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HMRC has increased its focus on the ‘tax gap’ and ever-increasing transparency between global tax authorities in an attempt to recover lost tax and prevent similar issues occurring going forward.
It is therefore important to ensure UK tax on your offshore assets has been correctly declared, or you could face severe penalties from HMRC.
The WDF can be used to make both voluntary and prompted disclosures of historically unreported offshore income and gains.
It is a two-step process, whereby an initial notification of intention to make a disclosure is made to HMRC. HMRC will then issue a disclosure reference number, which triggers the start of a 90-day window to submit the disclosure and pay the tax, interest and penalty calculated as due.
Whilst this sounds straightforward, determining the number of years to include in a disclosure and amount of penalty to offer depends on numerous factors, hence professional advice is recommended.
1. Increasingly complex and constantly changing UK tax legislation
2. Increasing global transparency
3. Penalties and other consequences
HMRC has an extensive nudge
letter campaign targeting individuals and businesses who are thought to have
undisclosed offshore income or gains. The letters are triggered by information HMRC routinely receives under the
Common Reporting Standard.
The Worldwide Disclosure
Facility is a formal settlement process that allows taxpayers and their
advisers to make a full disclosure of any offshore tax irregularities and make
an offer of tax, interest and penalties in full and final settlement of the
historic issues. HMRC will view engagement with the Worldwide Disclosure Facility
as a sign of co-operation which will help the investigation progress more
efficiently and ultimately resolve previous understatements by contract
It is also possible to make a
voluntary disclosure via the Worldwide Disclosure Facility if you realise that
you have unresolved offshore tax issues before HMRC gets in touch. Coming
forward voluntarily before HMRC opens an investigation will put you in a more
favourable position, and you will be exposed to lower tax-geared penalties.
The Worldwide Disclosure Facility
is available to individuals, companies or Trustees with
offshore tax issues to disclose. We have
dealt with numerous disclosures of this nature; please contact us if you would like to discuss how we can help you.
Taxpayers with historic offshore tax
issues who failed to take proactive action before the ‘Requirement to Correct’ deadline
on 30 September 2018 have automatically failed to correct; these individuals
are now exposed to huge penalties in respect of some past tax years, unless it
can be demonstrated they have a reasonable excuse for the failure.
Tax Resolutions practitioners often get asked this question. HMRC’s assessment powers are not unlimited, meaning there are strict rules about how many past years HMRC can seek to collect tax from. This depends on the nature of the non-compliance.
Broadly, the rules state that if a taxpayer has submitted inaccurate tax returns, the assessment window is defined by the behaviour that caused the inaccuracy. This is four years for innocent errors, six years for careless errors and twenty years for deliberate errors.
Recent legislation has now widened the assessment window for offshore matters, regardless of whether the loss was brought about due to innocent error or carelessness. This is to allow HMRC more time to investigate offshore cases where information is harder to obtain.
The effect of this is that HMRC has twelve years to assess tax lost as a result of innocent error and carelessness where offshore matters are concerned. We have recently seen HMRC attempt to apply this legislation, although there are safeguards which can be argued in certain cases. See our recent podcasts for more information.
If the taxpayer is in a 'failure to notify chargeability' situation, because they have never registered for Self-Assessment and are effectively a tax ghost, the rules are different. The default position is that HMRC can look back up to twenty years, unless the taxpayer has a reasonable excuse for the failure, in which case the window is four years.
Tax-geared penalties are also determined by the behaviour of the taxpayer. The penalty rates are increased where non-compliance is deliberate, the disclosure has been prompted by HMRC opening an investigation or there has been a significant delay between receiving the income/gains and making the disclosure. Enhanced penalties may also apply if the income or gains relate to certain countries which HMRC categorises as having a lower degree of tax transparency and information exchange.
The standard Failure to Correct penalty is 200% of the unpaid tax. This can be mitigated down to a minimum 100% for a good quality, voluntary disclosure. However, the minimum penalty for disclosures that have been prompted by HMRC is 150%.
FtC penalties apply automatically to underpaid tax on offshore assets unless the taxpayer has a reasonable excuse. See our numerous articles, webinars and podcasts on the subject of reasonable excuse.
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