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HMRC have opened a consultation introducing a new Requirement to Correct (“RTC”) obligation on UK taxpayers with offshore interests who have failed to regularise their affairs before full reporting under the Common Reporting Standard (“CRS”) comes into effect in September 2018.

With the CRS starting in October 2016, it will become far easier for HMRC to detect offshore evasion. Therefore, the introduction of the RTC aims to give taxpayers one last opportunity to regularise their offshore affairs before it will be too late to do so and they will face significant penalties for Failure to Correct (“FTC”).

The RTC will be introduced in Finance Bill 2017 and all corrections must be made by 30 September 2018. It is therefore crucial that advisers notify clients of these changes as soon as possible in order for them to take advantage of this 18 month window of opportunity.

From October 2018, the new FTC sanctions aim to penalise those who evade UK tax by moving UK income or assets offshore, those who choose not to declare any taxable income or gains arising offshore and those who use complex offshore structures as a way of hiding the beneficial ownership of income assets and gains. These new penalties will be far tougher than any existing penalties that already apply to offshore irregularities.

HMRC have put forward two penalty models for the FTC charge. The first model proposes a penalty of 200% of the tax due, irrespective of one’s behaviour. However, this can be reduced to 100% of the tax due depending upon the extent of the disclosure and cooperation provided by the taxpayer.

In addition to these tax geared penalties HMRC proposes charging a penalty equivalent to 10% of the asset value, where the potential lost revenue is in excess of £25,000.

HMRC is also looking to penalise those who seek to avoid the CRS by moving their assets to a non-participating territory by charging an extra 50% of the tax geared penalties.

The second penalty model is split into three penalty categories of lower, standard and higher which take into account whether or not the taxpayer’s disclosure was prompted or unprompted. The definition of a lower, standard and higher penalty is yet to be defined but it is understood they will be clearly set out in legislation if they are enforced. In this instance a penalty can be as low as 30% of the tax due, but can rise to a maximum of 200%.

As with all penalties, the taxpayer will have the right to appeal against the new FTC penalties.

Prior to the exchange of information between the UK and over 100 other countries, via the CRS, it was difficult for HMRC to obtain information regarding overseas assets held by UK taxpayers. Therefore, to incentivise taxpayers to come forward we have seen various disclosure facilities being made available with beneficial terms, most notably the Liechtenstein Disclosure Facility. With the CRS starting in October 2016 HMRC feels it no longer needs to incentivise taxpayers in this way and has announced that it will open its Worldwide Disclosure Facility (“WDF”) from 5 September 2016. The WDF will be available to anyone who is disclosing a UK tax liability that relates wholly or in part to an offshore issue and will allow those with outstanding tax to pay to put their affairs in order, however the WDF will offer no special terms.

Individuals will be able to make a disclosure via the online Digital Disclosure Service and once they have notified HMRC of their intention to disclose, they will have 90 days to calculate the tax due and complete their disclosure.
The offshore tax regime for individuals, trusts and companies is complex and we strongly recommend that anyone who is uncertain about their tax position in relation to offshore assets ad structures takes appropriate professional advice.

If you would like to discuss any of the issues discussed above with a member of our team, then please do not hesitate to contact us.