The Requirement to Correct legislation (FA(No.2) 2017) is rather clever because it:
- May catch most people with offshore interests;
- Specifically requires tax irregularities relating to offshore interests to be corrected; and
- Leaves responsibility whether there is a requirement to correct with the person;
- Imposes significant penalties if that person doesn’t correct but should have.
The legislation follows that introduced by Finance Act 2016, which delivered civil penalties for ‘enablers’ of offshore tax evasion. An Enabler being a person that has encouraged, assisted or otherwise facilitated conduct that constitutes offshore tax evasion or non-compliance. The enabler’s penalty is directly targeted at professionals advising in relation to the act potentially giving rise to tax evasion or non-compliance and those professionals merely assisting the act. The enabler legislation therefore encourages professionals to encourage their clients to consider the Requirement to Correct (“RTC”): it may even encourage finding a reason to correct so as not to be an enabler……..
The objective of the RTC legislation is to enable and incentivise persons with UK tax irregularities relating to offshore interests to regularise their tax affairs. The Requirement to Correct (“RTC”) period ends on 30 September 2018. After this date, it is intended that tougher sanctions be introduced.
The legislation is not aimed only at purposeful tax evaders or those using sophisticated offshore structures. All irregularities are caught. There is no behavioural differentiation at all in the penalty regime: a simple mistake will be treated the same as a deliberate act. The issue that many advisers or persons benefitting from such structures may not realise is that most offshore tax planning has sat in an area of law with many potential challenges. The tax advantages were unlikely to have ever been a given and would have almost always been subject to potential challenge. Today, Tribunals seem less tolerant of tax planning and this is likely to have a significant impact for many with offshore structures who choose not to correct.
It should also be noted that a specific definition of ‘avoidance arrangements’ was included in the draft legislation and referred only to circumstances where the main purpose, or one of the main purposes, was the obtaining of a tax advantage.
The penalties for not correcting are enormous. The amount of penalty is 200% of the potential lost revenue. The penalty can be reduced if the person makes an appropriate disclosure. The amount of the reduction should reflect the quality of the disclosure (timing, nature and extent). The penalty cannot be reduced below 100% of the PLR.
There is a right of appeal against the decision to charge a penalty, or the amount of the penalty. The penalty may be fully mitigated where there is a reasonable excuse. When considering reasonable excuse through reliance on a professional, it will be necessary to consider whether that professional was unconnected to the structure (i.e. not a provider or remunerated by the provider), whether an appropriately qualified expert to provide the advice; and whether the facts opined on were correct or whether generic advice was relied upon. Furthermore, independent professionals advising on complicated offshore structures will often set out the risks involved and a person in possession of knowing these risks may be regarded as acting in acceptance of them and not able to rely on a reasonable excuse. Therefore, to secure reasonable excuse it may appear that two independent advisers reporting on the tax position and confirming no significant risks are required.
The ‘Failure to Correct’ (‘FTC’) regime starts on 30 September 2018, with punitive penalties, including:
- A tax geared penalty (100% to 200%) of the tax not corrected;
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year;
- Potential “naming and shaming”; and
- A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC
Anyone who fails to correct their position despite knowing that they should do so may also face
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year; and
- Potential “naming and shaming”
The legislation is accompanied by the Common Reporting Standard. Information will be passing from different jurisdictions, including the favourite low tax ones, to HMRC. A further nail being positioned over the coffin is the offshore criminal offence, which can result in imprisonment without the need to prove intent and instead the only requirement is that the reported tax position be incorrect. Despite all these obstacles, those with offshore interests will have many counter positions to help negotiations. Whilst this is useful, a commercial approach is likely to be the most sensible one – what can be done now to achieve tax regularisation, alleviate the risk of penalties and prosecution, and be efficient without risk for the future.