With effect from 1 October 2018, the new requirement to correct (RTC) penalty regime will be in force whereby a default tax geared 200% penalty will apply to individuals with underpaid UK tax relating to overseas assets.
Time is now short to check that past declarations of foreign income/gains have been correctly reported to HMRC and, indeed, that your client is aware of the implications if they fail to make or correct a previous error in respect of their foreign affairs. If notification is not made by 30 September 2018 and an error is subsequently found, higher penalties apply even for innocent mistakes!
We see many reasons why UK resident taxpayers have made mistakes, including the following:
- A failure to understand that foreign income/gains are liable to UK tax even though monies have remained offshore or the income/gains were reported in the source country
- Non-doms not realising they can no longer benefit from the remittance basis of assessment in respect of foreign income/gains unless they make a formal election and, where relevant, pay the annual remittance basis charge
- Non-doms who claimed the remittance basis but who then inadvertently remitted foreign income/gains to the UK
- Non-doms who claimed the remittance basis and incorrectly claimed foreign capital losses to reduce their capital gains tax liability
- Individuals who have continued to claim the remittance basis on the basis they are non-dom after they have taken a domicile of choice in the UK
- Distributions/benefits received from offshore trusts which were not properly reported for UK tax
- Individuals who thought they were non-resident only to find they have been UK resident under the statutory residence test
- An excess claim for foreign tax credit relief in respect of foreign income/gains.
“How will HMRC find out?” is a question some taxpayers ask about reporting overseas income/gains. In the past, HMRC did not necessarily have access to overseas information but that is no longer the case with the RTC regime coinciding with the Common Reporting Standard (CRS). The CRS is an automatic exchange of financial information between more than 100 countries and HMRC has already started to receive valuable information from overseas countries which they are using. Taxpayers are already getting letters asking if they have something to declare.
In addition to the higher penalties charged under the RTC, in November 2017 HMRC announced that it intends to issue a consultation document in Spring of this year to extend the time limits so that it can assess at least 12 tax years, irrespective of the behaviour. The purpose of this is to allow HMRC sufficient time to review and utilise the information in its possession under the CRS.
A taxpayer who voluntarily corrects any irregularity in their tax affairs by notifying HMRC by 30 September 2018 will potentially benefit from lower penalties – this is therefore the time for any uncertainties to be ironed out and for taxpayers to address any concerns that they may have. Hoping the matter will go away or will not be discovered by HMRC is high-risk, bearing in mind the substantial automatic penalties for unpaid tax and the amount of information being shared with HMRC from overseas.
HMRC’s latest disclosure facility – the Worldwide Disclosure Facility (WDF) – is open for making any necessary disclosure to HMRC and will run up to 30 September 2018, when the RTC regime comes into play.
In light of the higher penalties and ‘last chance’ for taxpayers bring their UK tax affairs up to date under the WDF, we would strongly recommend communicating the forthcoming changes to your clients so that any necessary disclosure can be identified. In particular, any clients with offshore trusts or unusual offshore elements to their affairs should be certain that there are no errors, as even innocent errors will incur high penalties.
We have advisers who specialise in offshore tax matters who can review whether or not a declaration should be made to HMRC. Where a notification is required, our team can assist your clients through this process. Time is of the essence and now is the time for taxpayers to address their concerns – please contact us to discuss how we can assist.