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September 30, 2016
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Requirement to Correct – Offshore Tax Evasion

HMRC has released a consultation document detailing proposals of new Requirement to Correct (RTC) legislation. The proposed legislation will require any person that has undeclared UK tax liabilities in overseas interests to correct the situation by disclosing the appropriate information to HMRC. This proposal aims to compel such persons to put their UK tax affairs in order ahead of the widespread adoption of the Common Reporting Standard (CRS).

By 2018, over 100 countries will be implementing the CRS and exchanging financial information amongst one another which may be used to discover cases of tax evasion. The UK will be adopting CRS in September 2018 and following this, there will be a simplified and more severe set of sanctions for offshore tax evasion.

Background

Previous disclosure facilities often featured incentives (such as reduced penalties) for taxpayers to voluntarily disclose their affairs as it was difficult for HMRC to detect offshore evasion. With the implementation of CRS, the incentive to disclose will be to avoid tougher penalties later on.

The rationale behind this is that if the taxpayer has failed to disclose within the RTC window (before September 2018), they will have failed to come forward under the original disclosure facility and will now have failed to correct under the new obligations.

The normal rules of tax assessment will apply to the years to be corrected:

  • Up to 4 years after the end of the relevant year of assessment for errors made despite taking reasonable care;
  • 6 years where the tax loss is due to carelessness; or
  • 20 years where the tax loss was brought about deliberately.

The taxes in the scope of RTC include:

  • Income Tax;
  • Capital Gains Tax; and
  • Inheritance Tax (in scope of offshore penalties from April 2016).

Sanctions

The proposed sanctions contain scales based around behaviour (either careless, deliberate, or deliberate and concealed) and territory (various countries from category 1 to category 3, higher numbers carrying tougher penalties).

Penalties of up to 200% of the tax not corrected for may be imposed, however allowances would be made for the quality of the information provided by the taxpayer to HMRC and the degree of cooperation with regards to their disclosure.

For people who choose not to disclose offshore tax evasion within the RTC window, sanctions will be more severe. The minimum penalty would be 30%, increasing to 200% of tax unpaid for deliberate and concealed evasion.

The exact model after the RTC window is still to be decided however HMRC state that there will be a tougher and more straightforward set of penalties applicable to all tax years that have not been corrected for.

Conclusion

The consultation is open until the 19 October 2016 and HMRC will accept responses up to this date. Following this, responses to the consultation will be reviewed and the draft legislation will be decided for inclusion in the Finance Bill 2017.

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