As you may be aware, HMRC are receiving huge amounts of information from overseas, particularly as a result of the Common Reporting Standard. The CRS is a multi-lateral agreement between over 100 jurisdictions, to share information on financial assets of individuals resident in a particular country are holding assets elsewhere. The exchange of information started in 2017 with just under 50 jurisdictions taking part. Now, three years later, the number has increased to over 100 jurisdictions sharing information on an annual basis.
HMRC have been using and sifting through the information and sending out “nudge” letters (the last set were sent in July 2020) to prompt individuals to review their overseas affairs. With this in mind, we provide an update on the penalty position for under-declaration of UK tax in relation to overseas assets.
Failure to Correct (Section 67 and Schedule 18 Finance (No 2) Act 2017)
HMRC provided a “last chance” opportunity (the Requirement to Correct) for individuals with undeclared overseas income and gains to correct errors relating to all years up to and including 2016/17. Any errors up to 5 April 2017 that were not declared are now subject to the Failure to Correct penalty of 200% of the tax due.
The penalty can be reduced for unprompted disclosures though the minimum penalty will still be 100% of the tax, regardless of the behaviour that caused the underdeclaration (i.e. no further reduction for careless behaviour compared to deliberate). There is a carve out for “reasonable excuse”, though the individual will need to explain not only the reason for not having declared the tax in the first place but why they did not come forward under the RTC. Typically, HMRC’s version of “reasonable excuse” tends to err towards the meaning of “exceptional circumstances”, though courts have been known to disagree with their interpretation (including e.g. Scott Building Contracts Ltd vs Revenue and Custons  UKFTT 630(TC)). Be aware that the bar for reasonable excuse is high and it must have existed throughout the period of default for it to be valid. The error must be rectified as soon as the reasonable excuse ends for it to be valid.
Strict Liability Offence (ss106B – 106H, TMA 1970)
This legislation essentially makes it a Criminal Offence for an individual not to declare UK taxes arising as a result of overseas assets. It is the first such Strict Liability offence in the UK tax code. When the offence was first proposed, advisers were concerned that it erodes some taxpayer protections (such as reduced liabilities for negligence) as well as the possibility that this could be extended in due course to domestic matters as well. To date, this has not occurred and it remains to be seen how widely this offence is used.
The SLO comes with a custodial sentence of up to 51 weeks if the tax due is greater than £25,000, in addition to other civil penalties that are due. The only defence against this is if the individual had taken reasonable care to ensure their tax affairs were in order; careless or negligent behaviour has no effect on whether or not this penalty applies, however it may reduce the custodial sentence and is likely to impact the financial penalty.
A custodial sentence is a significant deterrent and for this reason, the “last chance” requirement to correct was implemented, ending on 30 September 2018 in relation to all periods to 5 April 2017. The Strict Liability offence applies to tax offences committed in relation to offshore assets for 2017/18 onwards.
Offshore asset moves (s165 and Schedule 22 Finance Act 2016, s121 and Schedule 21 Finance Act 2015)
This penalty applies if an individual is found to have moved assets either between jurisdictions or in relation to the ownership of the assets to prevent HMRC finding out about them. Further, the individual has to be subject to a deliberate penalty for failure to notify, an inaccuracy in a return or a failure to file a return for income tax, capital gains tax or inheritance tax, the potential lost revenue for one tax year is greater than £25,000 and the asset has to have been moved at/after the beginning of the tax year in relation to which the penalty relates (or for IHT, after the liability first arises). The penalty is the lower of 10% of the value of the asset to which the offence relates or 10 times the Potential Lost Revenue. However, there is a specific provision preventing more than one asset based penalty being charged per investigation.
When the CRS was first implemented and there were less than 50 signatories to the agreement, a person may have transferred assets to a jurisdiction that had not yet signed on the (mistaken) assumption that the assets would not then be disclosed to HMRC. Fast forward a few years and obviously, with additional signatories and more information being transferred than ever before, HMRC find out.
The argument for this penalty is that the individual must have known the tax was due and about the CRS and even then took steps to try and avoid being identified. Rightly or wrongly, the impression is that if the individual had not transferred the asset, the tax position would have been rectified sooner.
Penalties in connection with offshore matters and offshore transfers (Section 120 and Schedule 20 Finance Act 2015, s163 & Schedule 21 Finance Act 2016)
The Schedule amends penalties for failure to notify, for inaccuracies in returns and failure to make returns. The new penalties depend on what jurisdiction the asset giving rise to the penalty is based in. For jurisdictions in Category 1, the penalty increases by 25%, for those in category 2, 50% and for those in category 3, 100%. HMRC categorise the countries depending on their transparency in relation to tax and how easily information can be obtained regarding the overseas assets of UK tax payers. Typically, countries that have signed up to the CRS will be in category 1. Remember that for each year a penalty is applied, the category needs to be checked as the penalties will change if the category does.
Finance Act 2016 amended the penalty provisions again, so that the taxpayer can only achieve maximum mitigation of penalties if they provide “HMRC with additional information”. That additional information tends to relate to advisers who assisted the individual to underdeclare their taxes. HMRC can then use the “enablers of tax evasion” provisions to penalise the adviser.
Penalties for Enablers of offshore tax evasion or non-compliance Section 162 & Schedule 20 Finance Act 2016
These penalties will apply to advisers who knowingly assisted with evasion or “non-compliance” in relation to overseas assets. The definition of “enabled” includes if the enabler “has encouraged, assisted or otherwise facilitated conduct...that constitutes offshore tax evasion of non-compliance”. This paragraph will only apply if the taxpayer is issued a penalty in relation to relevant offences, which include a failure to notify HMRC of a charge to tax, an inaccuracy in a return, failure to make a return or a penalty in relation to offshore asset moves (see above).
It is clear that this provision is widely drafted and it will be interesting to see how the courts interpret the word “knowingly”. It is to be expected that HMRC’s version of “knowingly” will include circumstances where perhaps the adviser “should have known” or should have had perhaps a higher degree of scepticism when giving “hypothetical” advice. In some case, it is obvious that an individual is looking to hide the overseas income and gains that would otherwise be subject to UK tax. In other cases, perhaps the adviser turns a blind eye to the situation. We all know that our PCRT guidelines would frown on turning a blind eye, but is this enough to fall in the above legislation? Does “turning a blind eye” or wilfully “forgetting to ask additional questions” constitute “knowingly assisting”? The answer is likely to depend on how much information the adviser had before deciding on their course of action and whether a healthier level of suspicion would have been exercised by another adviser in the same position.
In summary, there are a raft of penalties available for HMRC to use to penalise those who under-declared UK taxes arising from overseas assets. Handling these investigations needs to be undertaken with care, keeping in mind the potential penalties at all stages of the process. Individuals who could be affected by these penalties may wish to consider making a disclosure to HMRC to ensure they remain more in control of the process and the narrative.
Mala Kapacee is a Chartered Tax Adviser and Director of London Tax Network Ltd, a Tax Investigations Specialist consultancy. Her experience includes resolving tax enquiries, CoP8 and 9 Investigations as well as disclosures for a range of taxes and situations; self-employment, property, owner managed businesses and non-UK domiciled individuals. Mala lectures regularly for professional bodies including the CIOT and the CIMA. She founded the London Tax Society in 2017 and actively encourages networking and technical development for Young Professionals. She was a finalist for Best Rising Star in Tolley’s Taxation Awards 2020. Email email@example.com or call 07783 236 845.