Penalties For Offshore Matters
UK residents with tax irregularities relating to any Offshore Matters are likely to be subject to stringent higher penalties. These include the ultra-harsh Failure To Correct penalties - which apply to all years up to 2015/16. For later years the "normal" penalties rules apply, but with some added severe penalties for offshore issues.
The special penalty rules relating to additional tax charged in relation to Offshore Matters are very complicated. They apply to Income Tax; Capital; Gains Tax; and Inheritance Tax (but not to VAT or Corporation Tax). The ultra-harsh Failure To Correct (F2C) rules apply to all tax years up to 2015/16. But there are severe additional penalties for Offshore Matters for later years also. For convenience, we have broken the rules down into 3 sections below: penalties applying to years up to 2015/16 only; those applying to later years only; and those applicable to all years.
The Failure To Correct sanctions: Tax Years up to 2015/16
- The ultra-harsh F2C tax-related penalties will apply to any additional tax charged related to an Offshore Matter for any years where HMRC collects extra tax, up to and including 2015/16.
- From 6 April 2021 the normal rolling time limits will apply: i.e. there is a 20-year time limit in cases involving Deliberate Errors in Tax Returns (made by the taxpayer or any agent) and in all cases of Failure To Notify (where there is no Reasonable Excuse); and the usual 4-year limit for innocent errors and 6-year time limit for Careless Errors. So, as at 6 April 2021, in cases of Deliberate non-compliance HMRC can go back to the year 2001/02.
- However, up to 5 April 2021 those usual assessing time limits have been temporarily extended by up to 4 years: e.g., for Careless errors undeclared income for the years 2011/12 to 2013/14 can be taxed up to 5 April 2021.
- F2C standard penalties are 200% of the tax lost. Penalties can be reduced according to the Quality of the Disclosure.
- In cases of full and high-quality Unprompted Disclosure the absolute minimum penalty is still a massive 100% of the under-declared tax.
- In other cases (i.e. Prompted or Incomplete Disclosures) the standard F2C penalties start at 200% of the tax owed, and can only be reduced to a minimum of 150% of the undeclared tax: dependent on the Quality of the Disclosure. So, the standard F2C penalty alone can be double the previously undeclared tax amount.
- A Disclosure made following a so-called "nudge" letter from HMRC is considered as Prompted.
- In addition to the penalties above, further, harsh penalties can also apply to the years up to 2015/16: see "all years" below.
Normal rules: 2016/17 and onwards
- For the tax years 2016/17 and later the Failure To Correct penalties do not apply; instead, the normal rules generally apply (see our guidance on Penalties For Incorrect Tax). The maximum standard penalty is 100% of the undeclared tax. But additionally, in certain circumstances, there can be some extra tough penalties for Offshore Matters.
- The normal rolling 20-year time limit will still apply to cases involving Deliberate Errors in Tax Returns (made by the taxpayer or any agent) and in all cases of Failure To Notify (where there is no Reasonable Excuse; or prior to 2009/10 no Negligence). So, as at 5 April 2021 in cases of Deliberate non-compliance HMRC can go back to the year 2000/01; whereas for Careless Errors they can go back to 2014/15, and for Innocent Errors only back to 2016/17.
- However, taxpayers can earn substantial reductions in the penalties charged by making High Quality Disclosures.
- The minimum penalties in Deliberate Error cases involving Offshore Matters are increased by 10% for all those years.
- Where irregularities go back more than 3 years prior to the Disclosure, then the maximum reduction of penalties for those earlier years is restricted by 10%.
- For years from 2016/17 onwards, an "Offshore Uplift" can apply to any standard penalties charged. Those penalties can be increased to 150% or 200% of the normal penalty - where the underlying offshore assets are held in countries with low reporting transparency. Therefore, the level of penalty depends on the Category of the Territory in which the offshore assets are held. E.g. The penalties where Jersey (a Category 2 Territory) is involved are multiplied by 1.5 of the normal penalty (after applying the normal reductions). And where Dubai (a Category 3 Territory) is involved, penalties charged are doubled.
- In the worst cases (of poor or incomplete Disclosures) the additional tax, plus the normal penalty, and plus the Offshore Uplift penalty can be triple the amount of tax itself! And there is yet worse to fear as well: see "All Years" below.
- In addition to all the other penalties applicable, there can be an additional “Offshore Asset Move Penalty”. This can apply if an offshore asset was deliberately moved to an alternative offshore jurisdiction - in order to avoid or delay detection for non-compliance. It only applies where penalties are already being charged for Deliberate Behaviour. Then the Offshore Asset Move Penalty is a yet further penalty up to 50% of the initial penalty (i.e. up to 300% of the tax!). So, the additional tax plus the standard penalty and plus the Offshore Asset Move Penalty can be quadruple the amount of tax itself! The trigger dates for the Offshore Asset Move Penalties are where assets are shifted after: 26 March 2015 for “Failure” cases; 1 April 2016 where IHT is involved; and 16 November 2017 for Error cases.
Worse again, where the undeclared tax is greater than £25,000 in any year then, in cases of Deliberate non-compliance, there can be a still further F2C penalty: known as the “Asset-Based Penalty”. This additional penalty is equal to the lower of: 10 times the amount of the undeclared tax, or 10% of the value of the offshore asset. That penalty can be reduced in respect of the: quality of disclosure and information provided; and the accuracy of the asset valuation. The maximum reduction is 50% for Unprompted Disclosures, and only 20% for Prompted Disclosures. So, the lowest possible Asset-Based Penalty in Prompted cases would still equal the lower of: 5 times the amount of the undeclared tax, or 5% of the value of the offshore asset.
HMRC can apply reductions for all penalties in “Special Circumstances”, but these are expected to apply in only the most exceptional situations.
As usual, interest will be charged at a commercial rate on the late paid tax.
The total amount of tax, interest, and penalties can easily exceed the total of the undeclared income and gains and/or the value of the offshore assets themselves.
And for further bad news, for all years, the " Naming and Shaming " provisions could also apply: meaning personal details can be published - where the undeclared tax is more than £25,000 for all years, and HMRC are not happy with the quality of the disclosures.
- As ever, HMRC reserve the usual right to prosecute in the most serious cases (unless Code Of Practice 9 has been issued). Where HMRC achieve a conviction then they will use the Proceeds Of Crime Act to confiscate the alleged "Criminal Assets".
How can Lynam Tax Enquiry Experts help me get a lower penalty?
Lynam Tax specialists are experts in Offshore Disclosures and Tax Penalty negotiations. We have dealt with hundreds of Offshore Disclosure cases. And we have over 90 years' experience in negotiating tax penalty levels. We can use our expertise to substantially reduce, and sometimes eliminate, the penalties that the tax inspector is demanding. We have helped hundreds of taxpayers achieve substantially lower penalties than those first sought by the taxman; including zero penalties in suitable cases.
*For Expert Advice, Guidance and Support: Call Paul: 0845 643 9997
*PS: If you, or a client, are facing HMRC penalties Lynam Tax Enquiry Experts can help. The sooner in a Tax Enquiry or Disclosure you involve us, the more we can potentially save: in tax, interest, penalties - and general stress and worry.
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