HMRC Consultation Document Tackling Offshore Tax Evasion: A Requirement to Correct Response by the Chartered Institute of Taxation

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HMRC Consultation Document Tackling Offshore Tax Evasion: A Requirement to Correct Response by the Chartered Institute of Taxation 1 Introduction 1.

1 HMRC Consultation Document Tackling Offshore Tax Evasion: A Requirement to Correct Response by the Chartered Institute of Taxation 1 Introduction 1.1 This is the latest in a series of consultations by HM Revenue and Customs (HMRC) which is considering changing the sanctions available for offshore tax evasion. It is proposing to introduce a Requirement to Correct (RTC) obligation that aims to compel those with offshore interests who have yet to put their UK tax affairs in order to do so by September 2018 ahead of the widespread adoption of the Common Reporting Standard (CRS). Taxpayers who fail to correct their tax affairs by September 2018 will be subject to a single, tougher set of Failure to Correct (FTC) sanctions for offshore tax evasion. 1.2 As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the Chartered Institute of Taxation (CIOT) is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the tax authorities. Our comments and recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 2 Executive summary 2.1 We welcome this latest initiative by HMRC to encourage taxpayers to review their offshore affairs and put them back onto a compliant footing where necessary. The CIOT supports HMRC s efforts to tackle tax evasion. 2.2 The RTC requires taxpayers to correct their tax affairs without specific prompting from HMRC, so effective communication of the proposals is the key to their success. As HMRC recognise, there are still taxpayers who have not put their offshore affairs in order not necessarily because they are deliberately trying to evade their responsibilities, but because they may have failed to take care with their obligations or because they have not reviewed their financial affairs recently and do not realise that they are no longer compliant. These taxpayers do not tend to identify themselves

2 in the category of tax evaders and consequently it has been difficult in the past to find an effective way for HMRC s messages to reach them. 2.3 Such taxpayers now need to act. HMRC s comments in paragraphs 2.3 and 2.8 of the consultation document are absolute key to their communications strategy. The extent of the game changing sharing of data and how HMRC will use the data must be effectively conveyed to non-compliant taxpayers so that it incentivises them to come forward. HMRC must do all their can to ensure publicity reaches these taxpayers given the significant penalties facing those who fail to correct. We would recommend a major publicity campaign across the general media not just on the HMRC website or in tax publications which, understandably, ordinary taxpayers are very unlikely to read. The campaign would ideally pick up the whole area of CRS data, offshore evasion penalties and the RTC obligations as well as the Worldwide Disclosure Facility (WDF). 2.4 The adviser letters 1 form an important part of HMRC s communication strategy. HMRC need to communicate these obligations quickly and effectively to advisers so that advisers are aware of their responsibilities in this area and are clear what they need to do to comply with them. Due to the fact that the regulations include several exemptions, it is quite likely that in many cases only a small number of clients will receive the letter unless an adviser decides to take a broad-brush approach and write to all their individual clients. It remains to be seen whether the measure is appropriately targeted and whether it will encourage those who do have something to disclose to come forward. 2.5 The WDF was launched by HMRC on 5 September 2016 and is clearly a further important element of this strategy. We would find it helpful if more guidance was available, including examples, about how the WDF will work once a disclosure has been made. This will encourage taxpayers to use it. 2.6 We understand that HMRC are not anticipating any nil disclosures from taxpayers with nothing to disclose but we believe it would be useful if taxpayers were allowed to self-certify compliance as part of the RTC process. This would provide greater certainty to both taxpayer and their advisers bearing in mind the significant sanctions that are going to be put in place for non-compliance, including the enabling civil penalty. 2.7 Additionally, we think it would assist if HMRC were clearer with taxpayers and their advisers about what they can expect from HMRC going forward, and in particular how they intend to use the CRS data. This would help incentivise taxpayers to make disclosures during the RTC period, get their affairs in order and continue to remain compliant in the future. 2.8 We have been concerned that changes to the penalty rules over the last few years have risked making the civil penalties regime for offshore tax evasion increasingly confusing and complicated. We therefore query whether simplification of the existing penalty regime can be reconsidered alongside the introduction of the RTC proposals and FTC penalty in order to make it more understandable and so more effective as a deterrent. 1 Introduced by the International Tax Compliance (Client Notification) Regulations 2016, which came into force on 30 September P/tech/subsfinal/MoT/2016 2

3 3 Question 1: Are there any key circumstances missing from the proposed scope and definition or do you foresee any difficulties with applying this definition? 3.1 We agree that the scope of the RTC should be as wide as possible and based around the legislative definitions of an offshore matter and transfer which focus on a UK tax loss rather than using definitions that focus on evasion and deliberate behaviour. 3.2 For clarity, it should be specified in the legislation that the scope of the RTC is not limited to UK residents (see paragraph 4.11 of the consultation document). 4 Question 2: What are your views on limiting the scope of the RTC to those taxes currently covered by offshore penalties? 4.1 Yes, we agree with this. We assume that income tax will include PAYE. If this is the case, it would be helpful if HMRC could make this explicit. 5 Question 3: What, if any, other taxes should we look to include within scope? 5.1 We do not believe that any further taxes should be included within the scope of the proposals. In particular, the inclusion of Corporation Tax or VAT within the rules is likely to lead to significant and unnecessary complication. 5.2 As an aside, we note that the introduction of the rules would also be an opportune moment to revisit the Inheritance Tax penalty rules for fraud and negligence. 6 Question 4: Do you foresee any issues with a window to correct covering the period April 2017 to September 2018? Should we consider any other dates for the window? 6.1 There may be an issue in respect of the treatment of amendments for the 2016/17 tax year. It appears to us that a taxpayer making an amendment to their 2016/17 tax return within the statutory amendment window may risk a FTC penalty on the basis that the amendment would not constitute a correction if made after September 2018 but before January It would be helpful if HMRC could specifically clarify the position in respect of such amendments. 7 Question 5: What is your view on capturing all compliance issues that exist up to and including 5th April 2017? Do you foresee any circumstances that this may miss? 7.1 We cannot see any downside to including 2016/17 within the RTC aside from our comments above. P/tech/subsfinal/MoT/2016 3

4 8 Question 6: Do respondents have any concerns about this approach to correcting? 8.1 No comments. 9 Question 7: Are there any other approaches to correction we could consider? 9.1 No comments. 10 Question 8: What are your views on using the standard assessment periods to define the contents of the RTC? 10.1 We agree with this approach. 11 Question 9: What are your views on handling the issue of taxpayers delaying to allow years to pass out of assessment time limits in this way? Are there any other approaches you believe we should consider? 11.1 We agree with this approach (fixing the RTC from 6 April 2017 for measuring assessment time limits). 12 Question 10: What are your views on a proposal to extend the assessment period for tax and penalties to ensure years do not drop out of assessment as the CRS data arrives? Could we address this issue in any other way? 12.1 We understand the difficulty that HMRC have identified but we are unhappy with the proposal to introduce a one-off extension to the assessment periods of five years. This appears to be an excessively long time. 13 Question 11: What are your views on the proposed contents of a correction? Do you foresee any issues or further information we should seek? 13.1 We think that taxpayers may sometimes find it difficult to provide information about a third party (paragraph 4.27). Additionally, some events/transactions may have happened a very long time ago. It is quite common to face difficulties obtaining information from offshore providers even when events took place relatively recently. We do not think that a taxpayer should face penalties if they are unable to require the production of information from third parties before the closure of the RTC window. Instead, it would make sense for taxpayers to be required to produce information which is reasonable and proportionate taking all of the circumstances into account. P/tech/subsfinal/MoT/2016 4

5 14 Question 12: We would be interested in views on whether HMRC should consider further information powers to support the RTC or more widely the CRS? 14.1 We think that existing information powers should be adequate to achieve HMRC s objectives. 15 Question 13: Do respondent have any alternative ways of handling the issue of ongoing enquiries? Are there alternatives to extending the window in these circumstances? 15.1 In our view, taxpayers who are under enquiry during the requirement window (April 2017 to September 2018) should be dealt with by extending the RTC window without the imposition of a FTC penalty, including being required to provide HMRC with all relevant information before the window closes. It is important though that taxpayers are not forced to provide information which is unnecessary or disproportionate. With that in mind, we would like HMRC to provide specific formal confirmation that all relevant information had been provided such that the requirement had been met and for an appeal process against a refusal to be included in the rules. 16 Question 14: Are there other complex situations we need to give special consideration to? 16.1 No comments. 17 Question 15: What do you think should be included within the scope of reasonable excuse for not having met the obligations of the RTC? What do you think should not be included as a reasonable excuse? 17.1 We agree that no penalty should be charged if a taxpayer has a reasonable excuse for not having met the obligation to correct in the defined time period We would not support introducing legislation that describes what does and does not constitute reasonable care as each case will depend on its own merits. With that in mind, we believe that a reasonable excuse should be considered by reference to all of the relevant circumstances for example, a taxpayer may have been unable to make a complete correction due to difficulties in getting information from a third party before the closure of the correction window (as referred to in our answer to Question 11) Further clarity in respect of the status of the adviser letters referred to in paragraph 2.5 above would also be helpful, for example, whether non-receipt of such a letter might be taken into account in considering whether there is a reasonable excuse or not. 18 Question 16: What are your views on the two penalty models proposed? We would welcome other ideas on a penalties model for FTC. P/tech/subsfinal/MoT/2016 5

6 18.1 Model 1 is attractive because of its simplicity, but we question whether it is too simple. There is a wide range of high tax geared penalties proposed in this model. A minimum penalty of 100% and a maximum penalty of 200% of the tax that has not been corrected will be charged irrespective of taxpayer behaviour unless they have a reasonable excuse for not meeting their obligations. Our concern, therefore, is that it is uncertain what level of penalty will be charged in which case and, on top of that, the model does not distinguish between prompted and unprompted disclosures, which may act as a disincentive for taxpayers to make voluntary disclosures. We accept however that this model will provide a strong incentive for taxpayers to come forward under the RTC because they will face a much higher penalty if they don t Model 2, whilst not having the simplicity of Model 1, does allow for a more detailed categorisation of penalties, including reflecting unprompted/prompted disclosures, which seems to be a more considered and proportionate approach. It still gives out a clear message that correcting under the RTC is the best option. Having more categories should not present difficulties, so long as the model is clearly laid out in legislation, unambiguous and easy to understand and apply As a result, we favour the approach in Model Question 17: What are your views on extending the civil enablers penalties to cover the RTC? 19.1 In principle, we do not see any reason why the civil enabler penalties in Finance Act 2016 section 150 should not be extended to cover situations in which an enabler has helped the taxpayer circumvent the RTC However, we are unclear how this will work since we understood that the civil enabling penalty will not apply until the 2017/18 tax year at the earliest and that it will not apply retrospectively. The RTC period will run from April 2017 to 30 September 2018 and will mean in the vast majority of cases, taxpayers would be correcting any outstanding irregularities relating to the tax year 2015/16 and earlier. Any future years should be dealt with under the normal filing process (paragraph 4.18). We would appreciate knowing some more detail around HMRC s thinking on how the civil enabling penalty will apply to a RTC failure In a situation where a taxpayer makes a voluntary disclosure which leads to a penalty for offshore tax evasion, we think that it may be helpful to introduce an adviser disclosure facility to improve protections for advisers who may be exposed to an enabling penalty In any event, we would like to understand better how HMRC are intending to apply the civil enabler penalties in general. It would be extremely useful if HMRC could publish guidance soon. 20 Question 18: Are there any other design considerations you feel we should consider? 20.1 No further comments. P/tech/subsfinal/MoT/2016 6

7 21 Acknowledgement of submission 21.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the Chartered Institute of Taxation is included in the List of Respondents when any outcome of the consultation is published. 22 The Chartered Institute of Taxation 22.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 17,600 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 19 October 2016 P/tech/subsfinal/MoT/2016 7

Tackling offshore tax evasion A requirement to notify HMRC of offshore structures: CIOT Comments 27 February 2017

HMRC consultation document Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures Response by the Chartered Institute of Taxation 1 Introduction 1.1 This consultation is considering