Common Reporting Standard (CRS)
CRS came into force in 2017 and there are now over 100 countries who have signed up to the use of CRS for sharing information, including all countries in the European Union, China, India, Hong Kong and Russia. As the US has its own reciprocal arrangements with FATCA, it has not officially signed up.
In the UK, the HMRC started to receive its first information under the UK’s Automatic Exchange of Information Agreements on 1 October 2018. Prior to this, 30 September 2018 was chosen as the final date to notify HMRC of any undeclared UK tax liabilities that involve offshore matters.
The Requirement to Correct (RTC)
The RTC was HMRC’s last attempt to coerce taxpayers with links to offshore assets to review and regularise their historic tax affairs to ensure that they are correct. The RTC applies to any person with a potential undeclared UK income tax, capital gains tax and/or inheritance tax liability, i.e. individuals, partnerships, trustees or non-resident landlord companies.
The legal requirement creates an obligation for anyone who has undeclared UK tax liabilities that involve offshore matters or transfers to disclose the relevant information about this non-compliance to HMRC.
Failure to correct
Failure to correct will have a far reaching effect on taxpayers, which are discovered through the ongoing information exchange taking place with tax authorities. If you failed to correct on or before 30 September 2018, you will now be liable to the new tougher RTC penalties. These can only be described as draconian.
RTC standard penalties
There is a tax-geared penalty of between 100% and 200% of the tax not corrected under the RTC. The Penalty starting point here is a 200% penalty which can be reduced to no lower than 100%. Mitigation will allow penalties to be reduced within this range to reflect the taxpayer’s co-operation with HMRC, the seriousness of the failure to correct, whether the disclosure to HMRC was unprompted and the quality of that disclosure.
If the disclosure is not voluntary the minimum penalty level will be increased from 100% to 150% of the tax not corrected.
The level of penalty mitigation available will depend on how much assistance is given to HMRC by the taxpayer, as follows:
For telling: up to 30% of the maximum available reduction
For helping: up to 40% of the maximum available reduction
For giving access to records: up to 30% of the maximum available reduction
What this means is those effected will not only have to pay the outstanding tax, but also pay at least the same amount of the tax again plus interest on top.
RTC additional penalties
A potential additional penalty of 50% of the standard penalty may be enforced if HMRC can show that assets or funds had been moved in an attempt to avoid having details reported to HMRC under exchange of information agreements. If we quickly do the maths, that adds up to an eye watering 300%.
Further still, an additional “asset based” penalty will be applied. This will be a penalty of up to 10% of the asset connected to the failure to notify. This has been capped at 10 times the potential lost revenue, however the penalty load is now an unbelievable 1300% of the undisclosed or uncorrected tax.
This will only be levied in serious cases, where the taxpayer was aware and made no attempt to correct.
Name and shame
Another deterrent - naming and shaming - can also apply if a taxpayer has had 5 or more penalties levied for offshore tax non-compliance.
This penalty is clearly aimed at those for whom the embarrassment of being publicly associated with tax cheats is more of an incentive to comply than the slap-on-the-wrist fine.
Naming and shaming will extend to the publication of the disgraced taxpayer’s address (or registered office) thereby giving the offender no place to hide.
For any taxpayer who has still not dealt with their off shore non-compliance, now is the time to correct.