Managing the risk of the requirement to correct

06 January 2017

What is the ‘requirement to correct’?

Under the proposed legislation, those with a UK tax liability relating to offshore income or assets, including offshore trustees in some cases and non-resident landlords, will have from 6 April 2017 until 30 September 2018 to ensure that their offshore tax affairs are up to date and fully compliant in the UK. 

Failure to correct past issues within this period will result in significantly increased penalties of up to 200 per cent of the liability not corrected. Further asset based penalties of up to 10 per cent of the value of relevant offshore assets, and public ‘naming and shaming’ could also apply.

Offshore non-compliance for these purposes will include any circumstance in which UK tax has been underpaid. The RTC penalty regime will therefore apply not just to deliberate tax evaders, but also those who have made innocent errors relating to income tax, capital gains tax or inheritance tax in respect of offshore matters. 

Potential issues could range from something as simple as undeclared overseas interest received to the impact of more complex overseas structures, which may be non-compliant because advice has not been taken, was incorrect, is no longer up to date or has been incorrectly implemented. The provision also includes errors relating to foreign pension schemes such as making unauthorised payments into the UK.

Is there something to correct?

Given the potential sanctions, taxpayers need to be certain that their affairs are in order. If taxpayers suspect their returns may contain inaccuracies or are simply unsure, they will need to review their position as soon as possible prior to 30 September 2018. This is the only way that the risk RTC presents can be managed to provide certainty that an unexpected and costly exposure will not be triggered at some point in the future.

HMRC considers that, as those with offshore interests are likely to have complex tax affairs, it is incumbent on them to seek professional advice in order to be sure their UK tax filing position was correct, or else face severe sanctions for failure to correct.

How to correct

Once a loss of tax has been identified there are a number of ways it can be corrected. However, careful handling of the disclosure will be needed to ensure the best outcome. 

Failure to correct?

HMRC may not have previously had the necessary information to identify non-compliance in overseas jurisdictions, but the information it will soon receive under the multilateral Common Reporting Standard for the exchange of financial account information between tax authorities will change that. 

HMRC is aware that it is about to receive a huge amount of data; it is therefore giving itself plenty of time to review this data. Existing time limits for HMRC to assess the lost tax and RTC penalty have been extended such that tax assessable as at 6 April 2017 will remain assessable until at least 5 April 2021, even where the loss is neither deliberate nor careless.

Faced with such severe consequences for errors, tax payers will be looking to their trusted advisers more than ever for guidance and reassurance that their UK tax affairs are fully compliant.

For more information, please get in touch with Andrew Hinsley.