment.
If Mrs X makes the disclosure in October 2018 she will be liable to a minimum penalty of £100,000 and a maximum penalty of £200,000.
If the tax in any year exceeded £25,000 and Mrs X knew prior to 30 September that she had failed to disclose an offshore interest but did not correct by that date she may be charged an asset based penalty of £300,000 i.e. 10% of the value of the offshore asset.
How can we help?
If you know that you have undisclosed assets or income we can help you calculate your liability to tax and make a disclosure to HMRC prior to 30 September 2018.
If you are not certain that your offshore affairs are compliant we can review your position and where necessary make any disclosure or correction of previous returns as appropriate.
As the deadline of 30 September is fast approaching it is important to take advice to avoid substantial penalties for what may be an innocent error.