UK HMRC and the Requirement to Correct

The Requirement to Correct (RTC) requires all UK tax payers with overseas assets to correct any issues with their UK tax filing obligations. Those who fail to do so face punitive financial penalties.

The RTC applies to any person with an undeclared UK income tax, capital gains tax and/or inheritance tax liability and extends to individuals, partnerships, trustees or non-resident landlord companies.

It is important to note that these new penalties will be applied for tax issues which are the result of genuine and innocent mistakes or carelessness, and of course, deliberate action. There is no differentiation.

The RTC affects all UK tax arrangements with a foreign element ranging from the most basic to extreme tax planning.  HMRC are expected to receive a vast amount of data relating to interests in offshore assets such as bank accounts and trusts under the Common Reporting Standard (CRS) and it is anticipated that significant resources will be applied to investigations, with the intention of uncovering additional tax revenues.

As such, this legislation draws a line in the sand and provides UK tax payers with one last opportunity to review their financial arrangements and to correct all issues in advance of the 30th September 2018 deadline, without suffering punitive penalties. This should therefore be seen as a huge incentive to identify and correct any offshore irregularities.

After this date, the Failure to Correct regime will start, with punitive penalties of 200% of any additional tax identified. This can be reduced, yet will not be less than 100%. As such, those affected will have to pay tax, interest and at the very least 100% of the tax again as a penalty. 

What action do you need to take?

We recommend a tax health check is undertaken to ensure your own and your family’s personal matters are in order. These issues will likely have special significance for clients who are or who have been, UK resident at any point, together with individuals who are either UK domiciled or who consider themselves non-UK domiciled. We may well have already commenced this health check for your structure based on discussions we have had with you to date.

A tax health check of a taxpayer’s position during the RTC period will help identify and cure any possible issue and if anything still comes to light after the 30th September 2018 deadline, the check should help provide a strong ‘reasonable case’ defense for the taxpayer which should mitigate any penalty for failing to correct.

HMRC’s guidance states there will be circumstances when a person has taken advice in good faith but it has turned out to be wrong, rendering them non-compliant. The requirement-to-correct legislation contains specific rules governing when a taxpayer cannot claim to have a reasonable excuse including when they have taken advice that HMRC deem as ‘disqualified’ advice. Disqualified advice includes any advice given by an ‘interested person’ which, includes any person who facilitated or advised on a relevant avoidance arrangement for which they received payment. A relevant avoidance arrangement was one where the avoidance of tax was the main or one of the main reasons for the structure.  The rules will not apply to arrangements that complied with legislation at the time and was accepted practice by HMRC, but the point is that even professional advice given by an interested person cannot be relied upon for reasonable excuse purposes.

We do hope the above provides an initial insight into the scope and extent of the new legislation and the punitive penalty regime after this September. Updated tax advice may be needed and remains the best way to provide you with the necessary comfort over your affairs especially given the ever changing legislation.