‘Failure to Correct’ – a whole new world

Posted On: 14 Jan 2019

The deadline for registering with HM Revenue & Customs (HMRC) to make a tax disclosure under the Requirement to Correct (RTC) rules has now passed. The RTC rules required any person with historic offshore irregularities as at 5 April 2017 or earlier to correct them by 30 September 2018 – FA (No. 2) 2017, Schedule 18 and s 67. In practice that meant they needed to register their intention to disclose with HMRC by that date, and under normal circumstances they would have 90 days to make their disclosure and pay any additional taxes, interest and maybe penalties (if applicable) due.

Unlike previous offshore disclosure facilities there was never really any carrot here, but a large stick waiting for those subsequently identified as having not made a disclosure which they could and should have. Now, the new Failure to Correct (FTC) penalties, both financial and non-financial are in force for anyone who has not notified HMRC (as above, where the taxes payable were: income tax, capital gains tax or inheritance tax). HMRC’s guidance on the RTC and FTC is here, and in their Compliance Handbook here.

By requiring people to correct undeclared offshore tax liabilities by a set date HMRC created a new line in the sand, one which it is using to trigger the new penalties applicable. These penalties were initially touted as being simpler to administer in comparison to the wholly behaviour-based regime that otherwise applies to offshore non-compliance. While this article does not look at the Common Reporting Standard, it is worth noting that this global framework underpins the current international information exchange agreements, providing for over 100 jurisdictions to share tax/banking information with one another annually – without needing a specific request. By 30 September 2018 more than half of these jurisdictions will have exchanged – twice – huge sets of data with the UK/HMRC. This enhances HMRC’s ability to detect offshore non-compliance or at least identify non-UK footprints for people where HMRC previously had no such knowledge about them.

Hit me now!

The new tax-geared (financial) penalty – Firstly, should HMRC be in a position to assess any person for additional taxes arising as a result of offshore irregularities in the period up to and including 2016/17, please note that the new standard penalty applicable is an eye-watering 200% (of the previously uncorrected tax due). This is regardless of the ‘behaviour’ or ‘jurisdiction’ involved, which are still important for the non-FTC standard offshore penalties regime which continues to apply where FTC penalties cannot be charged. However, if a person can demonstrate that they had a ‘reasonable excuse’ for their failure to correct then no FTC penalty will be chargeable. FA (No. 2) 2017, Schedule 18, paragraph 1.

Previously, many practitioners will have been able to successfully demonstrate to HMRC that their clients had taken ‘reasonable care’ with their UK tax affairs or had perhaps merely been careless. This helped negotiate penalties down to nil or secure considerably lower levels in comparison to scenarios in which clients had acted ‘deliberately’ and where comparatively opaque jurisdictions were involved. There were also opportunities to suspend some penalties where mistakes had been made in tax returns due to reasonable care not having been taken.

One of the main ways to secure a reduction in the FTC penalty level is for the person to ‘come forward voluntarily’ and disclose the failure(s) to HMRC. Conversely, if the person does not do this and is prompted by HMRC to make a disclosure then the penalty will not be reduced below 150%. This is the incentive mechanism designed to continue encouraging voluntary action post the RTC window. In doing so, the penalty level can be reduced from 200% to the new minimum of 100%.

A new way in which the level of penalty could be mitigated is by the person providing sufficient details to HMRC about the person(s) who ‘enabled’ their offshore non-compliance. This could be anyone who promoted a scheme/arrangement, for example, and specifically those who ‘encouraged, assisted or otherwise facilitated’ the offshore tax non-compliance. In practice ‘otherwise facilitated’ is deliberately wide and it is expected that HMRC will attempt to extend this to accountants and tax advisers who perhaps ‘turned a blind eye’ to a person’s actions.

This coupled with other forms of ‘telling, helping and giving’ is regarded as the ‘quality’ of the disclosure(s) to HMRC, the level of which will help secure reductions in the penalty level:

  • telling HMRC about, or agreeing that there is something wrong and how and why it happened;
  • telling HMRC everything you can about the extent of what is wrong as soon as you know about it;
  • telling and helping HMRC by answering their questions in full;
  • helping HMRC to understand your accounts or records;
  • helping HMRC by replying to their letters quickly;
  • helping HMRC by agreeing to attend any meetings, or visits at a mutually convenient time;
  • helping HMRC by checking your own records to identify the extent of the inaccuracy;
  • helping HMRC by using your private records to identify sales or income not included in your tax return;
  • giving HMRC access to documents they’ve asked for without unnecessary delay;
  • giving HMRC access to relevant documents they may not know about, as well as those that they ask to see.

Also, don’t forget that the RTC rules allow for a longer period for HMRC to take formal action to recover any taxes due that are subject to the RTC criteria. FA (No. 2) 2017, Schedule 18, paragraph 26.

Briefly, this means that for any uncorrected taxes (subject to RTC) relating to offshore non-compliance or offshore transfers, HMRC will continue to be able to formally raise assessments until 5 April 2021. Depending on how you look at this, it represents some four or five extra years for HMRC to deal with offshore irregularities, including those that originally arose due to the person’s carelessness or mistake(s) despite taking reasonable care, as well as any deliberate actions.

The new asset-value based (financial) penalty – Secondly, this may also be applicable if the person was aware at 5 April 2017 that they had offshore non-compliance to correct. HMRC are aiming this in its own words, at the most serious cases. So, the potential lost revenue (i.e. the tax payable) needs to be in excess of £25,000 in any tax year. FA 2016, Schedule 22, which came into force on 1 April 2017.

As well as this threshold the person’s behaviour needs to have been deliberate if the trigger for this new penalty is the charging of a standard offshore penalty and not the new FTC penalty, under e.g. FA 2007, Schedule 24, paragraph 1 (an inaccuracy in the person’s return/document); FA 2008, Schedule 41, paragraph 1 (a failure to notify chargeability); or FA 2009, Schedule, paragraph 6 (for failing to make a return more than 12 months after the filing date).

It is important to highlight that the legislation for this new asset-value based penalty is not strictly concerned with the person’s behaviour leading to the additional tax payable where a FTC penalty is in point. So, in practice this means that this new penalty of up to 10% of the value of offshore assets (corresponding to the offshore potential lost revenue) will apply more easily than some might consider – just like the new tax-geared penalty above even if the non-compliance was originally a simple error. HMRC has built in some relief here though, where a penalty equalling 10 times the offshore potential lost revenue is lower, then this will be charged rather than the asset-value based penalty.

Also, in a case involving an unprompted voluntary disclosure, a reduction of up to 50% of the penalty amount can be secured. This is in contrast to a disclosure which is prompted, where the maximum reduction permitted will be restricted 20% of the penalty amount. The penalty applicable can be reduced for disclosure to and co-operation with HMRC, otherwise known as the ‘quality’ –

  • provides HMRC with a reasonable valuation of the asset, and
  • provides HMRC with information or access to records that HMRC requires for the purposes of valuing the asset.

The new naming and shaming (non-financial) penalty – Thirdly, HMRC wanted to more easily publish details of those subject to FTC penalties, so it has gone beyond the standard Publishing Details of Deliberate Defaulters (PDDD) regime as per FA 2009, section 94.

The new criteria is at FA (No. 2) 2017, Schedule 18, paragraph 30, stating that HMRC may E+W+S+N.I.publish information about a person if (i) they E+W+S+N.I.have incurred at least one new FTC tax-geared penalty and the corresponding total offshore potential lost revenue exceeds £25,000, or (ii) they have incurred 5 or more such FTC penalties (irrespective of whether the threshold has been met).

So, while HMRC could cause reputational damage far more easily for certain people now, this penalty is discretionary and is therefore likely to be politically motivated. Also, similar to the PDDD regime, information may not be published if the amount of the corresponding FTC penalty is reduced to the minimum permitted amount of 100% or to nil or where special circumstances exist.

The offshore asset moves (financial) penalty – Lastly, FA 2015, Schedule 21 introduced a new enhanced penalty regime for cases where a person is found to have moved certain (hidden) offshore assets, from one (comparatively secret) jurisdiction to another (transparent one, committed to exchanging banking/tax information automatically, annually, under the Common Reporting Standard), to avoid detection.

This penalty is equivalent to 50% of the amount of any standard/other penalties being charged and so is charged in addition to those penalties. Notably, this enhanced penalty applies to the standard offshore penalties regime as well as the new FTC penalty, so either way a huge 200% penalty could become a whopping 300% penalty.

Appeals against HMRC penalty decisions

FTC penalties can be appealed against in the same way as appeals against the corresponding tax assessments, as per the normal safeguards in place for domestic non-compliance. It is worth noting that the new FTC penalties are statutory, and as such the tribunal has no jurisdiction to determine whether they are ‘fair’. The tribunal can only consider the facts set out before them to determine ‘on the balance of probabilities’ the level of assistance afforded to HMRC which corresponds to the level of penalty reductions. So regardless of a tribunal’s decision in relation to these reduction points, the penalty level simply cannot be reduced below the statutory minimum of 100%. It is likely that given the level of this minimum penalty, we will see more appeals to the tribunal.

Reasonable excuse safeguard

The new legislation specifically rules out ‘insufficient funds’ as a ‘reasonable excuse’ for not meeting reporting obligations, unless this is attributable to an event outside of the person’s control. This concept of events being beyond a person’s control and them taking corrective steps without unreasonable delay remains important, because it’s the only safeguard against the new FTC penalty. If demonstrated successfully, there will be no penalty payable. Notably, the concept of having taken ‘reasonable care’ does not apply here, and more importantly the ‘reasonable excuse’ safeguard itself has been heavily tightened so that it does not apply easily, specifically referring to ‘disqualified advice’ which makes for important reading. FA (No. 2) 2017, Schedule 18, paragraph 23.

For example, reliance on professional advice is not a reasonable excuse if that advice was provided by an ‘interested party’ – i.e. someone who participated in or stood to benefit from the person’s participation in a tax avoidance scheme. This would include promoters of tax avoidance schemes relying on generic advice in relation to the scheme.

Also, HMRC will argue (and the courts will likely agree) that the advice was not specific to the person concerned and that instead it was provided to the promoters. Typically the promoters will in turn have passed the advice on to numerous people and will themselves be the ‘interested parties’, as they had an incentive to encourage people to use the scheme.

Additionally, if advice was provided by someone with insufficient expertise or they did not take into account the person’s specific circumstances, then there is no reasonable excuse. If however, the adviser had held themselves out to have been suitably qualified, then on the basis of good faith the person is more likely to have a reasonable excuse. As always, but particularly in these FTC penalty circumstances, each case will be considered on its own merits and so the outcomes will differ.

Closing point: despite the increased number of and levels of penalties, including the new high minimum level, the fact is that assistance provided to HMRC will reduce applicable penalties. This continues to suggest that voluntary disclosures are still being encouraged, and this will help secure the lowest levels of sanctions. However, while some might argue that these new penalties deter voluntary compliance, clearly the previous regime starts to look surprisingly reasonable.