The deadline for registering with HM Revenue & Customs to make a tax disclosure under the Requirement to Correct rules has passed.

The Requirement to Correct ("RTC") rules required people with historic offshore irregularities as at April 5, 2017 or earlier to correct them by September 30, 2018 (Finance Act ("FA") (No. 2) 2017, Schedule 18 and section 67).

That meant registering intentions to disclose by that date, and then making disclosures and paying any additional taxes, interest and penalties due within 90 days.

Unlike previous offshore disclosure opportunities, there was no carrot here, only a large stick waiting for those failing to disclose during the RTC window.

FTC Penalties

Now, new Failure to Correct (“FTC”) penalties are in force.

HM Revenue & Customs’ ("HMRC") guidance on the RTC and FTC is available.

By requiring people to correct undeclared offshore tax liabilities by a set date, HMRC created a new legal obligation. The failure to meet this obligation is used to trigger the new FTC penalties.

While this article does not look at the Common Reporting Standard, it is worth noting that this global framework underpins new international information exchange agreements, providing for over 100 jurisdictions to share tax/banking information with one another automatically and annually. By September 30, 2018 these jurisdictions will have exchanged, at least once, huge sets of data with the U.K./HMRC.

This enhances HMRC’s ability to detect offshore non-compliance by identifying non-U.K. footprints where HMRC might previously not have had any such knowledge about people.

New Tax-geared FTC Penalty

Where additional taxes are payable as a result of offshore irregularities in the period up to and including 2016/17, and these were not corrected by September 30, 2018, the person is in line for the new standard penalty—an eye-watering 200 percent (of the uncorrected taxes). This is regardless of the “behavior” or “jurisdiction” involved, which are still important for the non-FTC standard offshore penalties regime (FA (No. 2) 2017, Schedule 18, paragraph 1).

However, if a person can demonstrate that they had a “reasonable excuse” for their failure to correct then no FTC penalty will be chargeable.

The main way to secure a reduction in the FTC penalty level is for a person to “come forward voluntarily” and disclose the failure(s) to HMRC. This is designed to encourage voluntary action after the RTC window. In doing so, the penalty level can be reduced from 200 percent to the new minimum of 100 percent.

Conversely, if a person does not do this and is prompted by HMRC to make a disclosure, then the penalty cannot be reduced below 150 percent.

A new way to mitigate the level of penalty is for the person to provide sufficient details to HMRC about the person(s) who “enabled” their offshore non-compliance, specifically those who “encouraged, assisted or otherwise facilitated” the offshore tax non-compliance. “Otherwise facilitated” is deliberately wide, and it is expected that HMRC will look to accountants and tax advisers who perhaps “turned a blind eye” to a person’s actions.

Assessing Time Limits Extension

The RTC rules also allow for a longer period for HMRC to take formal action to recover any taxes due that are subject to the RTC criteria (FA (No. 2) 2017, Schedule 18, paragraph 26). Briefly, this means that for any uncorrected taxes, HMRC will continue to be able to formally raise assessments until April 5, 2021.

This represents some four or five extra years for HMRC to deal with offshore irregularities, even those originally arising due to a person’s carelessness or simple mistakes.

New Asset-value Based Penalty

This may also be applicable if the person was aware at April 5, 2017 that they had offshore non-compliance to correct. HMRC are reserving this for the “most serious” cases, so the potential lost revenue (i.e. the tax payable) needs to exceed 25,000 pounds in any tax year (FA 2016, Schedule 22, which came into force on April 1, 2017).

Where the new FTC penalty is not being charged and so the trigger for this other/new penalty is the charging of a standard offshore penalty, e.g. under FA 2007, Schedule 24, paragraph 1 (for an inaccuracy in the person’s return/document), then the person’s behavior needs to have been “deliberate.”

In practice this new penalty of up to 10 percent of the value of the offshore assets concerned will apply more easily than some might consider. Alternatively, where a penalty equaling 10 times the offshore potential lost revenue is lower, then this will be charged rather than the asset-value based penalty.

By way of incentive, in a case involving an unprompted voluntary disclosure, a reduction of up to 50 percent of the penalty amount can be secured. This is in contrast to a disclosure which is prompted, where the maximum reduction permitted will be restricted to 20 percent of the penalty amount.

New Naming and Shaming Penalty

HMRC wanted to publish details of those subject to FTC penalties more easily, so it has gone beyond the standard Publishing Details of Deliberate Tax Defaulters regime as per FA 2009, section 94.

The new criteria at FA (No. 2) 2017, Schedule 18, paragraph 30, states that HMRC may publish information about a person if (i) they have incurred at least one new FTC tax-geared penalty and the corresponding total offshore potential lost revenue exceeds 25,000 pounds, or (ii) they have incurred five or more such FTC penalties (irrespective of whether the threshold has been met).

So, HMRC can cause reputational damage far more easily now, but notably this penalty is discretionary, and therefore it is likely to be politically motivated. Also, information might not be published if the corresponding FTC penalty is reduced to the minimum permitted level of 100 percent or to nil or where statutory special circumstances exist.

New Offshore Asset Moves Penalty

FA 2015, Schedule 21 introduced a new enhanced penalty regime for cases where a person is found to have moved (hidden) offshore assets, from one (comparatively secret) jurisdiction to another (transparent one), to avoid detection.

This penalty is equivalent to 50 percent of the amount of any standard/other penalties being charged and so is charged in addition to those penalties. So, a 200 percent penalty could become a 300 percent penalty.

Reasonable Excuse

The concept of an event being beyond a person’s control and then taking corrective steps without unreasonable delay remains very important, because it is the only safeguard against the new FTC penalty. If demonstrated successfully, there will be no penalty payable.

However, the “reasonable excuse” safeguard has been heavily restricted, specifically with regards to “disqualified advice” (FA (No. 2) 2017, Schedule 18, paragraph 23).

“Insufficient funds” is specifically ruled out as a reasonable excuse, unless this is attributable to an event outside of the person’s control.

Reliance on professional advice is not a reasonable excuse if that advice was provided by an “interested party”—i.e. someone who participated in or stood to benefit from the person’s participation in a tax avoidance scheme. This would include promoters of tax avoidance schemes relying on generic advice in relation to the scheme.

Also, HMRC will argue (and the courts will likely agree) that the advice was not specific to the person concerned and that instead it was provided to the promoters. Typically, the promoters will have passed the advice on to numerous people and will themselves be the “interested parties,” as they had an incentive to encourage people to use the scheme.

Additionally, if advice was provided by someone with insufficient expertise or they did not take into account the person’s specific circumstances, then there is no reasonable excuse. If, however, the adviser had held themselves out to have been suitably qualified, then on the basis of good faith the person is more likely to have a reasonable excuse.

Planning Points

Given the increased number, and higher levels of, penalties, practitioners should focus on identifying and demonstrating the level of “assistance” provided to HMRC. This assistance thereby the quality of the disclosure(s) will secure reductions in the level of the penalties.

Practitioners also ought to identity potential voluntary disclosers, so that they take action sooner and avoid HMRC writing to their clients first, as this will secure significant reductions on the level of the penalties too.

Amit Puri is a director at Lancaster Knox LLP, specializing in tax investigations, disclosures and disputes.

He may be contacted at: amit@lancasterknox.com