Have you sorted your offshore tax matters? Act now before it’s too late.

What is the requirement to correct? (RTC)

The UK government is concerned with offshore tax evasion. One of the measures that it has introduced to tackle this is the Requirement to Check (RTC). This is a new statutory obligation for taxpayers to correct any offshore non-compliance relating to UK taxes that came into force on 6 April 2017. The RTC doesn’t just apply to taxpayers who have entered into elaborate offshore tax arrangements; it also applies to those who have UK tax obligations in relation to assets, income or gains outside the UK or have been involved in offshore arrangements.

If taxpayers have failed to account for offshore matters or transfers correctly to HM Revenue & Customs (HMRC), the deadline for identifying and correcting any non-compliance is 30 September 2018.

It is by design that the deadline coincides with the date by which over 100 countries will exchange data with HMRC under the Common Reporting Standard. HMRC will use information it receives to see if there are any issues with UK tax reporting. If HMRC discovers any non-compliance relating to offshore matters or transactions, the RTC introduces severe sanctions in addition to normal penalties.

What is affected by the RTC?

The RTC applies to individuals and trustees. It covers liability to UK income tax, capital gains tax and inheritance tax in respect of offshore matters and transfers.

It applies to tax non-compliance committed before 6 April 2017 and where HMRC is able to:

• make an assessment to recover the income tax or capital gains tax in question on 6 April 2017 or
• make a determination to recover the inheritance tax in question on 17 November 2017.

It should be noted that, where HMRC would have been in time to assess tax at 6 April 2017, the deadline is extended to run up to 5 April 2021. This will give HMRC more time to review any information that it receives.

Examples of what the RTC could apply to include:

• failing to declare gains realised on the sale of an asset outside the UK whilst being a UK tax resident and not claiming the remittance basis of taxation;
• failing to pay tax on rental income from UK residential property despite not being  a UK tax resident
• trustees failing to pay inheritance tax anniversary charges in relation to UK investments held on trust.

Penalties

Where a taxpayer has failed to correct and HMRC discovers an under declaration of tax, there is a standard penalty of 200% of the tax liability. This can be reduced depending on the quality of disclosure, co-operation and previous behaviour. However, the penalty cannot be reduced to less than 100%.

For the most serious cases, HMRC may impose a penalty equal to 10% of the asset and name and shame the taxpayer.

It is important to remember that an innocent or careless mistake will incur penalties. The only way to escape the stringent penalties is if there is a reasonable excuse. However, these are narrowly defined.

What if I have a reasonable excuse?

If there is a reasonable excuse, taxpayers can avoid the severe penalties.

Current case law and HMRC practice means that they do not apply to many circumstances and cannot be easily relied upon. Furthermore, the legislation enacting the RTC has narrowed this further as the following cannot be taken into account:

• insufficiency of funds. It is only a reasonable excuse if it is outside the taxpayer’s control
• relying on someone else to do something (e.g. complete and file a tax return) unless reasonable care was taken to make sure that that other person did what they were supposed to do
• reliance on advice that the matters were all in order.

Advice can only be relied upon and will be a reasonable excuse if:

• it is specifically addressed to the taxpayer
• takes into account the specific circumstances
• the advice is sought from someone with the appropriate expertise.

What to do and how we can help?

It is important for taxpayers to consider their UK tax obligations in relation to their offshore matters and transactions. If they are not 100% sure that everything is in order, they should seek suitable professional advice as soon as possible to check and, if necessary, make the relevant disclosures to HMRC. Any correction needs to be made on or before 30 September 2018 to protect taxpayers from the stringent new penalties of 100% to 200%.