TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT A NEW COMPLIANCE OBLIGATION FOR UK TAXPAYERS

Transcription

1 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT A NEW COMPLIANCE OBLIGATION FOR UK TAXPAYERS

2 New legislation that requires taxpayers with outstanding tax liabilities relating to offshore interests, where they have yet to put their UK tax affairs in order, to come forward and correct those liabilities by September CONTENTS WHAT IS THE REQUIREMENT TO CORRECT? 2 FAILURE TO CORRECT 3 REQUIREMENT TO CORRECT FOR INDIVIDUALS 4 REQUIREMENT TO CORRECT FOR TRUSTEES 6 REQUIREMENT TO CORRECT FOR SETTLORS 9 REQUIREMENT TO CORRECT FOR BENEFICIARIES 11 REQUIREMENT TO CORRECT FOR OFFSHORE COMPANIES 12 The consequence of not meeting the requirement and carrying out the necessary correction within the defined window will see taxpayers subjected to a new set of legal sanctions for failing to correct, including a minimum penalty of 100% of the tax.

3 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 2 REQUIREMENT TO CORRECT WHAT IS THE REQUIREMENT TO CORRECT? As a result of tax transparency, HMRC are more likely than ever to spot non-compliance be it as a result of genuine mistakes, carelessness or deliberate actions or omissions. The Requirement to Correct ( RTC ) is a statutory obligation for taxpayers to correct any issues with their UK tax position, existing at 5 April Those who fail to do so face punitive financial penalties and other severe sanctions. The RTC applies to any person with offshore interests with a potential outstanding UK liability, i.e. individuals, trustees or non-resident landlord companies. Offshore structures, anti-avoidance legislation and remittances should also be reviewed. WHAT IS THE DEADLINE? Taxpayers must correct their UK tax position by 30 September WHAT SHOULD YOU DO NOW? HMRC wants all taxpayers who have, or who have had, any offshore financial connections (including those who consider themselves to be non-uk domiciled and/or non-uk resident) to review their UK tax affairs to ensure that all tax returns are submitted and correct. This includes checking : the implementation of planning that technical opinions (e.g. that someone is non-uk domiciled) are still correct whether a tax avoidance arrangement achieves its aims whether advice taken in the past was refreshed when the law or their circumstances changed.

4 3 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT FAILURE TO CORRECT WHAT HAPPENS IF AN ERROR IS NOT CORRECTED BY 30 SEPTEMBER 2018? After this date, the Failure to Correct ( FTC ) regime will start, with punitive penalties, including: a tax geared penalty of between 100% and 200% of the tax not corrected for those who are aware of an issue during the RTC and Fail to Correct, a potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over 25,000 in any tax year for those who were aware of an issue during the RTC period and Fail to Correct, potential naming and shaming where over 25,000 of tax per investigation is involved a potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC. HOW CAN BDO HELP? No penalty will be chargeable where the taxpayer has a reasonable excuse for failing to correct the position. A Health Check of a taxpayer s position during the RTC period is likely to provide a strong defence. We are already assisting clients with Tax Health Checks, reviewing both their historic position and, where appropriate, approaching HMRC with a disclosure.

5 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 4 CASE STUDY ONE REPORTING UNDER THE CRS A UK resident non domiciled individual holds funds in an overseas bank The domicile status of the account holder is irrelevant for the purpose of reporting under the CRS, i.e. the exchange of information under the CRS is based entirely on an account holder s residence position The bank provides the relevant personal and financial information concerning the account holder to its local taxation authorities. The information is passed to HMRC on 30 September 2018, following which date the Requirement to Correct window is expected to be closed. A new, punitive penalty regime is in force. THE POTENTIAL CONSEQUENCES OF TAKING NO ACTION The information passed to HMRC in September 2018 is input into the CONNECT data analysis system HMRC open an enquiry As a result of taxable remittances being made inadvertently to the UK from the account the account holder is found to have outstanding UK taxation liabilities The taxpayer suffers a penalty of between 100% and 200% of their outstanding liability. BENEFITS OF TAKING ACTION NOW The taxpayer reviews their taxation affairs, identifies the mistake and makes a full voluntary disclosure to HMRC during the Requirement to Correct window A lower penalty (possibly no penalty) is applied than if a disclosure was made after 30 September 2018 Even if there are no historic liabilities, it is still a good idea to review a taxpayer s offshore affairs before 30 September 2018.

6 5 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT CASE STUDY TWO REPORTING UNDER THE CRS A UK resident and domiciled individual used funds held in their overseas bank account to acquire a cash value insurance contract ( life wrapper ) The life insurance company will have a reporting obligation in respect of the policy holder of the cash value insurance contract The interest held by the policy holder will be reported to the local taxation authorities The information is passed to HMRC on 30 September 2018, following which date the Requirement to Correct window is expected to be closed A new, punitive penalty regime is in force. THE POTENTIAL CONSEQUENCES OF TAKING NO ACTION The information passed to HMRC in September 2018 is input into the CONNECT data analysis system HMRC open an enquiry into the source of funds The taxpayer has outstanding liabilities in respect of the funds held in the bank account prior to acquisition of the policy HMRC investigate the life policy documentation in detail and consider that the policy is in fact a Personal Portfolio Bond ( PPB ). The bond falls within the punitive PPB regime (i.e an annual income tax charge on a deemed, cumulative uplift in value of the bond of 15%) The taxpayer suffers a penalty of between 100% and 200% of their outstanding liability In the most serious cases, the taxpayer faces the increased likelihood both of prosecution and also naming and shaming. BENEFITS OF TAKING ACTION NOW The taxpayer reviews their taxation affairs and makes a full voluntary disclosure to HMRC during the Requirement to Correct window A lower penalty is applied than if a disclosure had been made after 30 September 2018 The taxpayer is not named and shamed as they made a full voluntary disclosure before 30 September 2018 Even if there are no historic liabilities, it is still a good idea to review a taxpayer s offshore affairs before 30 September 2018.

7 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 6 CASE STUDY THREE Trustee Liability A. A UK resident, non-domiciled individual settles property into an offshore, discretionary trust in the 2005/2006 tax year. B. Same facts as for case study one (a) except the trustees do not review the historic position during the course of the RTC period. The error is discovered by HMRC after 30 September The settlor is excluded from benefitting from the trust. A ten year charge of 30,000 arises in the 2015/2016 tax year in respect of UK situs property within the trust. Due to a change of staff and administrative oversight, the trustees fail to declare or pay this liability. The trustees review the historic position during the course of the RTC period and make a voluntary disclosure to HMRC. HMRC accept that the error was a result of a lack of reasonable care, rather than deliberate. The tax liability is chargeable. A tax geared penalty is possible, but could be reduced to nil in the case of a voluntary disclosure with full co-operation. Tax 30,000 Penalty Full mitigation Regardless of it just being an administrative oversight, a penalty of at least 100 % of the tax at stake is imposed on the trustees. HMRC has until 5 April 2021 to raise the assessment. Tax 30,000 Penalty 36,000 66,000 plus interest Notes: the assessment period will depend on the behaviour that gave rise to the error. If HMRC considered the error to have arisen through deliberate behaviour, then HMRC would have more time in which to raise the assessments. The time limit for deliberate behaviour is 20 years. There ought not to be an asset based penalty as the trustees were unaware of the outstanding liability during the RTC period. For the same reason, there should be no naming and shaming. 30,000 plus interest

8 7 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT CASE STUDY FOUR Trustee Liability A. UK resident, non-domiciled individual settles funds into an offshore trust The settlor is excluded from benefitting from the trust The trustees invest the money through an account with a non-uk bank Some of the funds are invested in error in UK situs assets Income derived from these assets is assessable to UK tax arising of 25,000 The trustees fail to declare the UK income or pay the associated UK tax liability The trustees review the historic position during the course of the RTC period and make a voluntary disclosure to HMRC. HMRC accept that the error was a result of a lack of reasonable care, rather than deliberate. As a consequence, assessments can be raised going back to the 2011/2012 tax year. The Income Tax liabilities are paid. A tax geared penalty is possible, but could be reduced to nil in the case of a voluntary disclosure with full co-operation. Tax 25,000 Penalty Full mitigation B. Same facts as for case study two (a) except the trustees do not review the historic position during the course of the RTC period. The error is discovered by HMRC after 30 September Although HMRC accept the error was a result of careless behaviour, a penalty of 100% of the tax at stake is imposed on the trustees. Assessments can be raised going back to the 2011/2012 tax year. HMRC have until 5 April 2021 to raise the assessments. Tax 25,000 Penalty 30,000 55,000 plus interest Notes: the assessment period will depend on the behaviour that gave rise to the error. If HMRC considered the error to have arisen through deliberate behaviour, then HMRC would have more time in which to raise the assessments. The time limit for deliberate behaviour is 20 years. There ought not to be an asset based penalty as the trustees were unaware of the outstanding liability during the RTC period. For the same reason, there should be no naming and shaming. 25,000 plus interest

9 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 8 CASE STUDY FIVE Trustee Liability A. UK resident, non-domiciled individual settles funds into an offshore trust The settlor is excluded from benefitting from the trust The trustees provide an interest bearing loan to a UK resident beneficiary The arising interest is taxable in the UK However, having relied on incorrect advice, the trustees do not declare the income and do not pay UK tax The trustees review the historic position during the course of the RTC period and make a voluntary disclosure to HMRC. HMRC accept that the error was a genuine mistake. As a consequence, assessments can be raised going back to the 2013/2014 tax year. The tax liability is paid, but no penalty is chargeable. B. Same facts as for case study three (a) except the trustees do not review the historic position during the course of the RTC period. The error is discovered by HMRC after 30 September Although HMRC accept the error was a genuine mistake, a penalty of at least 100% of the tax at stake is imposed on the trustees. Assessments can be raised going back to the 2013/2014 tax year. HMRC have until 5 April 2021 to raise the assessments. Tax 20,000 Penalty (say, 120%) 24,000 44,000 plus interest Tax 20,000 No Penalty - 20,000 plus interest Notes: If no interest is charged on the loan, then the loan benefit (currently computed at HMRC s official rate of 2.75% per annum) can be matched in the first place against undistributed relevant income and then to the capital gains of the offshore trustee and assessed on the beneficiary. The beneficiary would also have Failed to Correct. The assessment period will depend on the behaviour that gave rise to the error. If HMRC considered the error to have arisen through deliberate behaviour, then HMRC would have more time in which to raise the assessments. The time limit for deliberate behaviour is 20 years. There ought not to be an asset based penalty as the trustees were unaware of the outstanding liability during the RTC period. For the same reason, there should be no naming and shaming.

10 9 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT CASE STUDY SIX Settlor s Liability A. An individual with a UK domicile of origin becomes resident outside the UK in July 2011 Two years after leaving the UK, they settle property worth 1.5m into an offshore trust The beneficiaries include the settlor s UK resident children The settlor believed he was non-uk domiciled from the moment he left the UK. However, at the time he left the UK, the settlor was deemed UK domiciled for UK taxation purposes (Inheritance Tax) as they were UK resident for 17 out of 20 UK tax years As a consequence, the transfer into trust resulted in a lifetime charge of 20% of the value of the transfer above the IHT nil rate band ( 1,500, ,000 = 20% = 235,000) The settlor did not declare the liability or pay the tax The settlor reviews the historic position during the course of the RTC period and makes a voluntary disclosure to HMRC. HMRC consider that the error arose as a result of a failure by the settlor to take reasonable care. They do not believe the error to be deliberate. As a consequence, assessments can be raised going back to the 2011/2012 tax year. The tax is paid. A tax geared penalty is possible, but could be reduced to nil in the case of a voluntary disclosure with full co-operation. Tax 235,000 Penalty Full mitigation 235,000 plus interest

11 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 10 CASE STUDY SEVEN Settlor s Liability B. Same facts as for case study four (a), except the trustees /settlor review the historic position during the course of the RTC period but Fail to Correct. HMRC become aware of the issue after 30 September Although HMRC accept the original error was not deliberate, a penalty of at least 100% of the tax at stake is imposed on the settlor. Because the settlor was aware of the issue but did not make a voluntary disclosure, there is a chance both of naming and shaming and an asset based penalty. Assessments can be raised going back to the 2011/2012 tax year. HMRC have until 5 April 2021 to raise the assessments. Tax 235,000 Penalty (say, 160%) 376, ,000 plus interest Notes: HMRC are increasingly challenging claims to be non-uk domiciled. It may be the case that, because the settlor retains significant links to the UK, HMRC consider they have retained their UK domicile. As a consequence, a transfer into trust would be a Chargeable Lifetime Transfer at any point after the settlor moved out of the UK. The assessment period will depend on the behaviour that gave rise to the error. If HMRC considered the error to have arisen through deliberate behaviour, then HMRC would have more time in which to raise the assessments. The time limit for deliberate behaviour is 20 years.

12 11 TAX DISPUTE RESOLUTION THE REQUIREMENT TO CORRECT CASE STUDY EIGHT Beneficiary Liability A. A UK resident, non-domiciled individual settles funds into an offshore trust The trustees invest the money through an account with a non-uk bank Income and gains arise in the account, but these are not segregated. As a consequence, the account contains mixed funds. Further, accurate records of the relevant pools of income and gains are not maintained The trustees make distributions to the UK bank account of a UK resident but non domiciled beneficiary The remitted funds contain a mixture of income, gains and clean capital The beneficiary does not include the distribution on their tax return, incorrectly having been advised that funds were non-taxable clean capital The beneficiary reviews the historic position during the course of the RTC period and makes a voluntary disclosure to HMRC. B. Same facts as for case study five (a) except the beneficiary does not review the historic position during the course of the RTC period. The error is discovered by HMRC after 30 September Although HMRC accept the error was a genuine mistake on the part of the beneficiary, a penalty of at least 100% of the tax at stake is imposed. Assessments can be raised going back to the 2013/2014 tax year. HMRC have until 5 April 2021 to raise the assessments. Tax 25,000 Penalty (say, 120%) 30,000 55,000 plus interest HMRC accept that the error was a genuine mistake. As a consequence, assessments can be raised going back to the 2013/2014 tax year. The Income Tax and Capital Gains Tax liabilities are paid but no penalty is chargeable. Tax 25,000 No penalty - 25,000 plus interest

13 THE REQUIREMENT TO CORRECT TAX DISPUTE RESOLUTION 12 CASE STUDY NINE Offshore Company Liability A. A UK resident non-domiciled individual settles funds into an offshore trust The settlor is excluded from benefitting The trustees establish an offshore company which is wholly owned by the trust The offshore company uses the funds to acquire a residential property in the UK The property is rented out, giving rise to a rental profit in the UK which is not declared and the arising UK income tax liability is not paid The trustees/company directors review the historic position during the course of the RTC period and make a voluntary disclosure to HMRC. HMRC consider that the error arose as a result of a failure by the directors to take reasonable care. They do not believe the error to have been deliberate. As a consequence, assessments can be raised going back to the 2011/2012 tax year. The Income Tax is paid and a suspended penalty agreed. B. Same facts as for case study six (a) except the trustees do not review their historic position during the course of the RTC period. The oversight comes to light after 30 September 2018 and they are contacted by HMRC. Although HMRC accept the error was careless, a penalty of at least 100% of the tax at stake is imposed on the company. Assessments can be raised going back to the 2011/2012 tax year. HMRC have until 5 April 2021 to raise the assessments. Tax 30,000 Penalty (say 130%) 39,000 69,000 plus interest Tax 30,000 Penalty (say 20%) 6,000 (suspended) 30,000 plus interest Note (a): If a beneficiary of the trust lives in the property rent free, this will give rise to a potential tax charge for the beneficiary.

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16 FOR MORE INFORMATION: RICHARD MORLEY +44 (0) DAWN REGISTER +44 (0) This publication has been carefully prepared, but it has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright April 2018 BDO LLP. All rights reserved. Published in the UK. HB010468