In recent months, tax practitioners have received warnings about HMRC’s new Requirement to Correct rules, advising them that clients who have not taken steps to bring their offshore tax compliance up to date by 30 September 2018, will be subject to tough new ‘super’ penalties.
These ‘Failure to Correct’ penalties, start at 200% of the undeclared tax (and can only be mitigated down to a minimum of 100%). They are not determined by the client’s behaviour, and so a person who may have made an innocent mistake, will face the same potential penalties as someone whose mistake was fraudulent. The only defence, is for a person to show they had a ‘reasonable excuse’ for not meeting their obligation, for which the definition is tightly drawn.
HMRC’s actions are underpinned by the vast volume of financial data that it will now automatically receive about accounts, portfolios and investments held by UK residents in over 100 jurisdictions, under the Common Reporting Standard (‘CRS’). We have already seen the effect of this prior to 30 September 2018, with a number of ‘nudge’ letters being issued by HMRC, urging clients to review their overseas tax affairs and to make a disclosure of any undeclared income, if necessary.
We wait to see how HMRC will take these cases forward, but there is likely to be a layered approach including, where the enquiry window has closed, assertions that a ‘discovery’ has been made. In more serious cases, investigations under Code of Practice 9 may be opened and HMRC will be under pressure to pursue criminal prosecutions in appropriate cases, to act as a further deterrent.
Irrespective of how HMRC proceeds, it is clear that the CRS information will lead to many clients appearing on its radar, who will then have to engage with HMRC. HMRC has stated that for those who do not come forward voluntarily, the minimum penalty will actually be 150% and so a considerable saving on the penalty, of 50%, can still be achieved by coming forward now.