The requirement to correct and failure to correct

The requirement to correct, or ‘RTC’ as it’s known, is set to become law in the UK in early November 2017. The RTC requires people who have undeclared UK tax relating to offshore assets to correct that position by coming forward to HM Revenue and Customs.

The RTC will run from 6 April 2017 to 30 September 2018, and those who don’t act before the deadline will face much tougher penalties.

The RTC will apply to any person (including non UK resident trustees and non-resident landlords) with a UK tax liability that relates wholly, or in part, to an offshore asset. The taxes covered are income tax, capital gains tax and inheritance tax.

Under the Common Reporting Standard, HMRC has already started to receive information from over 50 jurisdictions around the world concerning UK residents with assets held offshore. There are a further 50+ jurisdictions who are set to join and start sharing information by the end of 2018.

Under RTC the ‘normal’ HMRC assessing time limits are extended and frozen as at 5 April 2017, until 5 April 2021. This means that early year liabilities will not fall outside the scope of HMRC’s assessing powers. So the usual 20 year time limit which HMRC can assess a deliberate understatement of tax can be extended up to 24 years and for a careless understatement of tax, the six year assessment period can be extended to up to ten years.

So what happens when someone doesn’t come forward?

There are potentially three separate penalties which may apply:

1. The first is a tax geared penalty of between 100% – 200% of the uncorrected tax.
2. The second penalty which may apply is where the tax exceeds £25,000 and this will be the lower of either: 
 (a) 10% of the value of the asset giving rise to the FTC penalty; or
 (b) 10 x the potential loss revenue.
3. Finally, a third penalty will apply where assets or funds have been moved in an attempt to avoid RTC, and this will be an additional 50% of the amount of the standard penalty.

Whilst very unlikely in practice, in theory a penalty of 1,300% of the tax could apply. Clearly the impact on a taxpayer subject to an FTC penalty is potentially catastrophic, as they could lose the entire value of the previously undisclosed asset and more.

To add to their woes, a person subject to an FTC penalty is also at risk of having their personal details (including their name, address, amount of tax evaded and penalty levied) published on HMRC’s website. This will apply in cases where the additional tax is more than £25,000 and the person has not made a full disclosure of their historical tax issues. It can also apply where the taxpayer has incurred five or more FTC penalties.

So how can Moore Stephens help?

If you have income or assets abroad, now is the time to consider whether your tax affairs are up to date. Our experts can give you all the support and guidance you need, to help you decide whether any additional tax needs to be disclosed.

First published by Moore Stephens LLP (6 Nov 2017)