Policy paper

Tackling offshore tax evasion: requirement to correct

Published 5 December 2016

Who is likely to be affected

Individuals with offshore interests who have previously not declared the right amount of UK tax or who need to review their tax affairs to check they are compliant.

General description of the measure

The Requirement to Correct (RTC) will introduce legislation that will require taxpayers who have previously undeclared UK tax liabilities in respect of offshore interests to correct that position by disclosing the relevant information to HM Revenue and Customs (HMRC).

The consequence of not carrying out the necessary correction by 30 September 2018 will be the application of new tougher sanctions for Failure to Correct (FTC).

Policy objective

The objective is to get taxpayers with undeclared UK tax relating to offshore interests into a compliant position. At the end of the RTC period (September 2018) there will be simplified and tougher sanctions for offshore tax evasion.

The introduction of a new RTC and tougher penalties for the FTC sends a strong message that there is a step change in the government’s toughening approach to offshore tax compliance. The measure will introduce an obligation for taxpayers to put past affairs in order and strongly penalise those who do not meet this requirement. In doing so, the measure will drive taxpayers with offshore interests who are unsure whether they have declared the right UK tax to review their affairs to either:

• satisfy themselves they are compliant
• correct the non-compliance by disclosing the relevant information to HMRC

Background to the measure

The RTC past offshore tax non-compliance was first announced at Autumn Statement 2015 and confirmed at Budget 2016.

Following consultation (22 August to 19 October 2016), a response document and draft legislation was published on 5 December 2016.

Detailed proposal

Operative date

The RTC measure will have effect after Royal Assent to Finance Bill 2017. The RTC ‘window’ will be from Royal Assent to Finance Bill 2017 to 30 September 2018. After this period, from 1 October 2018 the FTC penalty for those who have failed to correct from 6 April 2017 to 30 September 2018 will apply.

Current law

The offences we want to be within scope of the RTC are ‘failing to notify chargeability’, ‘failing to make a return’ and ‘delivery of certain inaccurate documents to HMRC’.

Relevant legislation is drawn from the Taxes Management Act (TMA)1970, section 254 of Finance Act (FA) 2004 and Schedule 24 to FA 2007.

The penalties chargeable for the RTC offences were originally set out in the legislation at TMA 1970 and new provisions covering:

• schedule 24 of FA 2007
• schedule 41 of FA 2008
• schedule 55 of FA 2009
• schedule 20 of FA 2015 and schedule 21 to FA 2015
• schedule 24 of FA 2016

Proposed revisions

Taxpayers within scope of the RTC will be those who have not declared the right amount of UK tax in respect of offshore interests on or before 5 April 2017. These will be taxpayers who have done one of the following in respect of offshore tax:

• failed to notify chargeability
• failed to make and deliver a return
• delivered an inaccurate document (for example, a return) to HMRC

In addition the failure must relate to Income Tax, Inheritance Tax or Capital Gains Tax and not have been corrected on or before 5 April 2017.

Taxpayers within scope of the RTC are required to correct that position on or before 30 September 2018 by providing the appropriate information to HMRC. For example, a taxpayer who delivered an inaccurate return to HMRC by omitting a source of offshore income will be required to provide sufficient information to HMRC to allow that inaccuracy to be corrected by HMRC assessing the under-declared tax.

Where a taxpayer fails to correct the offshore tax non-compliance on or before 30 September 2018 the legislation will introduce a new sanctions for that failure. The new sanctions:

• are a tax geared penalty of between 100% and 200% of the tax not corrected - penalties will be reduced within this range to reflect the taxpayer’s cooperation with HMRC, including whether they came forward unprompted to tell HMRC of their failure
• are an asset based penalty of up to 10% of the value of the relevant asset would apply in the most serious cases, and involved over £25,000 in any tax year
• will have the ability for HMRC to name those who have failed to correct in the most serious cases, and where over £25,000 tax per investigation is involved
• will adopt the enhanced penalty for asset moves of 50% of the amount of the standard penalty, which would apply if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct
• will have no penalty where the taxpayer has a reasonable excuse for failing to correct the position. HMRC will also have the option of, exceptionally, charging the existing penalties instead if that is appropriate

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
-	+10	+25	+15	+60	+70

These figures are set out in table 2.1 of Autumn Statement 2016 as ‘Offshore Tax: close loopholes and improve reporting’. These figures represent the combined Exchequer impact of ‘Offshore funds: Calculation of reportable income’, ‘Foreign pension schemes’ and ‘Tackling offshore tax evasion: A requirement to correct’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2016.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

The Exchequer impact consists of additional tax resulting from a behavioural response whereby individuals come forward to disclose their offshore tax affairs as a result of the new sanctions.

Impact on individuals, households and families

This measure will have an impact on individuals with offshore interests reviewing their tax affairs to satisfy they are compliant.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

Any affected equality groups are likely to be those represented amongst those of above average wealth.

There is no data to identify the size of this group. Apart from those customers within this group, it is not anticipated that there will be adverse impacts on any other customers sharing protected characteristics.

Impact on business including civil society organisations

This measure will have no impact on businesses and civil society organisations who have correctly accounted for their UK tax liabilities in respect of offshore interests. It will only impact on businesses with income or gains offshore who evade their UK tax responsibilities.

Operational impact (£m) (HMRC or other)

HMRC already has teams in place to handle disclosures from customers and the impact on HMRC people staffing resource is expected to be nominal.

HMRC will need to make changes to Information Technology systems to process the new FTC penalties and the cost of these changes are estimated at £484,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be kept under review through communication with affected taxpayers and practitioners.

Further advice

If you have any questions about this change, please contact Steve Manning on Telephone: 03000 535682 or email: steve.manning@hmrc.gsi.gov.uk.