Since 2017, UK taxpayers have been faced with a powerful statutory incentive to correct any omissions from or inaccuracies in tax returns, resulting in undeclared or understated tax liabilities, where there is an "offshore" dimension.

The UK government now holds its annual budget statement on tax, spending, borrowing and economic measures in the autumn rather than in late March, as used to be the case. And while Brexit sometimes seems to dominate the domestic political agenda, there is much to ponder on the tax front. A continued preoccupation of ministers has been clamping down on presumed abuses of tax laws by the wealthy, such as those using offshore financial jurisdictions. 

To explore compliance requirements for offshore structures, and the measures individuals and advisors should take, is Dominic Lawrance, partner at Charles Russell Speechlys. He concentrates on international tax planning issues. The editors of this news service are pleased to share these views and invite responses. As ever, the editors do not necessarily endorse all views of contributors. Email the editor at tom.burroughes@wealthbriefing.com

Since 2017, UK taxpayers have been faced with a powerful statutory incentive to correct any omissions from or inaccuracies in tax returns, resulting in undeclared or understated tax liabilities, where there is an "offshore" dimension.  The Requirement to Correct (RTC) legislation imposes a deadline for such corrections of 30 September 2018.  A failure to rectify omissions or inaccuracies by this date will typically result in harsh financial penalties, and perhaps further sanctions on the taxpayer.

The tale of Mr Green offers a cautionary tale. Mr Green is UK resident and domiciled. On the advice of a local US lawyer, he purchased a $1.0 million San Francisco holiday home in January 2005 using a US discretionary trust of which he and the lawyer were trustees. Mr Green did not report the funding of the trust to HMRC.

The holiday home was then rented and Mr Green paid US income tax on the rent, but failed to report the income in the UK. In January 2015, the property was sold for $1.8 million, with the US dollar having appreciated substantially against sterling since the purchase. Mr Green paid US income tax on the gain, but again, failed to report and pay tax in the UK. The trust was terminated immediately after the sale, without any reporting of the inheritance tax liability triggered by the termination.

Although the word “offshore” may evoke tax havens, for the purposes of the RTC legislation the word means anything outside the UK, including in a high tax jurisdiction such as the US.  Thus a foreign holiday home, for example, counts as an “offshore” asset – even if foreign tax has been paid on it. UK income and UK gains are also potentially caught if they have accrued to a non-UK resident entity, such as a company or trust, or proceeds have been transferred to such an entity. The rules are capable of catching "offshore" non-compliance regardless of the level of taxpayer culpability – so not only are deliberate defaults caught, but so are inaccuracies or omissions resulting from careless, and even non-careless, errors.

Put simply, if a taxpayer’s UK tax filings regarding ‘offshore’ matters are not totally in order by 30 September, severe penalties will generally be imposed.

These penalties can involve paying up to 200 per cent of the outstanding tax, on top of the tax itself and statutory interest. In some cases, a penalty of 300 per cent may be imposed, and/or a penalty of 10 per cent of the value of the asset concerned. And as if this were not enough, there is also a widely drawn power to “name and shame” taxpayers who have been caught out by these rules.

The RTC is particularly aimed at individuals and trustees who do not consider themselves to be “tax evaders” and who may therefore have not considered using other disclosure facilities in the past. If previous non-compliance is not notified to HMRC by 30 September, then “failure to correct” penalties will bite. There is little doubt that, for various reasons, many taxpayers who do not appreciate that they may have irregularities in their tax reporting will miss this deadline, with potentially disastrous consequences. Non-doms are particularly at risk, due to the complexities of the tax rules applicable to them, and the fact that such individuals are intrinsically more likely than UK domiciled taxpayers to have non-UK assets. 

While this sounds ominous, it does raise the question: why is the treatment of "offshore" non-compliance becoming harsher? 

From 30 September 2018, HMRC will be receiving the first reports from the 100 countries that signed up to the Common Reporting Standard (CRS); an information standard for the automatic exchange of information regarding bank accounts on a global level, between tax authorities. The reporting applies not only to individually held accounts, but also looks through accounts held by companies or trusts. 

With the help of its super-computer, Connect, that already holds a large amount of information on UK taxpayers and residents, HMRC has the means to assimilate and process the vast quantity of data it will be receiving from 30 September and will be able to identify more easily where taxpayers’ offshore affairs are not in full compliance. The chances of issues of non-compliance being detected will therefore become substantial.

So, what of Mr Green? 
Even allowing credit for US income tax paid by Mr Green, there is a significant amount of UK income tax, capital gains tax and inheritance tax that should have been paid by Mr Green/the trustees of his trust, but was not.  The tax due may be in the region of £150,000 ($196,647).

The difference in the timing of a disclosure is stark in purely financial terms: Mr Green may have to pay as little as £200,000 if the tax liabilities are disclosed by 30 September, against a possible overall liability in excess of £450,000 if he fails to make a disclosure before the RTC deadline, and is caught at a later date. The severe financial consequences of failing to make corrections before the RTC deadline could be coupled with reputational damage, if HMRC uses the “naming and shaming” power. The absolute worst case scenario is that on top of all these very undesirable outcomes, HMRC presses criminal charges. Prosecution is a real possibility for individuals who have been advised that they have historic tax liabilities, but fail to notify HMRC.

Inevitably, there will be taxpayers with liabilities relating to “offshore” matters who won’t come forward before the RTC deadline - whether out of stubbornness, miscalculation, fear or complete ignorance. They are now more likely to be caught than ever before, thanks to the unprecedented amount of financial information being transmitted between tax authorities and other government agencies. Many tax evaders will be banged to rights. But there are bound to be many innocent victims too, guilty of nothing more than forgetfulness, misunderstanding or having received incorrect tax advice, who in the coming months and years will be harshly sanctioned under the RTC regime. The zero-tolerance message from HMRC is that historic tax liabilities won’t be forgotten, and inaccurate reporting won’t be forgiven. 

With time running out, let the example of Mr Green keep you out of the red ...