Long gone are the days of the secret Swiss (or other territory of choice) bank account. In an almost worldwide effort to crack down on cross-border tax evasion, tax authorities are increasingly sharing information on accounts and assets held in their respective countries.
These sharing agreements are reaching an apparent crescendo in the form of the full implementation of the Common Reporting Standard (‘CRS’) in September this year and, with it, a last chance for taxpayers to declare historic offshore income and assets to HM Revenue and Customs (‘HMRC’) before the imposition of a new, aggressive, penalty regime for failing to do so.
HMRC recently implemented requirement to correct (‘RTC’) legislation, compelling taxpayers to disclose any offshore historic non-compliance (to 5 April 2017), and to pay the relevant tax, interest and penalties, by 30 September 2018. Failure to do so will result in any undisclosed offshore income or assets being subject to the ‘Failure to Comply’ regime.
The sharing of account and asset information between countries has been commonplace for many years now. However, the CRS co-ordinates these obligations and provides a prescribed list of information to be provided.
At present, around 100 countries (including the UK) have signed up to the CRS. Many have already implemented the CRS and all countries are expected to have completed implementation by 30 September 2018. This is the date that HMRC have chosen to commence the new Failure To Comply regime.
In the meantime, individuals are compelled to disclose historic offshore non-compliance by the full implementation date. This approach differs from softer measures that HMRC have adopted in the past (such as the use of voluntary disclosure facilities) and, coupled with the new penalty regime, evidences the seriousness with which HMRC views offshore tax evasion.
What is the requirement to correct?
The RTC legislation places a statutory obligation on taxpayers to correct any overseas non-compliance matters by 30 September 2018.
The legislation covers both deliberate and accidental non-compliance. This could take the form of non-disclosure of income or gains overseas but also can include non-deliberate errors such as accidental under-reporting of overseas income or accidental failure to submit personal or offshore trust tax returns (for example through a lack of appreciation that such returns are required).
The legislation is focused on individual and trust non-compliance. The taxes covered are UK income tax, UK capital gains tax and inheritance tax. Therefore, except in a very small number of cases, the legislation does not apply to company non-compliance.
What are the penalties?
The associated penalty regime, which comes into force on 1 October 2018, punishes the failure to correct historic non-compliance, rather than the non-compliance itself. The default penalty for failure to correct is 200% of the tax not corrected by 30 September 2018. This penalty can be reduced to a minimum of 100% depending on the extent of taxpayer co-operation, the seriousness of the non-disclosure, and whether the disclosure was prompted or unprompted.
The default penalty can be increased by 50% (i.e. 300% in total) if it can be shown that the taxpayer took steps to move undisclosed assets in an attempt to avoid detection under the CRS.
In addition, a further penalty can be imposed where the undisclosed tax amounts to more than £25,000. This ‘asset-based’ penalty is calculated as the lower of 10 percent of the value of the asset, and ten times the tax not declared.
Finally, for the most serious of offshore non-compliance case (i.e. where the tax at stake is at least £25,000 or a taxpayer receives 5 or more offshore non-compliance penalties) HMRC has the ability to ‘name and shame’ individuals through publication of their details, including name and address on the HMRC website.
It should be noted that this penalty regime applies to undisclosed offshore income, gains and assets to 5 April 2017 only. Any non-disclosure of income, gains or assets arising after this date (or arising in the UK) will be subject to the normal penalty regime which allows for the possibility of penalties being reduced to nil in the case of non-deliberate unprompted disclosure.
What do individuals need to do?
Individuals with overseas income or assets should be taking steps to understand their disclosure requirements now, and ensuring that all relevant disclosures have been made, and tax paid, prior to 30 September 2018. The scope of the new penalty regime, and its applicability to even minor, unintentional non-disclosure incidents, means that HMRC are not just after the major tax evaders.
If any instance of non-disclosure is discovered, a professional advisor should be consulted at the earliest opportunity. There is no prescribed method of notifying HMRC, however there is a worldwide disclosure facility which is available for use until 30 September 2018.
Advice should be sought from a professional advisor prior to making any disclosure as there are strict time limits for both notification and disclosure itself.
If you have a query about undisclosed offshore income or assets you may have, please contact Paul Houston today on 0131 558 5800 or at firstname.lastname@example.org.