In life, some of us are perfectionists while others can live with the odd blemish. Not so with your UK tax affairs, especially when it comes to reporting anything going on outside the UK that has relevance in computing your UK tax liability. In such matters perfection is essential, and that includes how good your reporting has been in past tax years. The effect of recent legislation is that what might appear to be a minor blemish in prior reporting to Her Majesty’s Revenue & Customs (HMRC) could lead to truly eye-watering penalties. For example, when an overseas asset is involved, the penalties charged will include a charge equal to 10% of the asset’s value. This Armageddon scenario can be avoided, but there is a very limited time period in which to act.
The new penalty regime refers to inaccuracies in the prior reporting of “offshore matters” and “offshore transfers”. Without going into the detailed definitions, a simple rule of thumb is as follows. If something happened offshore (i.e. outside the UK) that had relevance to your UK tax affairs, and reporting to HMRC has been either absent or inaccurate, then the new penalties will apply unless HMRC receive a "correction" no later than 30 September 2018.
The tax return inaccuracies being targeted are those arising in the 2016/17 tax year (y/e 5 April 2017) and all earlier years. There are rules which determine how many past years can be examined by HMRC. A detailed discussion of those rules is beyond the scope of this briefing. However, given all the publicity in recent years concerning offshore disclosure facilities, HMRC are likely to take the view that a failure to correct amounts to at least “careless” behaviour on the part of the taxpayer. Depending on the facts, HMRC might argue that the omission was more serious and amounted to “deliberate” behaviour by the taxpayer. “Careless” behaviour allows HMRC to look back over six years, whilst “deliberate” behaviour opens up a 20-year window. Furthermore, given the mass of internationally exchanged data which HMRC is in the process of receiving, the legislation allows HMRC until 5 April 2021 to open any enquiries.
Correcting errors before the 30 September 2018 may still expose the taxpayer to penalties, but those will be raised under the "old" rules rather than the chilling new regime.
A recent article in a professional magazine contained a graphic example of the cost of not correcting by the 30 September 2018 deadline. In a perfectly plausible example of an accidental omission, the minimum penalty involved under the "old" rules after a voluntary disclosure would be £37,500, which HMRC have the power to suspend. However, if correction is not done until after the deadline, the penalties involved would range between £2,250,000 and £2,500,000.
The message is simple; if you have past errors and you don’t correct within the deadline, then it is likely to cost you an arm and a leg in penalties.