Introduced in 2017, the period for the Requirement to Correct (RTC) ends on 30 September 2018.
Until 30 September 2018, those who own up to offshore tax non-compliance will be subject to the current penalty regime. From 1 October 2018, enhanced penalties apply and will, in some, if not many, instances be five or possibly ten times higher in amount than was previously the case.
As such, the RTC is not a requirement but, rather, it is an opportunity for taxpayers to avail themselves of the existing penalty regime before the penalty levels are significantly increased.
Why not simply keep quiet?
For those taxpayers who are non-compliant, the temptation may be to continue to be silent. This is a decision for those concerned but the choice should be taken in the context of automatic information exchange, under which over 100 countries will soon be notifying each other of financial assets held by banks and other institutions in their own countries.
The UK authorities have already been receiving information from the Crown Dependencies and will start receiving information from those countries participating in the Common Reporting Standard from 1 October 2018; hence, the opportunity to correct tax irregularities before that date.
Who does it apply to?
Individuals, acting in their personal capacity, as members of partnerships or, possibly, as settlors, trustees or beneficiaries of trusts.
Non-UK resident companies who are chargeable to income tax and capital gains tax (but not to NRCGT).
The location of the taxpayer is not relevant but, rather, whether there is a liability to UK tax.
What does it apply to?
UK liabilities to income tax, capital gains tax, or inheritance tax, which relate to offshore tax non-compliance.
The liabilities must arise from a failure to declare, or an under or incorrect declaration, the over-claiming of a relief, credit or repayment, where the non-compliance could, if known by HM Revenue & Customs, have then been assessed, under the usual time limits, on 6 April 2017. (The slightly later date, of 17 November 2017 applies for inheritance tax.)
The usual time limits are, broadly, four, six, or 20 years from the end of the tax year in which the liability to income tax or capital gains tax etc., arose. The relevant limit depends on the type of behaviour which gave rise to the non-compliance, i.e., innocent, careless, or deliberate.
Where the usual time limit for HMRC action expires without the RTC being engaged by the taxpayer before 30 September 2018, that limit is automatically extended so that assessment can continue until at least April 2021.
What is covered?
The enhanced penalties from 1 October 2018 will apply to offshore matters and offshore transfers. Liabilities arising on sources of income or gains etc., which are neither, are, by default, onshore matters. (The existing penalty regime will continue to apply for non-compliance concerning onshore matters.)
An offshore matter is on where tax is due on income arising from a source outside of the UK, a gain on the disposal of an asset based outside the UK, or a trade carried on outside of the UK.
An offshore transfer is where tax is due on income, or a capital gain on an asset etc., arising in the UK, and where the receipt or proceeds was received or transferred out of the UK.
In all cases, tracing applies and, therefore, the rules apply to the reinvested proceeds etc., as much as they do the original receipt.
What penalty rates currently apply?
The penalty charged for offshore tax non-compliance will typically be in the range of 30% to 70% of the tax concerned. In certain circumstances, the penalty can be lower or, exceptionally, higher at 100% or 200% of the tax. The exact level of penalty will depend upon whether the disclosure to HM Revenue & Customs is voluntary, the degree of co-operation given by the taxpayer, and other similar factors.
No penalty is charged where, in the case of innocent or careless, but not deliberate, behaviour, the taxpayer is held to have a reasonable excuse for the failure or error which gives rise to the tax liability.
Where advice has been received from advisers, and relied upon by the individual who then finds himself subject to offshore tax non-compliance, it is possible, in some circumstances, for that advice to provide the individual with a reasonable excuse; this applies even where the advisers, counsel or promoters etc., were directly involved in the non-compliance concerned.
What enhanced penalty rates will apply from 1 October 2018?
The standard rate of penalty will be 200% of the tax concerned. As with the present regime, reductions will be given for the nature and quality of the disclosure. However, and even with full voluntary disclosure and co-operation etc., the penalty will not be reduced to below 100% of the tax.
Where the person does not voluntarily disclose their non-compliance but, rather, is caught by HMRC, the penalty will not be reduced below 150% of the tax involved.
Again, a reasonable excuse can absolve the taxpayer from a penalty. But, and in contrast, to the pre 1 October 2018 regime, reliance on another person will be considerably more difficult to achieve successfully. In particular, the post 1 October rules hold that reliance cannot be placed on advice received from persons who are not independent of the offshore non-tax compliance avoidance on which the liability arises.
The Way Forward
It is possible that some persons will have taken a fully-informed decision not to disclose voluntarily their offshore irregularities ahead of 1 October 2018. Instead, they will be taking their chances over not being caught by HMRC after the receipt and processing of the financial information HMRC will now shortly be receiving from other countries.
It is, however, just, if not more, likely that many persons will be unfamiliar with the enhanced level of financial penalty to which they are exposed. Whilst there was a statutory requirement imposed on relevant institutions and advisers to inform those clients of the impending changes, that requirement expired in August 2017 and anecdotal evidence suggests the warning has been ignored by many non-compliant taxpayers.
Those to whom the new rules could be relevant but who have still yet to review their non-UK affairs in this context are therefore, advised to do so without delay.
For those persons who decide on making a disclosure, notification of the fact to HMRC will need to be made by not later than 30 September 2018, after which there will be 90 days in which to agree the detail with HMRC and the opportunity to arrange a timeframe for payment of the tax etc.