Requirement To Correct
Background
In recent years HM Revenue and Customs (HMRC) has focused heavily on offshore matters but it still considers a significant amount of tax remains uncollected in this area. In response to this, the Requirement to Correct (RTC) legislation was introduced last year, requiring a taxpayer with overseas assets to bring their tax affairs up to date.
The deadline for compliance with these new obligations, of 30 September 2018, is now fast approaching and many taxpayers have recently received letters warning them to disclose information by this deadline. Taxpayers who do not correct any issues in time will face heavy penalties and other sanctions under the Failure to Correct regime.
Detail
The RTC requires any person with a potential undeclared liability relating to UK Income Tax, Capital Gains Tax and/or Inheritance Tax arising on offshore assets before 6 April 2017, to correct the situation by 30 September 2018. For RTC purposes, a “person” is defined as an individual, a partnership, trustees or non-resident landlord companies.
Examples of overseas income or gains that taxpayers would need to declare include:
- Overseas bank accounts – additional UK tax may be due even if tax is already deducted
- Stocks and shares
- Rental from land and buildings
- Disposal of assets – such as antiques, jewellery, property
From 30 September 2018, the Common Reporting Standard (CRS) also comes into effect across more than 100 countries, allowing a greater exchange of personal financial information. With this increase in, and ease of, sharing information globally it is more likely than ever before that HMRC will identify non-compliance in the UK, whether it arises from a genuine mistake, carelessness or deliberate action.
If corrections are not made by the 30 September 2018 then the Failure to Correct (FTC) regime will come into play, under which the penalties and sanctions will be far more severe than the existing regime for incorrect returns and underpaid tax.
Penalties
The penalties under FTC are as follows:
- A standard penalty of 200% of the uncorrected tax liability;
- In addition, where the tax involved exceeds £25,000 in any tax year, a potential penalty of 10% of the value of the asset involved;
- Potential naming and shaming of the person where the tax involved exceeds £25,000 per investigation;
- A potential additional penalty of 50% of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC.
The standard penalty can be reduced based on a taxpayers level of co-operation with HMRC and quality of their disclosure to HMRC. However, the penalty cannot be reduced below 100% of the potential tax liability.
A person receiving an RTC penalty has the right to appeal HMRC’s decision to charge the penalty, or HMRC’s decided tax liability. No penalty will be charged if the taxpayer has a “reasonable excuse” however the RTC legislation has also introduced the concept of Disqualified Advice and HMRC will not accept such advice as a reasonable excuse for non-disclosure.
Disqualified advice is considered to be any of the following:
- Advice given by an “interested person”;
- Advice given as a result of arrangements between an interested person and the person who gave the advice;
- Advice given by someone not qualified to give such advice;
- Advice which failed to take account of all of the individual’s circumstances;
- Advice which was provided to someone other than the taxpayer involved.
If a taxpayer has any overseas income or gains that need to be declared then now is the time to submit such disclosures. Penalties may still apply for any previous non-disclosure, but these will become much more severe if HMRC identify any such non-compliance after 30 September 2018.
If you would like any advice or assistance in connection with determining if the RTC regime will apply to you, or assistance if making a declaration to HMRC under RTC, or alternatively would like to discuss any of the issues raised above then please contact our Tax Director Jenny Marks.
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