Under the ‘Requirement to Correct’ (RTC) regime, HMRC is asking taxpayers to declare and settle any unpaid UK tax relating to offshore assets before 30 September 2018. After that date, if HMRC discovers unpaid UK tax liabilities, they will apply a default penalty of 200 percent of the tax due.
The penalty can be reduced by cooperating with HMRC, but the minimum reduced penalty will be 100 percent of the unpaid tax in all cases, amounting to a double tax charge. The regime is being launched at a time when HMRC is gaining access to more data, shared by other jurisdictions, about the offshore tax affairs of UK residents.
Earnings must be disclosed
Some UK taxpayers could be caught out by this regime, which is targeting unpaid tax liabilities relating to offshore assets, dating back to 1998. For example, even if a UK resident has been renting out an overseas property for just a few weeks per year, these earnings must be disclosed to HMRC each year. If this has not been done properly in the past, then a penalty will be applied to the total amount of tax due, which could add up to a significant lump sum.
Alternatively, individuals may have come to live in the UK and be unfamiliar with the domestic tax system. For example, many offshore jurisdictions don’t charge tax for non-local income and gains, and individuals taking up residency in the UK could wrongly assume that the same rules apply here. In other situations, non-doms who are UK residents could have received inaccurate or incomplete advice in this area and be unaware of their liabilities.
The RTC regime is being viewed as a final warning from HMRC, as it follows a series of earlier initiatives to encourage the voluntary disclosure of unpaid offshore tax liabilities, such as the Lichtenstein Disclosure Facility. In addition to imposing penalties on those that fail to disclose any unpaid offshore tax liabilities in the required timescale, it should be noted that HMRC has the power to name and shame individuals who fail to pay up, if their liabilities amount to £25,000 or more.
If in any doubt, taxpayers should seek advice about their offshore tax arrangements now. Even individuals with relatively straightforward tax affairs could have unpaid tax liabilities related to investments in offshore trusts, unit trusts or offshore businesses. In some cases, individuals may have inherited investments of this nature and be unaware of the tax implications.
Failing to disclose these liabilities now, could incur significant costs further down the line.