Last orders! Only days left for Requirement To Correct

Time is running out for taxpayers to get their offshore affairs in order and notify HMRC under the Requirement To Correct (RTC) rules by 30 September 2018. Those who fail to do so risk being exposed to severe penalties, starting at 200% of unpaid tax.

Whilst RTC rules are primarily targeted at a small minority who deliberately evade UK tax overseas, their scope is much broader. There is the risk that individuals have been making inadvertent mistakes, as they are oblivious to  RTC rules, and they therefore suffer the most.

What are the new rules?

RTC was first introduced in the Finance Act (No. 2) of 2017. It applies to taxpayers who have failed to disclose  their UK Income Tax, Capital Gains Tax (CGT), or an Inheritance Tax (IHT) liability on an ‘offshore matter’ or ‘offshore transfer’.

Broadly, an ‘offshore matter’ is one involving:

• income arising outside the UK;
• assets situated or held outside the UK;
• activities carried on wholly or mainly outside the UK; or
• anything having an effect, as it it were income, assets or activities.

An ‘offshore transfer’ goes further and identifies situations of income or capital gains relating to UK activities or assets being transferred offshore (e.g. a non-resident landlord of UK property).

Who is affected and why are the rules changing?

Every year, HMRC publishes the ‘tax gap’, highlighting the difference between the amount of tax that they believe should have been paid to them and the amount of tax actually collected.

In 2018, the tax gap was £33bn. £5.9bn of this was apparently due to failing to take reasonable care, whereas £5.3bn  is linked solely to tax evasion.

It is therefore no surprise that HMRC has a detailed strategy on how to tackle offshore tax evasion. ‘No Safe Havens’ and RTC rules form part of their plan to deter tax evaders and encourage individuals to admit to any tax indiscretions.

RTC rules go much further than just tackling deliberate tax evaders, for it also impacts those who may have simply made mistakes in their overseas affairs.

Given the tax gap statistics outlined above – these are in place for cases of carelessness – HMRC clearly believes there is a significant number of individuals who fail to pay the right amount of UK tax on their overseas affairs by mistake.

What errors need to be identified?

In order for RTC rules to apply, it must have been possible for HMRC to have made an Income Tax or CGT assessment on 6 April 2017, or, if the matter relates to IHT, on 17 November 2017 (the date the Finance Act (No 2) 2017 received Royal Assent).

The precise time limits for making an assessment vary depending on the circumstances. The standard limits for Income Tax and CGT are as follows (these limits apply from the end of the relevant tax year):

• Standard errors: 4 years
• Careless errors: 6 years
• Deliberate errors: 20 years

So, for a taxpayer who has made a genuine error but took reasonable care, RTC rules will only be applied if the ‘offshore matter’ or ‘offshore transfer’ occurred after 5 April 2013 (assuming it relates to Income Tax or CGT). Similarly, if HMRC deems an error to be careless, then RTC will only be relevant for errors made after 5 April 2011.

The difficulty here is determining whether an error is careless or not. It will depend on the particular circumstances and, if in doubt, advice should be sought to confirm the position.

Failing to disclose

With numerous information sharing agreements coming into effect this year between various countries, HMRC has a much better opportunity to identify taxpayers who have not made the appropriate disclosures of their offshore affairs.

For those that fail to make a disclosure under RTC, HMRC will seek to recover the tax and interest due, but also levy substantial penalties, starting at an eye-watering 200% of the tax unpaid. In addition, cases involving a substantial amount of unpaid tax in a year (over £25,000), will have further penalties of up to 10% that will be charged to the relevant offshore assets involved, as well as potentially being named and shamed.

If matters come to light after the deadline, it would be best to seek out the advice of a tax risk and investigations specialist.

Even if HMRC do agree to lower the penalties, it is unlikely that the penalty charge would be below 100%, unless there is a reasonable excuse.

Conclusion

Although only a few days remain until RTC comes into effect, there is still time to have conversations with clients and notify HMRC that a matter requires disclosure under RTC.

If there is some uncertainty on a position, but reason to believe there is potential risk, it may be worthwhile to make a protective disclosure to HMRC. This could be followed up with in more detail later.

Chris Etherington is a partner at RSM in Leeds.