What you need to know about the Requirement to Correct
Susan Cattell outlines key features of the Requirement to Correct and why CAs need to think about it.
What is the Requirement to Correct (RTC)?
The RTC legislation in F(2)A 2017 requires taxpayers who have undisclosed UK tax liabilities (IT, IHT and CGT) in respect of offshore interests, to correct the position by telling HMRC about the outstanding tax due.
It is important to realise that RTC applies to anyone with relevant undisclosed liabilities – not just those who were deliberately evading UK tax. If someone did not realise they needed to tell HMRC (or their agent) about, say, rents from an overseas holiday home, meaning that the right tax has not been paid, RTC will be relevant to them.
The details of RTC are complex and HMRC has provided guidance on the rules (and how to make corrections) which should be consulted.
Some key points are outlined below:
RTC applies to non-compliance which took place before 6 April 2017. There are different types of non-compliance (including, for example, failing to notify and submitting an inaccurate return) and when non-compliance was committed depends on the type of failure or inaccuracy.
HMRC sets out the approach for each type in its guidance. Where a correction is required it must be made by 30 September 2018: the tax and interest will have to be paid and the existing penalty rules will apply.
Under the RTC legislation, HMRC has a longer period than usual to take action to recover any tax. As a result, for any offshore tax that HMRC could have assessed on 6 April 2017, HMRC will be able to assess that tax until the later of 5 April 2021 or the date on which an assessment can be raised under the normal rules.
What are the penalties for failing to correct?
If a correction is not made by 30 September 2018, the taxpayer will become liable to a new penalty for the failure to correct (FTC). The FTC penalty regime is harsher than the existing penalty regime for offshore non-compliance.
There will be a penalty of 200% of the additional tax due, which may be reduced to an absolute minimum penalty of 100%, depending on the level of cooperation and the quality of disclosure. In serious cases (broadly cases, where the tax involved, exceeds £25,000 in any tax year) there will also be an asset-based penalty of up to 10% of the value of the underlying asset.
Where it can be shown that a taxpayer has moved their assets to avoid reporting under international information exchange agreements, HMRC can apply an additional penalty.
An FTC penalty will not be due where the taxpayer has a reasonable excuse for failing to correct, although the tax and interest will still be payable - and a penalty could be due under the existing rules for the original non-compliance.
It is important to note that the RTC legislation imposes some restrictions on what can count as a ‘reasonable excuse’ - particularly where the taxpayer relied on advice, but the advice is ‘disqualified advice’.
It is therefore essential to consult the legislation and HMRC guidance (which includes examples) in assessing whether a reasonable excuse might exist.
In more serious cases where the taxpayer knew they had relevant offshore non-compliance (with total tax due of more than £25,000) and failed to correct it, HMRC may also ‘name and shame’ them. The detailed rules are similar to those which already apply to publishing the details of deliberate tax defaulters.
What is offshore non-compliance?
Broadly, offshore non-compliance involves either an ‘offshore matter’ or an ‘offshore transfer’. An offshore matter could be fairly straightforward: for example, unpaid tax will be within the definition if it is charged on, or by reference to, income arising from a source in a territory outside the UK or assets situated in a territory outside the UK.
If income (or sale proceeds in the case of a capital gain) is received abroad or was transferred abroad before 6 April 2017 this would be an offshore transfer: this could include a taxpayer who moved to a non-UK territory but received income in that territory from renting out UK properties.
There are more complex scenarios which will also be within the scope of the legislation, so the legislation and the HMRC guidance should be consulted; the guidance includes examples to illustrate the meaning of offshore non-compliance.
Common Reporting Standard Exchange of Information
The 30 September 2018 deadline for making a correction was deliberately chosen because it is the date by which more than 100 countries will exchange data on financial accounts under the OECD’s Common Reporting Standard (CRS).
HMRC will, therefore, be receiving information about bank accounts, investments and trusts of UK taxpayers held in many jurisdictions around the world.
HMRC will need time to analyse the data it receives under CRS - which was the justification for the extended assessing time limit in the RTC legislation (see above).
How to make a correction
There are a number of ways of making a correction before 30 September 2018. The most obvious is to use HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility (WDF). However, there are others which are set out in HMRC’s RTC guidance.
What should agents do?
Agents may be approached by new or existing clients with concerns about RTC: HMRC guidance to taxpayers suggests that if they are unsure whether their tax affairs are in order they should seek advice from a professional tax adviser or agent.
As explained at the beginning of this article, RTC does not only apply to those who have deliberately evaded tax. It could be relevant where a client simply did not realise that they had a liability (perhaps where they inherited an offshore asset, for example); or where a client took advice in the past but either the advice was incorrect or tax legislation (or the client’s circumstances) have changed.
Agents may want to discuss RTC with clients if they think there is a risk that RTC could be relevant. Agents, therefore, need to be aware of RTC and the consequences of failing to make a correction where it is relevant.
They also need to be aware of the rules on ‘disqualified advice’ which could result in a client being unable to claim a reasonable excuse for a failure to correct. There is detailed guidance, including examples, on ‘disqualified advice’ in HMRC’s guidance (in Part 2: the RTC in practice - what to consider).
Agent Talking Points
Recordings of two HMRC Talking Points webinars are available, which may be useful to agents wanting an overview of RTC and the WDF:
On the Worldwide Disclosure Facility
HMRC has provided a handout for agents, with links to relevant legislation, guidance etc and a handout for taxpayers.