6th March 2017

“Offshore tax planning – HMRC replacing the carrot with a stick”

In the run up to 5 April, there is no time like the present to ‘get one’s house in order’ especially in relation to any offshore interests that you may have.

In the context of this article, when I say RTC, I am not discussing a Road Traffic Collision, although failure to comply with HMRC’s stringent requirements may well feel like a head-on collision. 

I am in fact referring to HMRC’s abbreviation of the “Requirement To Correct” (“RTC”), which is in effect the Revenue’s warning to UK taxpayers to correctly
disclose and declare offshore matters (broadly income, gains or assets outside the UK) and offshore transfers (transfers
of UK income, gains or assets out of the UK).

The taxes covered are:-

  • Income Tax
  • Capital Gains Tax (but not Non-Resident Capital Gains Tax for offshore companies)
  • Inheritance Tax

Non-compliance – whether deliberate, careless, or even an innocent mistake – includes:-

  • Errors in completing a tax return
  • Failure to complete a tax return
  • Failure to notify HMRC that a tax return should be issued

Will you be affected?

You do not need to fill in a tax return if your only foreign income is dividends under £300 in total and you do not have anything else to report.

Most foreign income is taxed in the same way as UK income, but there are special rules for:-

  • Pensions
  • Rent from property
  • Certain types of employment income

Ensure that you have satisfied yourself in this regard by referring to the Government’s advice website (https://www.gov.uk/tax-foreign-income/overview)
or having taken specialist tax advice.

The key dates for your diary

If your historic tax returns filed up to 5 April 2017 are not corrected, then from 30 September 2018, HMRC will impose
penalties of up to 200% of the tax due. In the most serious of cases, that tax penalty can increase to 300%, including a further penalty of 10% of
the assets in question, and the potential naming of persons caught by HMRC.

A history lesson

As part of the Revenue’s on-going efforts to tackle offshore tax evasion, the “Requirement to Correct” was introduced in the Autumn Statement 2015, and
was then further developed in December 2016 draft legislation. The new Finance Bill 2017 will require taxpayers to disclose information appertaining
to undeclared UK tax liabilities between April 2017 and September 2018 or face penalties under the “Failure to Correct” (“FTC”) offence.

Prior to this latest scheme, previous government schemes introduced to tackle the issue of offshore tax non-compliance adopted a more “softly softly” approach,
offering rewards for good behaviour, or in other words, the carrot approach. Some of the RTC’s predecessors offered immunity from prosecution and flexible
treatment to those who willingly came forward. HMRC appears to have done away with this lenient approach under the new RTC, instead promising to impose
penalty charges i.e. the stick approach.

Pleading ignorance or waving a white flag will not work

Under this new legislation the motives of the taxpayer will hold limited sway as both the RTC and the FTC will apply to any tax non-compliance
connected to offshore assets; even innocent mistakes can be penalised. This is because the Revenue has now offered multiple opportunities for taxpayers
to investigate and address any mistakes made. An individual may cite a “reasonable excuse” as a defence, although the scope of this is extremely narrow.

Advice

Any person with UK tax liabilities should take this opportunity to review the taxation of their offshore assets or structures.

Seek proper private client law services: do not rely on generic advice or professional advice which
lacks the appropriate expertise.

Take care to review the following (with specialist advice):-

  • Any bank accounts held outside the UK
  • Older tax structures that may not comply with the new rules
  • Your domicile position/status
  • Benefits received from offshore trusts & funds
  • Payments made from offshore assets
  • Any other offshore bank account or asset that has not been accurately declared to HMRC