The offshore tax net tightens
Common Reporting Standard
The Common Reporting Standard (CRS) is a very innocuous, not to say boring, name for something that represents an important change in international tax. The CRS came into being in 2014 when all 34 OECD countries, along with 13 others, agreed to share information on assets and incomes with each other. Many more countries have since joined, taking the number up to more than 100.
Information held by one country’s tax authority relating to a resident of another country will be sent automatically to that other country’s tax authority. This is a major change, as previously a request had to be made, but now it will be shared even if there is no suspicion of wrongdoing. The UK is an ‘early-adopter’ of the CRS and has already started receiving information.
This led to the ‘Worldwide Disclosure Facility’, which opened on 5 September 2016. Anyone who wants to disclose a UK tax liability that relates wholly or partly to an offshore issue can use the facility. An offshore issue
includes unpaid or omitted tax relating to:
- income arising from a source in a territory outside the UK
- assets situated or held in a territory outside the UK
- activities carried on wholly or mainly in a territory outside the UK
- anything having effect as if it were income, assets or activities of a kind described above
- income (or sale proceeds in the case of a capital gain) that arose in the UK but was either received or transferred abroad before 6 April 2017
- a disposition that gives rise to transfer of value for IHT purposes involving assets that are transferred outside the UK before 6 April 2017.
It also includes funds connected to unpaid or omitted UK tax not included above, that you’ve transferred to a territory outside the UK or are owned in a territory outside the UK. At the same time substantial penalties were introduced – see here. After September 2018 new sanctions will apply under the Requirement to Correct regime introduced by the Finance (No.2) Act 2017 to reflect HMRC’s even tougher approach.
Requirement to Correct
This could affect you if you own and let a property overseas, have an offshore bank account or shares in an overseas company. If you have always properly reported and paid tax on your overseas income and gains in full, then you’re unlikely to notice the difference.
But anyone who hasn’t reported their overseas income and gains, or has under-reported them, has until the Requirement to Correct (RTC) deadline of 30 September 2018 to disclose them to HMRC and take advantage of the significant discounts on penalties available for those who tell HMRC before it finds out.
Penalties for failure to correct
If non-compliance is not corrected by 30 September 2018, the following penalties may be imposed.
- An RTC standard penalty of 200% of the tax involved. This can be reduced, but the minimum is 100% of the tax involved, unless HMRC thinks there are special circumstances that justify a further reduction. These do not include a potential loss of revenue from one taxpayer balanced by a potential overpayment by another.
- An asset-based penalty of up to 10% of the value of assets connected to a failure to comply if the tax involved exceeds £25,000 in any tax year.
- An ‘offshore asset moves’ penalty equal to 50% of the RTC standard penalty if assets were moved to avoid having details reported to HMRC under international agreements on exchange of information.
- The taxpayer’s name and address will be published if more than £25,000 tax is involved. Full details on how these sanctions will be applied will be published before 30 September 2018.
These penalties will be chargeable if taxpayers fail to correct by 30 September 2018, unless they can demonstrate a ‘reasonable excuse’. If so, there will be no RTC penalty, but the tax will be payable, with interest.
Possible omissions from tax returns
Examples of possible omissions from tax returns include rent from an overseas holiday home, a gain realised on the sale of such an asset and benefits derived from offshore ‘bonds’ (which often take the form of single premium life policies, such as the Holiday Property Bond, which is explained in more detail below). While UK insurers will advise policyholders of any amount chargeable when benefits are enjoyed, overseas insurers are unlikely to.
Extension of period for assessment of offshore tax
The legislation also gives HMRC more time to ask for offshore tax. For example, they will always have at least until 5 April 2021 to assess something which should have been reported to HMRC before 6 April 2017.
If you have any undisclosed offshore (or indeed UK) income or gains, contact Shipleys as soon as possible so you can take advantage of the reduced current penalties before the much harsher regime comes into effect. The
alternative is to wait until HMRC analyses its information and contacts you, at which point the significant reduction in penalties for coming clean will no longer apply. There is even the possibility of prosecution in large or extreme cases.
Holiday Property Bonds
A Holiday Property Bond is a non-qualifying life policy written by an Isle of Man insurance company. The policyholders get ‘holiday points’ that entitle them to ‘rent-free’ use of properties from a choice of over 1,000 properties. In practice there is a modest ‘user charge’ payable. As unit-based whole life policies, on maturity the value of the units is paid plus a modest life cover sum.
If their advertising is to be believed, there must be a value realised on each occasion when holiday points are used, as well as on maturity or earlier surrender. If not reported in time, the aggregate of this return might exceed the initial premium and result in an income tax liability. For more details, see www.hpb.co.uk