Tough new penalties in respect of offshore tax matters

Tough new penalties are being introduced from 30 September 2018 for those that have made errors in their UK tax returns relating to ‘offshore tax matters’.  

A new legal obligation will require taxpayers to correct any returns that fail to properly report offshore matters that would give rise to a UK tax liability. This requirement is a final opportunity to put things right, before new penalties come into force. Penalties will start at 200% of the tax liability. The penalty can be reduced to 100% of the tax liability, but no lower. In addition, in the most serious cases a further penalty of up to 10% of the value of a relevant asset can also be imposed and HMRC will be able to ‘name and shame’ on their website.

The introduction of the Common Reporting Standard to take effect in September 2018, will see information being provided to HMRC about bank/investment accounts held by UK residents in approximately 100 countries.  Many of you will have received forms from your UK bank asking you to confirm your tax status with regards to residency, your tax reference and that your tax affairs are up to date, which is all part of the information gathering process.  In addition, advisers such as Harbour Key have had to contact clients advising them to normalise their tax affairs where required

All individuals and trustees with offshore interests who have a UK tax liability should review their tax affairs to ensure that they are fully compliant.  The rules cover all taxes, with any link to offshore matters (broadly income, gains or assets outside the UK) and offshore transfers (transfers of UK income, gains or assets out of the UK).  Non-compliance, whether deliberate, careless, or even an innocent mistake including incorrect returns, failure to submit returns and a failure to notify that a return should be issued are all covered under the new standard.

The penalties

For those that fail to correct any errors before 30 September 2018, the penalty will start at 200% of the tax due. This can be reduced, but to no lower than 100% of the tax due. Any reduction will be based on the quality of the disclosure, co-operation and the seriousness of the behaviour.  Taxpayers could also face a further penalty of up to 10% of the value of the relevant offshore assets and public naming and shaming depending upon the particular circumstances.

Unlike the existing penalty regime, these new penalties will focus less on taxpayers’ motives. HMRC will work on the basis that taxpayers will have already committed the original failure, failed to respond to previous publicity/disclosure opportunities and failed to respond to the recent request to disclose. As such, the penalties would even apply to innocent mistakes. The only defence is that a person had a ‘reasonable excuse’ not to correct. The existing case law on what constitutes ‘reasonable excuse’ is narrowly drawn and therefore a mere assumption on the part of someone that all is in order is unlikely to be a valid defence.

Those with offshore interests must be confident that their affairs are in order. Whilst acknowledging that offshore tax issues are complex, HMRC expects those who may be unsure whether they have a problem or un-notified liabilities to seek professional help to clarify whether or not issues need correcting. Failure to do so will have severe consequences as already highlighted.

It is therefore vital that those with offshore tax issues consider their historic UK tax compliance as soon as possible and certainly well in advance of 30 September 2018.  Anyone with UK tax liabilities who has not recently reviewed the taxation of their offshore assets or structures should seek specialist professional advice to help with this.

The best way to show the impact of the penalties position, is by an example:

A taxpayer checks her affairs and realises that she has undeclared income from an offshore investment portfolio, which is valued at £2m. Approximately £50,000 of taxable income has not been reported on the UK tax returns for each of the last six years. The behaviour amounts to carelessness rather than deliberate. The effect of disclosure would be as follows:

Disclosure now

  • Tax – £120,000 plus interest

  • Penalty – nil (voluntary and unprompted)

Disclosure post 30 September 2018

  • Tax – £120,000 plus interest;

  • Penalty – minimum £120,000 up to a maximum of £240,000.

If the behaviour was deliberate post 30 September 2018

  • Tax – £120,000 plus interest;

  • Penalty – minimum £120,000 up to a maximum of £240,000;

  • Additional penalty of up to £200,000 (10% of asset value);

  • Naming and shaming.

The example shows how serious the penalty situation is going to become, it is therefore imperative that you review and check your offshore position, to confirm everything is in order.  Harbour Key can assist with this if required. Contact us now.