Kate Johnson: HMRC’s Requirement to Correct rules explained

Kate Johnson explores the HMRC's Requirement to Correct regime. With time running out before implementation, it is becoming increasingly important to make sure clients are aware of their obligations, she writes

UK taxpayers with offshore assets and trustees of offshore trusts which own, or have previously owned, UK assets may be affected by the Requirement to Correct (RTC) regime which has been launched by HM Revenue and Customs (HMRC).

Those with undeclared offshore assets must declare them to HMRC on or before 30 September, or risk strict penalties being applied.

The RTC regime was introduced as part of the Finance (No.2) Act 2017 and creates an obligation on UK taxpayers to notify HMRC, by 30 September this year, of any “offshore non-compliance”. Failure to disclose on or before this date will result in a new “failure to correct” (FTC) penalty which is likely to be far higher than the standard penalty regime, with the ability for HMRC to charge 200% of the tax involved. If the disclosure is not voluntary, there is a minimum penalty of 150%. Criminal penalties could also be applied.

If the offshore non-compliance is not declared to HMRC via the RTC, HMRC is very likely to become aware of it via the “common reporting standard” under which HMRC will receive, by 30 September 2018, tax data on UK taxpayers from the tax authorities of over 100 jurisdictions.

There is offshore non-compliance if income tax, capital gains tax or inheritance tax is owed to HMRC in respect of income, assets or activities outside the UK; or income, sale proceeds or assets which were received abroad or transferred abroad before 6 April 2017.

Non-compliance covers a failure to include the offshore matter or transfer in a tax return or making an inaccurate declaration of that matter or transfer in a tax return.

The length of time that HMRC can look back to penalise offshore non-compliance varies according to the particular tax at stake, broadly starting from four years but, in the case of inheritance tax, the assessment period can be unlimited.

Who does it affect?

The affected taxpayers could be: any UK taxpayer or trustee who owns or holds offshore assets; any UK taxpayer who has an interest in offshore assets (e.g. a beneficiary of an offshore trust); any UK taxpayer who has moved income or the proceeds of sale from a UK assets to offshore; trustees of offshore trusts with UK tax liabilities; and executors of a UK domiciled person who held offshore assets at death.

The assets could include overseas bank accounts, property and timeshares, art and antiques, life assurance policies and pensions, the benefit of a debt, and offshore trust interests.

For example, a UK taxpayer with a holiday home overseas which they rent out with the income being paid into their overseas bank account and not declared to HMRC.

If the taxpayer has taken professional tax advice in relation to their offshore assets and has not declared the asset on the basis of that advice, they may have a “reasonable excuse” and will not be subject to FTC penalties if it later turns out that HMRC disagrees. However, certain categories of HMRC advice are disqualified. One such example is professional advice that relates to “avoidance arrangements”; that is, arrangements where one of the main purposes is to obtain a tax advantage and HMRC has not indicated its acceptance of the particular arrangement.

A disclosure is made using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility (WDF). In certain circumstances, taxpayers can also disclose in separate correspondence with HMRC or by delivering or correcting a return for the tax year to which the non-compliance relates.

In limited circumstances, not all information needs to be provided by 30 September. These circumstances include where a taxpayer has notified their intention to make a disclosure via WDF by registering on the digital disclosure service by midnight on 30 September (or, with 30 September being a Sunday, by 4pm on 28 September if registering by phone) and the disclosure process is then completed “fully and accurately” within 90 days.

Further time is also available if the taxpayer emails a completed form CDF1 to HMRC by 30 September informing HMRC that they wish to make a disclosure of deliberate behaviour via the contractual disclosure facility and the outline disclosure is submitted within 60 days, or if HMRC has already opened an enquiry by 30 September and the taxpayer informs the person conducting the enquiry that they wish to make a disclosure and submit an outline disclosure to that person by 29 November.

With time running out, it is becoming increasingly important to make sure that clients are aware of the RTC and if in doubt that they have taken professional advice on whether a disclosure is needed.

It is unlikely that better terms will be offered by HMRC in the near future so affected clients should be encouraged to make use of this window of opportunity.

Kate Johnson is senior associate at Wedlake Bell