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Offshore Income Omission-0% HMRC Penalty Possible?

Is That Possible? Elderly Client Made Innocent Error.

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Very elderly client is just not with it any more. He omitted foreign income going back to 2011/12 and after. It was an innocent error. He is normally quite careful.

I am completing the Digital Disclosure and inserting the penalty % to charge on the foreign income. I have inserted 0% penalty charge. Do you think HMRC will accept this. Tax and interest lost is around £2,500 (2013/14 to 2016/17). (2011/12 and 2012/13 not charged because DDS ignores these two years for innocent error).

Any views?

P.S. Disclosure was unprompted.

Replies (19)

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By Brads.Kings
10th Dec 2019 08:55

I think you will find that the 2011/12 and 2012/13 years can only be excluded if the taxpayer had a reasonable excuse (ie sought and obtained written tax advice that the income was not taxable).

If this was prompted disclosure, the penalties are 150%, even if error was innocent oversight. HMRC's view is undisclosed offshore income puts you in the serious tax evader bracket.

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Replying to Brads.Kings:
By penelope pitstop
10th Dec 2019 12:29

For the draft DDS disclosure I have ticked the box that client has reasonable excuse, so the DDS has then automatically excluded 2011/12 and 2012/13. But of course HMRC could disagree with that in due course.

Client is very elderly and has always given me ALL paperwork. The problem is that one of the paying agents went paperless and sent income data to client's computer, which of course wasn't working/worked intermittently/out of date operating system/could access emails sometimes-sometimes not/but the emails he was supposed to see were not there etc. etc. A real mess until client compelled the paying agent to send him hard copies of everything.

Client is not a tax evader by any description.

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Replying to penelope pitstop:
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By Brads.Kings
10th Dec 2019 13:20

I am sympathetic, but found HMRC isn't. The more I looked at reasonable excuse, the more difficult it appeared. Adviser error might be a way to go??

I would expect HMRC to reply quickly requesting how you have concluded reasonable excuse.

According to: https://www.accountingweb.co.uk/community/industry-insights/requirement-... :

Unlike normal penalties for incorrect returns, it will not matter if the errors have arisen through innocent error or deliberate actions – the only basis for appeal will be reasonable excuse where a taxpayer has relied on advice from an appropriate adviser, which has transpired to be incorrect.

I concluded that my client couldn't use reasonable excuse for a careless error. Your client's circumstances might have more chance, but I expect you will have to argue the point.

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By craig__2k4
10th Dec 2019 09:19

Does the 0% fit into one of HMRC's grid boxes? (depending on circumstances)

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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By richard thomas
10th Dec 2019 09:41

This may sound pedantic, but there is a difference between a penalty of 0% and no liability to a penalty.

In this situation a 0% penalty is a possible outcome for an omission of offshore income which is careless but not deliberate AND which is unprompted AND where a 100% reduction for the quality of the disclosure is appropriate - see para 10A Such 24 FA 2007.

A 0% penalty is also a possible outcome where there are special circumstances justifying a special reduction in a penalty reducing the whole penalty to nil.

But if it is the case that the disclosure was prompted as a result of information supplied to HMRC by another fisc which HMRC have written to the client about, a 0% penalty is not possible (save for the case of special circs).

If the argument is however that the client was not careless then there is no liability to a penalty under Sch 24 FA 07 at all, even at 0%. It may be that the form you are using to make the disclosure does not recognise this distinction but it will nevertheless be clear to HMRC what it is you are arguing.

And pace the previous poster, but reasonable excuse is not a feature of Sch 24 FA 2007. Suspension is a possibility if HMRC accept as I am sure they will that the omission was not deliberate.

And depending on the territory of source of the income, the maximum penalty may be 200% of the amount that would be charged for an omission of UK source income. But in the vast majority of these cases what the previous poster says is scare mongering, as if the source is a Category 1 territory the penalties are the same as for UK cases, and category 1 contains all the common territories, even Liechtenstein and the Cayman Islands.

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Replying to richard thomas:
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By Brads.Kings
10th Dec 2019 09:54

My 'scaremongering' is based on:

Finance (No.2) Act 2017

Schedule 18 of Finance (No.2) Act 2017 introduces:

A Requirement to correct (RTC) undeclared UK tax liabilities in respect of offshore issues at 5 April 2017 by 30 September 2018

Severe tax geared penalties if taxpayers falling within the RTC do not correct by 30 September 2018:

The maximum penalty will be 200% of the tax not corrected.
The minimum penalty will be 100% of the tax not corrected regardless of behaviour unless the disclosure is not voluntary in which case it will be 150%.

From Ross Martin website

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Replying to Brads.Kings:
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By richard thomas
11th Dec 2019 18:46

At the time I posted, the only posts were that by the OP and yours of 0855.

The OP’s post did not refer to “reasonable excuse” only to “innocent error”. I assumed, because of my lack of knowledge of the finer workings of RTC (it is not something which ever crossed my judicial horizon, given its recency), from the failure to refer to reasonable excuse that the issue was only Schedule 24 FA 2007 penalties, where as you will know, there is no reasonable excuse exception.
I took your reference to a 150% penalty to be to the maximum Schedule 24 penalty payable, for a deliberate and concealed omission of Category 3 territory income, disclosure of which was prompted.

I now realise from your post @0954 referring me to Schedule 18 F(2)A 2017 that your 150% penalty reference was to the provisions of the RTC. I have to say that I cannot see any basis in that Schedule for your statement that the minimum FTC penalty is 100% for an unprompted disclosure and 150% for a prompted one. A 150% minimum for a “non-voluntary” disclosure does appear to be HMRC’s practice - it is referred to in HMRC’s Compliance Handbook at CH123405, with no indication that it is actually in the legislation where you say you found it.
At the time I posted, the one thing that had been said by the OP about the quality of the disclosure was that it was unprompted, so “voluntary” in HMRC’s terminology.
Despite the fact that in my original post I did not realise you were talking about the RTC and I now do, I still think you are scaremongering to some degree about the level of penalties. Not because you said 150%, when the minimum penalty is 100% for an unprompted/voluntary disclosure, but because I do not believe that on the facts that we know HMRC will succeed in imposing any penalties, whether under Schedule 24 FA 2007 or FTC penalties.

I say that for these reasons.

1. The circumstances of the client described by the OP strongly suggest that the client is not and has not been for some time capable of managing their financial affairs, ie they are a “vulnerable adult”.

2. In relation to Schedule 24 FA 2007, even if it is incorrect to say that the client was not careless, the status as a vulnerable adult will lead to the inevitable conclusion that there are special circumstances justifying a reduction of any penalty to nil.

3. In relation to RTC penalties, the same argument for special circumstances will apply and there is also the very substantial likelihood that the client would have a reasonable excuse not excluded by paragraph 23(2) Schedule 18 F(2)A 2017, and would not then have to rely on special circumstances. (See below for more on “reasonable excuse”)

My second reason for maintaining that you are scaremongering arises from the first paragraph of your 0855 post.

The OP’s original post points out that where there is an innocent error claimed, the DDS excludes the first two years in question. It is not clear from that whether the exclusion amounts only to not being liable for any omitted tax for those years (with the necessary consequence that Schedule 24 FA 2007 penalties could not be applied as there would be no PLR) or also has the consequence that FTC penalties cannot be applied in relation to those years. I am hamstrung somewhat by not having access to the DDS forms, as you have to make a disclosure to find out.

Your view as expressed in your 0954 post is that exclusion is only possible if the client had a reasonable excuse. Exclusion from assessment to tax is possible where s 34 TMA imposes a time limit which is not overridden by s 36. Section 36 TMA allows assessments up to 6 years back if a loss of tax is brought about carelessly, ie by a failure to take reasonable care on the part of the client or the OP (s 118(5) TMA). Both 2011/12 and 2012/13 are now out of time for actual assessing even by virtue of s 36(1), so it seems more likely that the item on the DDS is aimed at FTC penalties, as was your comment, given that it refers to reasonable excuse, and the OP’s post of 1229 confirms that they were talking about reasonable excuse, not innocent error.

So why do you say that the two early years can only be excluded if there is a reasonable excuse for the FTC? Paragraph 1 Schedule 18 F(2)A 2017 says that a penalty is only payable if the person “has any relevant offshore tax non-compliance to correct” as at 5 April 2017.

Paragraph 3 defines “relevant offshore tax non-compliance” (ROTN-C) and 3 conditions are required to be met before any non-compliance is ROTN-C. Clearly Conditions A and B are met, so the question whether the client has ROTN-C depends on the terms of Condition C.

That Condition is that on 6 April 2017 it was lawful for HMRC to assess the person concerned to any tax the liability to which would have been disclosed to or discovered by HMRC if on that date HMRC were aware of the information missing as a result of the failure to correct that tax non-compliance. That again brings in the assessing time limits in ss 34 and 36 TMA, so that it would not have been lawful for HMRC to assess 2011-12 and 2012-13 on 5 April 2017 unless they could have shown the loss of tax was brought about by careless conduct.

That does not involve any question of reasonable excuse, only whether there was a failure to take care. I have assumed that the OP does not accept there was failure to take care because they use the term “innocent error”. As I pointed out in my first comment, this is a slightly dangerous term to use, as careless conduct and innocent error are not mutually exclusive. If however it is established that s 36(1) TMA would have applied at 5 April 2017 to allow those two years to be assessed because there was careless conduct, the question of reasonable excuse for failure to correct in time is relevant.

So far so good, but you add a purported exclusive definition of reasonable excuse, that it is only possible to claim it if written tax advice was sought and obtained that the income was not taxable. I see however that you got this purported definition from a post on this site by people from Gabelle Tax.

The problem is that it is totally at odds with the legislation which you have referred to as justifying your remarks. Reasonable excuse is covered in paragraph 23. That paragraph allows a reasonable excuse to trump a penalty. It then, without defining what a reasonable excuse is, excludes from being such an excuse a number of matters, many of which are standard such as those in sub-paragraph (2)(a) (lack of funds unless beyond taxpayer’s control); sub-paragraph (2)(b) (reliance on another without oneself taking care) and sub-paragraph (2)(c) (excuse valid but ceased). Sub-paragraph (2)(d) is new and says that reliance on advice cannot be a reasonable excuse unless certain conditions are met. These are that the advice was independent (not that, directly or indirectly, of person involved in a tax avoidance scheme); from a qualified person who did not fail to take into account all the taxpayer’s circumstances; and was addressed or given to the taxpayer. Nothing in the paragraph says that the advice must have been sought, or that it must be in written form. Nor does HMRC's Compliance Handbook suggest that this interpretation is correct, for what it's worth (which is not much).

Even supposing that the advice given to the OP’s client was disqualified by failure to meet the conditions in paragraph 23(3) (and of course I do not suggest it was – if any was given) that simply means that the reasonable excuse cannot be “I relied on advice”. That does not, nor could it logically, stop some other reason for the failure being used as an excuse which satisfies HMRC. A failure such as the taxpayer’s mental or physical condition is often successfully used as a reasonable excuse, and is not forbidden by paragraph 23 whatever Gabelle Tax think.

By relying on this advice and not reading the legislation you have in my view been guilty of scaremongering, ie suggesting things could be worse for the client (and the OP) than they conceivably are and could be.

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Replying to richard thomas:
By penelope pitstop
12th Dec 2019 01:09

Thanks for your lengthy response. I have skimmed through it very quickly and it looks very comprehensive and impressive. I will look through it with a fine tooth comb in due course.

I think your response was so good you should post it yourself as a very helpful AWeb Any Answers for other readers to refer to.

After speaking with client again, (he is very old now), he had no comprehension whatsoever that he was in receipt of this foreign income. The income was derived from his intellect in relation to activities decades ago (he has always lived in the UK), so he knew he had no overseas asset to even contemplate or link with this foreign income. And he never received any physical paperwork which showed any income. All he had were bank entries showing quarterly credits, which he assumed were something to do with his tax-free ISAs (probably because the bank credit description was something similar to the word "PEP"). He has ALWAYS sent me every single piece of tax paperwork in his possession bar details of this omitted income. But as soon as the penny dropped, he ensured that he did everything to obtain full details of his omitted income.

What I would say now is that the Digital Disclosure form is in BETA stage of development. If circumstances are out of the ordinary then the form becomes an ordeal to complete. There are a few boxes where you have a maximum of 100 characters to explain things, which is equivalent to two brief sentences. Not really good enough.

One laughable flaw in the DDS form is that early on as agent you are asked to enter your first and last name only. This then populates the letter of offer at the end of the DDS, which you cannot manually amend. The letter of offer asks for your full name as agent, but of course your full name has already been pre-populated on the letter of offer as, for example, "John Smith", missing off your middle name of e.g. "Cuthbert" because there was no space for this when it asked for your (the agent's name) earlier on. Such a simple error which should have been ironed out by HMRC.

The HMRC interest calculator was a bit of a pain to deal with, and I could not download it using Google Chrome. I had to use Internet Explorer to download and of course you can only use Adobe acrobat reader. Meanwhile the minutes are ticking away dealing with the mundane IT technicalities rather than the meat of the tax and penalty issues. HMRC do not half present us accountants with problems with productivity.

A serious issue with the DDS is where it links to external HMRC reference material. For example, for country ISO codes you were asked to enter the main country from "this list". Of course, HMRC could not be bothered to link it to just the one list, but had to link it to an array of lengthy HMRC guides. Fortunately, due to some experience of HMRC guides the real ISO list was found after not too much trouble (half an hour or so?). But it could have been made a lot simpler by linking it directly to the ISO list. Talk about handing you a basket of "red herrings".

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Replying to richard thomas:
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By Brads.Kings
12th Dec 2019 11:54

Excellent note. It has certainly progressed my understanding of this difficult area of tax law. I need to consider it further.

I hereby appeal against the guilty scaremongering charge and will provide a reasonable excuse defence in due course.

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Replying to Brads.Kings:
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By richard thomas
15th Dec 2019 18:41

I have considered your appeal and uphold it, as in this area any excuse is reasonable.

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Replying to Justin Bryant:
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By Brads.Kings
10th Dec 2019 10:34

Justin
Good point re EU, not an easy argument to pursue looking at https://www.icaew.com/technical/tax/tax-faculty/taxline/taxline-2018/feb...

"In general, A1P1 [Article 1 of Protocol 1 – protection of property] has not been successfully invoked to strike down tax penalties, although a line of cases has upheld the principle that the protections conferred by Article 6 may be relevant if a tax penalty is tantamount to a criminal charge because of its severity (King v UK [2004] ECHR 631 (fraudulent and negligent delivery of tax returns)) or because of alleged dishonesty on the part of the taxpayer (Han v C&E Commissioners [2001] EWCA Civ 1048 (civil evasion)).

This is so despite the domestic classification of such penalties as ‘civil’, as in the UK whose civil penalty code for taxation matters follows the recommendations of the Report of the Committee on Enforcement of Powers of Revenue Departments headed by Lord Keith in 1983. Article 6 will apply where the nature of the offence and the severity of the penalty, in addition to the domestic classification, point to its being criminal in nature. It also applies in determining a person’s civil rights and obligations, but the performance of a taxpayer’s obligations in general, being public in nature, falls outside the scope of the taxpayer’s civil rights and obligations and therefore outside the scope of Article 6..."

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Replying to Brads.Kings:
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By Justin Bryant
10th Dec 2019 10:47

No, no, no, no, no. Contrary to what Nigel Farage et al say, The HRA 1998 is UK law, not EU law and is irrelevant here. I mean EU freedoms laws (click on the above link to read more).

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Replying to Justin Bryant:
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By Brads.Kings
10th Dec 2019 10:58

I can't see enough linkage between UK tax penalties and EU freedoms to create more than a frivolous challenge to the penalties. Not an topic I am familiar with though.

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Replying to Brads.Kings:
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By Justin Bryant
10th Dec 2019 11:15

Well, I'm pretty sure RT would agree it's not frivolous at all.

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Replying to Justin Bryant:
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By richard thomas
15th Dec 2019 18:45

I do agree that such a challenge would not be frivolous. Difficult (and relevantly to this case with a tax loss of £2,000 or so) and expensive, yes.

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By itp3e
10th Dec 2019 13:20

"Do you think HMRC will accept this. Tax and interest lost is around £2,500 (2013/14 to 2016/17). "

Is Arnold Schwarzenegger made of green cheese?

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By unearned luck
12th Dec 2019 01:25

To recapitulate and to add my tuppenceworth:

There are two penalty regimes that might apply; the normal (sch 24) and the retirement to correct regime. The former might involve enhanced penalty rates depending on the source country. The later applies to years up to 2015/16 where HMRC could, at 5/4/17 raise a valid DA.

The ECHR applies to both types of penalty (despite what Justin says) as they are classed as criminal for the purposes of the convention. HMRC no longer argue that this only applies where the tax is at least 70% of the PLR. The HRA 1998 simply makes it easier for appellants to raise HR arguments in UK courts and tribunals. Art 6 must be complied with, including the burden of proof being on HMRC (innocent until proved guilty). But note RTC failure is a strict liability offence.

Justin, however, is right about the EU law requirement. If A, a resident of England, invests in Scotland and fails to declare the income, his failure wouldn’t be subject to an RTC penalty, whereas it would be if he had invested in, say, Germany. This discourages investment in other member states of the EU (one of the four freedoms). It is no answer to say that RTC penalties only applies to historical investments as if the UK has discriminated in this way once it might do so again.

I don’t see how, as Justin says, this applies to third countries. Perhaps he would explain.

Expect HMRC to reject any defence on EU law arguments (regardless of Brexit) and, subject to anything Justin has to add, only applies if the source is in the EU. An appeal to the FTT will either see HMRC fold (to avoid the EU law issue being aired) or HMRC will to appeal every loss.

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Replying to unearned luck:
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By Justin Bryant
12th Dec 2019 10:48

EU freedoms law applies to 3rd countries re free movement of capital (see Routier).

Adding to RT's highly erudite and learned response above, it's potentially possible to also argue IOTL as a RE defence. See:

See: https://www.buzzacott.co.uk/insights/is-lack-of-knowledge-a-reasonable-e...

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