‘We have information that shows you may have received overseas income or gain that you may have to pay UK tax on. We have received this information through the UK’s tax information exchange agreements with other countries.’
As the summer draws to an end, HMRC have begun issuing letters about ‘Your overseas assets, income or gains’. For several years, letters have been sent to UK residents that own offshore income or assets. Overseas financial intermediaries report to their tax authorities who in turn report to the UK. HMRC compare ‘the information…..received with your tax record and tax return’. The letter states they believe that you may not have not paid the right amount of UK tax and they ‘want to help make sure you are paying the right UK tax on your overseas income and gains’.
I am not sure many taxpayers genuinely trust HMRC to help them pay the right UK tax. I suspect many will consider that HMRC will collect the most amount of tax they can without considering whether there are factors that would reduce any liabilities. More recent approaches by HMRC appear to allege a right to go back up to twenty years. Whilst this is true, it is only possible for HMRC to go back this far where the act resulting in a loss of revenue were deliberate. More concerning is where HMRC assert they can go back twenty years the reasons provided clearly ignore the law.
We have recently seen written communication simply stating a tax liability was obviously brought about deliberately without explanation. Also, another communication asserting that in the absence of a reasonable excuse the act is deliberate and proceeding on the basis the act or acts were deliberate.
Let’s assume that Bob, the almost honest taxpayer, forgot to disclose the disposal of an asset or overseas income. HMRC have stated that want to help Bob pay the right amount of tax. Would Bob choose to believe HMRC will help him, look after his best interests and guide him through the complexities of tax legislation, manage the risks of higher penalties and the ultimate risk of the offshore criminal offence? It strikes me that HMRC may be conflicted because whilst they are obliged to collect only the right amount of tax and ‘help’ a taxpayer, they are also employed by the Government.
The Government has some outstanding employees, including those that blatantly partied on during lock down, misrepresented the facts during the leave campaign and led the country into wars stating untrue justifications. A business is often successful because of the vision and values shared by employees and the employer. The behaviour of the ultimate employer probably does little for a taxpayer to genuinely believe HMRC will be helpful or even to want to pay the right amount of tax. It is the fear of what HMRC may do that encourages good behaviour.
The Failure to Correct regime started on 30 September 2018, with punitive penalties, including:
- A tax geared penalty (100% to 200%) of the tax not corrected.
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year;
- Potential “naming and shaming”; and
- A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the requirement to correct.
Anyone who fails to correct their position despite knowing that they should do so may also face:
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year; and
- Potential “naming and shaming”
The penalty regime is complicated and mitigating penalties starts at the point communications open with HMRC. One of the reasons it is important to be represented is to ensure the lowest possible penalty in the circumstances can be achieved. Those not knowledgeable will inevitably end up with significantly higher penalties.
However, the risks with undisclosed offshore income and gains is greater than penalties. HMRC will generally investigate those with offshore assets to a standard for criminal prosecution. That does not mean they prosecute in all cases, although the Offshore Criminal Offence was introduced by Finance Act 2016 potentially making prosecution easier.
HMRC do have increased targets for prosecution and it is therefore likely that over the next few years, more taxpayers will face prosecution. An easy way to increase prosecutions would be to invoke the Offshore Criminal Offence.
The offshore criminal offences which apply for the purposes of income tax and capital gains tax only, apply where a person has failed to declare offshore income or gains in accordance with TMA (1970) Sections 7 and 8. The offence applies where the loss of tax meets the threshold amount. The offences do not prescribe the need to prove intent for failing to declare taxable offshore income and gains. All you need to have done is failed to include something on your tax return.
A reasonable excuse may prevent the offence being invoked. Reasonable excuse is not defined by legislation. HMRC consider reasonable care to be a standard of care undertaken by a prudent reasonable person although also identifying the person’s ability and circumstances. HMRC’s ever useful guidance defines a reasonable excuse as “an unexpected or unusual event that is either unforeseeable or beyond the person’s control, and which prevents the person from complying with an obligation to notify when they would otherwise have done” and assess whether a taxpayer exercised “reasonable foresight and due diligence” that would be expected of a prudent taxpayer.
Many may suggest that they relied on an adviser and that constitutes reasonable excuse. HMRC will not normally accept reliance on a third party as a reasonable excuse unless he took reasonable care to avoid the failure.
A person guilty of an offence under section 106B, 106C or 106D TMA 1970 may face an unlimited fine and/or imprisonment not exceeding 51 weeks (six months in relation to an offence committed before section 281(5) Criminal Justice Act 2003). In Scotland or Northern Ireland, the fine must not exceed Level 5 on the standard scale and/or to imprisonment for a term not exceeding six months.
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