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Requirement to Correct legislation

Many taxpayers are unaware of the “Requirement to Correct” legislation which has recently been introduced and has potentially enormous consequences for non-compliance.

Richard Coombs, Tax Partner at Bates Weston explains:

The legislation is very much targeted at people with undeclared offshore income and assets and so HMRC have those people who were the subject of the Panama/Paradise papers and similar structures very much in their sights.  However, the legislation is actually written very broadly and can potentially catch a client with any offshore connection, even if the tax at stake has nothing to do with being offshore. 

Whilst most clients will not have to concern themselves with the legislation, as advisors we all need to be aware of these rules as the consequences for any client of non-compliance can be dire.  The more common types of situations which you might come across would be:

  • a client with a foreign holiday home who lets it out when they are not using it and has so far failed to declare the income on it
  • a client who has sold overseas property for a gain and has not declared it on their UK tax return.
  • A client who has speculated on overseas stock markets (e.g. Dubai) using an offshore trading account and has not reported any income or gains
  • a UK beneficiary of an Employee Benefit Trust has received a benefit which has not been declared to HMRC.  

Often the client is simply not aware of their tax reporting responsibilities, rather than trying to cheat the system.  However, lack of knowledge of the rules is not a defence and so they will still be within the rules.

Essentially, HMRC is giving all taxpayers who have any offshore financial connections an opportunity to review their UK tax affairs to ensure that all tax returns are correct.  They have until 30 September 2018 to notify HMRC of any under-declarations of income tax, capital gains tax and inheritance tax.  This date is important and it is no coincidence that it is also the date after which many countries will start exchanging information under the “Common Reporting Standard”.  The date has been specifically chosen by HMRC so as to give taxpayers the opportunity to correct any errors before HMRC find them.

After this date, the ‘Failure to Correct’ (‘FTC’) regime will start, with punitive penalties, including:

  • a tax geared penalty of between 100% and 200% of the tax not corrected 
  • a potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • potential “naming and shaming” where over £25,000 of tax per investigation is involved
  • a potential additional penalty of 50% of the amount of the standard penalty (i.e. a 300% penalty in total), if HMRC could show that assets or funds had been moved to attempt to avoid the RTC

Anyone who fails to correct their position despite knowing that they should do so may also face

  • a potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year
  • potential “naming and shaming” where over £25,000 of tax per investigation is involved

With a minimum penalty of 100% of the tax due, this is not something that can be swept under the carpet and we would urge you to speak to any clients who may have an offshore asset or income to ensure they have the opportunity to correct any previous mistakes before it is too late.

If you require any assistance in assessing whether a client is required to make a declaration then please contact Richard Coombs at richardc@batesweston.co.uk. 

As always we must remind you that this article is generic in nature and you should take no action based upon it without consulting your professional advisor.