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Tax
Requirement to correct
By Gavin Gafan, Manager - Tax, Deloitte Limited
There has always been a degree of cooperation between tax jurisdictions in respect of exchange of information. Historically however, tax authorities were encouraged not to enter into fishing exercises with other jurisdictions when trying to ascertain potentially undeclared overseas income and/or gains. That is to say, tax authorities were limited to submit information requests only in respect of specific taxpayers whom they were aware held investments or derived income overseas. Invariably this may have facilitated erroneous or deliberate concealment.
Any international barriers impeding communications in this regard have slowly been dissipating over the years in the wake of more effective information exchange facilitated largely by initiatives such as the Common Reporting Standard (CRS). Accordingly, global tax authorities commit- ted to exchange of information under CRS are now doing so automatically. With over 100 countries having committed to exchange of information on a multilateral basis, CRS will undoubtedly increase international tax transparency with the main objective of reducing tax evasion.
Worldwide Disclosure Facility In the advent of enhanced exchange of infor- mation, taxpayers need to be certain that full disclosure of their overseas income and gains is been (and has historically been) reported correctly with the relevant tax authorities. With many countries employing a ‘self-assessment’ basis for the filing of tax returns, a failure to correctly report, whether deliberate or not, will in all likelihood not preclude taxpayers from penalties. Jurisdictions such as the UK have introduced mechanisms via which taxpayers can report undeclared tax liabilities on overseas income and gains. One of these mechanisms is the Requirement to Correct (RTC) provisions effective from April 2017, which aims to encourage taxpayers to correct their tax position in earlier tax years.
In addition, on 5th September 2016 HM Revenue & Customs (HMRC) also
launched the Worldwide Disclosure Facility to also encourage people to come forward and clear up their tax affairs. These RTC rules and Worldwide Disclosure Facility links with the CRS and HMRC’s increasing focus on those persons with complex affairs where there is increased risk of inadvertent errors in UK tax compliance.
Under the RTC rules offshore non- compliance which has taken place before 6th
April 2017 must be corrected by 30th September 2018. This requirement covers Income Tax and Capital Gains Tax, which HMRC could have assessed at 5th April 2017, and Inheritance Tax assessable at 17th November 2017, thus potentially covering years back to 1997 in cases of deliberate concealment.
Naming and shaming
These rules apply to any legal person (i.e. companies, trusts or individuals) and creates an obligation for anyone who has undeclared UK tax liabilities arising from offshore matters, or transfers, to disclose the relevant information about said non-compliance to HMRC.
Tax non-compliance involves an offshore matter if the unpaid tax is charged on or by reference to: l Income arising from a source in a territory outside the UK; l Assets situated in a territory outside the UK; l Activities carried on wholly or mainly in a territory outside the UK; or l Anything having effect as if it were income, assets or activities of a kind described above.
If non-compliance is not corrected by 30th September 2018, taxpayers could be liable to a Failure to Correct (FTC) penalty of 200% of the tax due. With full disclosure and cooperation with HMRC, it might be possible for this penalty to be reduced to a minimum of 100%. HMRC guidance also
states that in more serious cases, asset-based penalties and ‘naming and shaming’ may also apply, which could raise penalties above 200% of the tax due.
HMRC have also stated that RTC is not just about the minority who knowingly evade tax. Accordingly these rules could apply to an individual with complex affairs who has entered into an offshore structure where the tax advice received on
creation may no longer be fully accurate or sufficiently comprehensive. HMRC has signalled that under RTC they expect taxpayers to review their affairs and structures and confirm whether the tax analysis remains appropriate.
The only defence to a penalty under the RTC rules is that a taxpayer has a “reasonable excuse” for their failure to correct. Taking advice from a competent professional that no tax was due could constitute a reasonable excuse, however there are several limitations in this respect and given that the legislation is drafted widely, taxpayers who consider that they have taken appropriate tax advice may find that this might not constitute a reasonable excuse to avoid penalties.
In a world of enhanced tax transparency, encouraged by homogenised effective standards, and where taxpayers are obliged to disclose on a self-assessment basis, it is advisable that professional advice is taken periodically on existing structures to ensure that earlier advice is still consistent with current legislation and practice. Taxpayers who have disclosures to make with HMRC should do so at an early opportunity and by no later than 30th September 2018.
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‘The only defence to a penalty under the RTC rules is that a taxpayer has a “reasonable excuse” for their failure to correct
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