2017 saw the introduction of new penalties for non-compliance in matters involving offshore tax. Such penalties can apply to UK resident taxpayers who have assets outside the UK, for example an investment portfolio, a property or an interest in an offshore trust. The penalties can also apply to persons not resident in the UK for example trustees of an offshore trust in respect of IHT Ten Year Charges or an offshore company in respect of rental income on a UK property.
The legislation is in two parts: Requirement to Correct (RTC) and Failure to Correct (FTC).The RTC legislation offered a window in which corrections to non-compliance could be made which avoided the full impact of the new penalties. That window has now closed although there are a few cases still active.
Going forward, the main concern of taxpayers will be the FTC legislation. Where taxpayers discover a failure in past compliance they will wish to consider how best to correct and disclose that failure. Where taxpayers only become aware of such a failure after being approached by HMRC, they will wish to consider how best to mitigate the consequences.
Discovering non-compliance
If non-compliance is discovered or suspected, some may be tempted to sit tight and hope HMRC do not discover it. This is a high risk strategy. In worst cases it can be treated as a criminal offence of deliberate tax evasion. Even if treated as a civil offence, the financial penalties can be enormous – up to 300% of tax due PLUS 10% of the value of the asset concerned, for example the investment portfolio or the property.
Consideration should also be given to the likelihood of the non-compliance coming to light. There is an ever-growing tide of information flowing in to tax authorities from initiatives such as Common Reporting Standards and identification of ultimate beneficial owners. There are powerful IT systems (such as HMRC’s CONNECT ) which can gather, transfer and analyse huge amounts of diverse information with a view to identifying potential noncompliance. Taxpayers who are approached by a tax authority are in a less advantageous position than those who approach the authority to make a voluntary disclosure.
Reasonable excuse
If the taxpayer in his approach to HMRC can argue that there is a “reasonable excuse” for the non-compliance then this will be a defence against penalties. While HMRC are reluctant to accept this defence, there is a large body of case law, some of which indicates that the courts can be convinced the defence is valid where HMRC cannot.
However the FTC legislation limits the scope to use this defence. A “reasonable excuse defence” often involves the taxpayer arguing that he followed professional advice and, as such, has a reasonable excuse for the actions he took. Under FTC legislation, advice from certain types of advisers cannot be accepted as a defence. This itself is likely to generate some interesting case law.
Penalties
As previously indicated, financial penalties can be enormous. The default penalty is 200% of the Potential Lost Revenue (PLR). The term PLR is used rather than the term “Tax” since the complexities of offshore tax can sometimes result in a debate about how the tax bill should be computed. Where there is such a debate, the legislation states that the computation should be done in a way which is “just and reasonable”. This simple principle is likely to raise some complex points.
Where HMRC believe assets have been moved between jurisdictions to facilitate the noncompliance, they can seek to increase the penalty by 50% (thus a 200% penalty will be increased to 300%). For the most serious cases, HMRC can levy a penalty of 10% of asset value. So if there has been a consistent failure to declare rental income on a property worth £1m, apart from penalties arising from the failure to pay tax on rent, HMRC can impose an additional penalty of £100,000. Apart from financial penalties, the legislation details criteria which will also allow HMRC to publish details of the taxpayer and thus cause reputational harm
Penalties may be mitigated by such factors as cooperation but, unless a reasonable excuse defence is successful, the MINIMUM penalty will be 100% of PLR.
The position of advisers
Where a taxpayer is subject to penalties, HMRC will consider whether any professional advisers involved (which could include accountants, lawyers, bankers, trustees) have in some way “enabled” the non-compliance. Such Enabling legislation was introduced in 2016 and is broadly drawn. It allows for the imposition of financial penalties (default penalty being 100% of tax). It also has provisions for reputational naming and shaming.
