Requirement to Correct: HMRC’s new 200% tax penalty regime

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From 30 September 2018, HMRC will introduce a new, more severe penalty regime that will apply to any unpaid UK tax connected to non-UK (otherwise known as ‘offshore’) assets. At its starting point, this new regime imposes financial penalties of 200% on any such unpaid tax, and the rules require a minimum of 100% to be levied, irrespective of taxpayer co-operation.

These aggressive sanctions arise from the UK’s new Requirement to Correct legislation, which imposes an obligation on any UK taxpayer to correct areas of their tax affairs which, for any variety of reasons, have not been reported in a timely or accurate fashion to HMRC in previous years and therefore resulted in a tax underpayment. The rules specifically apply to offshore assets such as foreign investments, accounts or UK funds transferred abroad that have triggered a UK tax charge.

This new stringent legislation is designed to dovetail into the recent introduction of the Common Reporting Standard, whereby governments and tax authorities throughout the world are now sharing information on their citizens on an unprecedented scale in an effort to reduce tax non-compliance. HMRC’s efforts are focusing on non-compliance committed before 6 April 2017 and it has the power to review matters that occurred up to 20 years ago.

The legislation stipulates that if any taxpayer impacted does not come forward then they will be subject to near unprecedented levels of penalties. Taxpayers risk a financial penalty of, in some circumstances, between 100% and 200% of the tax due, plus penalties of up to 10% of the value of the offshore assets, plus a potential enhanced additional 50% penalty. Whilst HMRC has a discretion to reduce the penalty in certain circumstances based on taxpayer co-operation, the legislation does not permit a reduction below 100% of the tax due.

The requirement to correct (and its connected penalty regime) extends to trustees as well. Therefore trustees should be carefully considering their trust’s tax compliance status even if relevant tax events pre-dated their own appointment. Given the wave of new tax rules introduced in recent years, it may well be that some trustees have been unable to keep abreast of their obligations and may have undeclared tax liabilities.

High risk areas for trustees will likely be

  • accidentally unreported relevant property regime ten year anniversary charges or exit charges
  • tax charges arising when a trust becomes non-UK resident
  • traditionally non-UK resident trusts that have inadvertently held UK situated assets at the trust level

If a taxpayer notifies HMRC of their intention to correct their tax position before the 30 September deadline then they with fall within the current, more benign regime even though they have not filed the documentation updating their position at that point. HMRC will still collect the tax and interest due but significantly the existing (much less severe) penalty system will apply. Given the severe tax penalties that will be imposed after 30 September, and the potential criticism from dissatisfied beneficiaries, trustees should strongly consider obtaining expert advice on any area of uncertainty.

Ince Gordon Dadds private wealth team can undertake a tax ‘check-up’ for individuals and trust structures at short notice in order to protect your position. If we can assist or if you need advice, please contact Matthew Biles or Roger Harding in the private wealth and tax teams.

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