All present and correct

It may seem bizarre, but until the Finance (No. 2) Bill 2017, there was no tax legislation which specifically required that tax errors be corrected. That is all set to change with the ‘requirement to correct’ (RTC) rules due to become law once the bill receives royal assent.

Schedule 29 of the bill applies to anyone who, at 5 April 2017, has under-declared tax linked to offshore matters. The draft legislation introduces an obligation to correct this issue before 30 September 2018. This is the end of the period during which the late adopting countries will provide huge amounts of data to HMRC concerning holders of offshore assets, such as bank accounts, under the common reporting standard (CRS). Once that data has been received, HMRC will be fully aware of what offshore assets are held and will therefore be able to ask relevant questions of the taxpayer in order to try to unearth additional, previously under-declared tax.

Linked to this is a new ‘failure to correct’ (FTC) penalty which will apply if the individual is found, after September 2018, to have additional tax to pay. HMRC is sending the message that taxpayers have until then to find and rectify any problems.

In the initial consultation document issued in the autumn of 2016, HMRC states strongly that taxpayers with offshore affairs should get them independently reviewed without delay. The consultation document includes quotes from HMRC such as ‘the measure will drive taxpayers with offshore interest to review their affairs’, ‘some… may not realise they have not paid the correct tax on their offshore income’, and ‘complex tax affairs… can include tax structures which were compliant when they were set up but are not now’.

In view of the strict penalties proposed, which are discussed further in this article, solicitors are advised to make sure their clients are aware of the RTC and that potentially affected clients should commission an independent review of their offshore affairs. It may be that practitioners are not aware that a particular client has offshore assets, because it has never been relevant to the solicitor’s particular role. With that in mind, solicitors should try to bring these new rules to the attention of as many clients as possible.

Failure to correct penalties

HMRC’s further document published in December 2016 reiterated the strong message that taxpayers should have their offshore affairs reviewed, stating that ‘acting early is vital’. It also referred to the ‘toughest sanctions’ for those who don’t take action now.

Once the FTC penalties are live, the old penalty regime will disappear, with a massive new penalty being applied. This will start at 200 per cent of the additional tax found to be due, which can be reduced but only to 100 per cent. Consequently, affected clients will not only pay the tax plus interest, but will also face a penalty of a minimum of 100 per cent of the tax again. There is therefore a huge incentive to find and correct any offshore irregularities under the normal penalty regime before FTC penalties start.

These new penalties do not only apply to tax years from 6 April 2017, the date referred to in the Finance Bill. They will apply to all offshore irregularities, no matter when they occurred, as long as the period in question is still within the assessing time limits.

In some cases there will be even higher penalties, being an asset-based penalty (up to 10 per cent of the offshore assets) and an enhanced 50 per cent penalty where the individual has moved assets around in an attempt to stay 1 per cent ahead of the CRS. This is expected to be relatively rare.

Avoidance arrangements

It is easy to assume that, given the huge penalties, these measures are aimed only at hardcore evaders using offshore structures. However, that is not the case, and nor do the new rules apply only to sophisticated offshore avoidance arrangements. A specific definition of ‘avoidance arrangements’, albeit given in the context of whether advice can be relied upon, is included in the draft legislation and refers only to circumstances where the main purpose, or one of the main purposes, was gaining a tax advantage. This could therefore easily catch straightforward structures, for example the opening of an overseas bank account in order to benefit from the remittance basis taxation.

Unlike the existing penalty regime, there is no behavioural differentiation at all; everyone will be subjected to the same penalty levels whether the cause of the problem is simple human error or, at the other end of the spectrum, deliberate fraudulent actions.

Over the years, I have seen countless cases where additional tax arises linked to an offshore matter where there was clearly no untoward activity. This could include matters such as misunderstandings, the complexity of the tax position (for example, where the remittance basis rules apply), and where the overseas service provider has not kept up with the numerous complex changes to legislation and UK obligations, often seen where trusts are involved.

Independent review

I echo HMRC’s message that clients are strongly advised to have their offshore affairs reviewed by an independent expert without delay. The independence of any such expert is important, as schedule 29 also introduces a further new development.

In the past, acting under professional advice has been accepted by the Tax Tribunal as taking reasonable care, and you would expect any penalty to be quashed in those circumstances. However, on the matter of whether a taxpayer has a reasonable excuse for the tax failure or not, the Finance Bill specifically states that any advice that is ‘disqualified’ will automatically not count. This includes any advice given by an ‘interested person’, which, to paraphrase, includes any person who received any consideration when helping the taxpayer enter into the offshore arrangements. This means advice from the incumbent accountant or lawyer may well be disqualified, so a third-party review is essential.

Post-script: Although these draft provisions were among those removed from the Finance Bill in the cull on 25 March, it is very likely that they will be reintroduced shortly after the election. The proposals have already been through the full consultation process so are unlikely to change and, when announcing the changes, the government confirmed that the clauses would be reintroduced 'at the earliest opportunity' after election.

John Cassidy is a tax investigations partner at Crowe Clark Whitehill

@CroweCW

www.croweclarkwhitehill.co.uk