John Flood considers the new law covering the need to make disclosure of offshore tax non-compliance. Failure to do so may result in significant penalties.
As part of HMRC’s continuing effort to crack down on offshore tax avoidance, new disclosure requirements and penalties came into effect from 18 November 2017. The new provisions are contained in F(no 2) A 2017 s 68 and Sch18. In summary, they provide for an enhanced penalty if a taxpayer has any relevant offshore tax non-compliance to correct at the end of tax year 2016/17, but fails to correct it before 30 September 2018. This is the date by which many countries should have made automatic disclosure of substantial tax information.
If the taxpayer fails to correct his position, the potential penalty can be a significant one: up to 200% of the potential loss of revenue (PLR) from the uncorrected position. Certain reductions can be made by HMRC (see below). The taxes covered by the provisions are income tax, CGT and IHT.
What is offshore tax non-compliance?
F (no 2)A 2017 Sch 18 para 7 defines ‘offshore tax non-compliance’ to include offshore tax matters and offshore asset transfers. This covers a variety of situations:
- Failure to comply with an obligation under TMA 1970, s7 to give notice of chargeability to income tax or capital gains tax
- Failure to deliver a return or other specified document before the relevant filing date
- Delivery of a return or other document which contains an inaccuracy which leads to a loss of tax (understatements, false loss statements, false repayment claims)
- Transfers of income, proceeds of a disposal received in a territory outside of the UK, or which was transferred on or before 5 April 2017 to a territory outside the UK
The liability must relate to income from a source outside the UK, assets situated or held in a territory outside the UK, or activities carried on wholly or mainly in a territory outside the UK.
If there has been non-compliance, the taxpayer should make a disclosure to HMRC to correct it. This includes giving any required notice, giving the relevant information to HMRC, delivering the relevant document, and correcting errors. Where appropriate, HMRC may agree a method as to how to make a disclosure, e.g. information to be sent directly from a foreign bank. The compliance deadline to meet is 30 September 2018.
If there is a default the penalties payable can be up to 200% of the PLR attributable to the offshore non-compliance. Where the relevant tax is greater than £25,000 and the taxpayer knew there had been offshore non-compliance, then an asset based penalty of up to 10% of the value of the assets can also be imposed (FA 2016, Sch 22).
In cases where it can be shown that the person moved assets to avoid having details reported to HMRC then another penalty can also be imposed of up to 50% of the standard ‘failure to correct’ penalty (FA 2015, Sch 21).
Reductions by HMRC
Failure to correct penalties can be reduced by HMRC when the taxpayer:
- tells HMRC about the default
- gives HMRC reasonable help
- informs of any person who acted as an enabler of the tax avoidance (i.e. as it enables further enquiries and possible penalties against an enabler who acts unsuccessfully)
- allows HMRC access to records
Assessment of the quality of the disclosure, and the consequent reduction in penalty by HMRC, involves looking at the timing, nature, and extent of the disclosure. The ‘failure to correct’ penalty may not be reduced to below 100% of the PLR. If HMRC decide there are special circumstances, then there may be further reductions. Excluded from these special circumstances are reasons relating to an ability to pay, or that a PLR from one taxpayer is offset by an overpayment by another taxpayer.
Like the existing domestic tax penalty regime, a penalty can be avoided if there was a reasonable excuse for the offshore non-compliance. The many cases on this area provide guidance as to what can be advanced, three relevant examples are:
- serious illness preventing compliance
- misleading advice from HMRC
- advice from a professional advisor as to the nature of obligations
In relation to advice excuses, reasonable care must still be taken by the taxpayer. As usual, an insufficiency of funds is excluded from the definition of reasonable excuse, and an excuse only lasts provided any default is remedied without unreasonable delay.
Certain advice situations are excluded from amounting to a reasonable excuse. This is intended to restrict the opportunities for a taxpayer to rely on questionable advisors. Advice is disqualified from reliance as part of a reasonable excuse if the advice was given:
- by an interested person
- because of an arrangement between an interested person and the person who gave the advice
- by a person without the appropriate expertise for giving the advice
- without taking account of the taxpayer’s individual situation
- the advice was given to somebody else
If somebody makes reasonable enquiries and reasonably believes that the advice is not disqualified, then relying on the advice is not barred. Similarly, if the advice accords with established practice or HMRC had indicated that their acceptance of the particular practice.
Penalties are enforced by HMRC raising an assessment within 12 months of the ending of any appeal period for a tax assessment. A special provision provides for an extension to this period, so HMRC can raise a tax assessment until 5 April 2021, and thus penalty assessments may be raised in a longer period than at first thought.
In addition to penalties the trader’s name can be published by HMRC if the penalty is over £25,000 and the person knowingly failed to correct the non-compliance.
Following any review of the penalty a person may appeal to the First-tier tribunal against a penalty and its amount. The Tribunal may affirm HMRC’s decision or substitute its own view if there has been a flawed decision by HMRC.
About John Flood
John Flood is a retired barrister and ex-employee of HMRC. He is a co-author with George Rowell (Exchange Chambers, Manchester) of the new book, Tax Penalties: A Practitioners Guide (Sweet & Maxwell Thomson Reuters).