From 30 September 2018, the new requirement to correct (RTC) penalty regime will come into force and with it, an eye-catching, and indeed eye watering, new tax geared minimum 100% penalty charge. Any individual with underpaid UK tax relating to overseas assets will be within the scope of the new penalties. The regime will therefore apply to UK resident and domiciled individuals and non-UK domiciled individuals who are UK resident as well as potentially to offshore trustees.

In a previous life, I worked for a large multi-national oil services company where we regularly received tax determinations from less developed and ill-equipped foreign tax authorities for hundreds of thousands – or even millions – of dollars, calculated using penalties of 100-500%, often where the company didn’t have, and has never had, any business or presence in the country. We would simply reply and point out that we have no business in the country and the demand would be withdrawn.

When I left my previous role, I thought my days of such punitive penalties were behind me. HMRC however had different ideas, the introduction of the RTC penalty will coincide with the first full automatic exchange of information between the countries signed up to the common reporting standard (CRS). The CRS is an automatic exchange of financial information between more than 100 countries and represents a significant step change in the information HMRC has available to it on individuals with offshore assets or who undertake activity outside of the UK.

HMRC has a number of penalties available to it under RTC, which include:

  • A tax geared penalty of 200% of the tax not corrected – penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure, with a potential reduction to a minimum penalty of 100%
  • An asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, involving £25,000 or more in underpaid tax in a tax year
  • HMRC will also be able to use naming and shaming provisions in serious cases, and where over £25,000 of underpaid tax is involved
  • A further enhanced penalty of 50% of the amount of the standard penalty (i.e. penalty of up to 300%), will apply if records show the individual had moved the overseas asset in an attempt to avoid the requirement to correct. For example, moving the asset to a non-CRS participating country

The new RTC regime will apply to personal income tax, capital gains tax and inheritance tax. The only way to avoid the 100% penalty is to have a reasonable excuse and as outlined in Finance Bill (No.1) 2017, the RTC legislation attempts to limit when the reasonable excuse defence can be used. Schedule 29, paragraph 22(2) states that, “reliance on advice is to be taken automatically not to be a reasonable excuse if it is disqualified”. The CIOT is currently trying to ascertain when advice taken by individuals will be considered ‘disqualified’.

I recently listened to a HMRC webinar where the presenter suggested that if an individual has relied on the same adviser to setup an offshore structure and to provide them with the ongoing advice, then the advice may be disqualified on the basis that the adviser has a vested interest due to having set up the structure originally.

This surely cannot be the intention, and I would expect to see a significant number of cases being taken to tribunal should HMRC adopt the stance suggested by its webinar presenter. I hope that the CIOT is successful in getting a clearer idea from HMRC of when advice is likely to be disqualified.

As well as a new stricter penalty regime, the RTC provisions introduced an extension to the enquiry window for HMRC to look into individuals with overseas affairs. This extension effectively allows HMRC to bring into assessment any tax that would be assessable at 6 April 2017 and allow it to remain within assessment until 5 April 2021, meaning HMRC will be able to potentially enquire into an individual’s affairs where there is an overseas connection for up to 24 years as opposed to the usual 20 year limit.

The introduction of RTC to coincide with the information coming into HMRC’s hands from the CRS is no coincidence, and HMRC’s intention is to charge RTC penalties in instances where individuals are found to have underpaid UK tax as a result of information HMRC has gleaned from the CRS.

To avoid the ramifications of the new RTC regime, individuals need to act now. The worldwide disclosure facility (WDF) is the latest, and if HMRC is to be believed, and last disclosure opportunity for individuals with undeclared overseas affairs. The WDF will run up to 30 September 2018 and individuals who take advantage of it will be able to benefit from more favourable penalty rates, potentially as low as 10% compared to the RTC minimum of 100%.

In my view, one of the real areas for concern stems from the significant degree of ‘grey areas’ when dealing with overseas affairs and the technical points relied on as to whether a UK tax implication exists. This is of particular concern given the points I made previously on the limitation of the reasonable excuse defence. Without clarification on reasonable excuse, individuals could find themselves exposed to a 100% penalty – or more – simply because a technical view taken by an adviser is no longer a justifiable defence.

In my view, the only way for individuals and advisers relying on a technical argument to guarantee they will not be caught by the new RTC provisions, is to make a voluntary disclosure ahead of 30 September 2018, albeit this may be a ‘nil tax’ disclosure.

Should you be considering a disclosure ahead of the RTC provisions coming into force, our offshore and tax investigations specialists would be more than happy to discuss this with you.

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