As the deadline for HMRC’s ‘Requirement to Correct’ (RTC) campaign approaches, Phil Clayton looks at the tax authority’s tougher stance on unreported income, gains or assets.
When telling people I’m a tax adviser, the automatic assumption is that I help clients to hide all their money offshore. Even if I wanted to facilitate this sort of activity, the reality is that it’s become almost impossible to secretly place your funds in a numbered bank account somewhere and get away with it. Instead, HMRC has been working with tax authorities across the globe under the Common Reporting Standard to collate information from foreign banks and investment companies to challenge the information on UK tax returns. It is likely Switzerland will soon enter into this agreement too.
HMRC is paying particularly close attention to foreign assets and individuals, and has been writing to individual taxpayers dealt with by HMRC’s specialist high net worth units to draw their attention to the ‘Requirement to Correct’ (RTC) campaign and the ‘Worldwide Disclosure Facility’ (WDF). HMRC has the power to investigate an individual’s finances from as far back as 20 years ago to pick up unreported foreign income or gains. As well as Income Tax and Capital Gains Tax, this also extends to Inheritance Tax and so has the potential to affect Trustees/Executors as well as individuals.
Taxpayers have the opportunity to come forward to make a disclosure by 30 September 2018, and will then have to declare any previously unreported income, gains or assets that are taxable in the UK, and pay the tax due, plus interest and possibly penalties. Those penalties, however, will fall under the current system, which sees penalties typically in the region of 0% to 30% of the tax due.
Where undisclosed income or gains come to light after 30 September 2018 - either because of a HMRC investigation or the taxpayer discovering a previous error - the penalties will fall under the new ‘Failure to Correct’ regime, which can see penalties as high as 200% of the tax due. HMRC also has the power to increase this by 50% if it believes the taxpayer was evading or concealing income/gains, charge 10% of the total asset value, and name and shame taxpayers if the liability is over £25,000.
The new penalties can best be described as ‘significant’ and the potential 20 year window may cause issues, particularly as the standard tax return enquiry window is merely a year from submission (if submitted on time). Furthermore, HMRC only requires a taxpayer to maintain records for two years after the end of the tax year in question, or six years if the individual is a sole trader, partner in a partnership or is letting property. As a person who forgets what modules he did at uni (only five years ago), I don’t see how HMRC can expect people to defend themselves on transactions made over six years ago when they would have no requirement to even maintain the appropriate records.
Fortunately, for HMRC to go back more than four years, they have to be able to demonstrate that the taxpayer was careless (in which the limit is extended to six years) or has deliberately concealed/hidden income etc (20 years).
Nonetheless, we advise all individuals to review their tax returns and ensure all UK or offshore income and gains have been correctly reported to HMRC before 30 September.
If you believe you may have additional matters to report, please contact Phil Clayton on +44 (0)20 7516 2412 or firstname.lastname@example.org. Alternatively, you can download our WDF guide for more information.