The Requirement to Correct, or RTC, is a piece of legislation which demands that all UK taxpayers to get in touch with HMRC and notify them if they have offshore tax liabilities that had so far gone undeclared. This includes Capital Gains Tax, Income Tax, and Inheritance Tax.
The final date for RTC was 30th September 2018 for all tax which had gone undeclared before 6th April 2017. After this date, anyone who still has offshore tax liabilities is liable to receive a penalty.
Why was this legislation passed?
To understand the need for the RTC, you first need to understand how offshore tax evasion works. There are various ways in which an individual might avoid paying the correct amount of tax if they live abroad or have assets abroad. This may be on purpose, but could also be a mistake.
An individual might own a property abroad and decide to rent it out or sell it whilst they remain in the UK. If they do not inform HMRC about this income, this is tax evasion.
An individual may be the sole beneficiary to a will from a relative who lives abroad. If they then take over this person’s foreign bank account and they do not inform HMRC, this is also tax evasion.
Businesses have been known to register their company in another country where they will pay less tax on their income even though they actually trade in the UK. This, too, would be considered offshore tax non-compliance.
This is a bigger problem than it may first appear. A 2017 US study found that 73% of Fortune 500 companies were using offshore tax havens in 2016 to avoid paying the correct amount of tax. Corporate tax avoidance is estimated at $500bn, whilst personal tax evasion is estimated at $200bn.This is the case in America however the situation in the UK is comparable and, globally, around 8% of wealth is thought to be held offshore in an attempt to avoid paying the required tax on it.
Everyone is legally required to pay tax on what they earn so HMRC is clamping down on UK residents with harsher penalties for those who continue to avoid paying what they owe.
Who does the RTC apply to?
- Individuals, partnerships, trustees and some businesses who either live abroad but have a source of income (such as a rental property) in the UK.
- Those who have undisclosed Income Tax, Inheritance Tax or Capital Gains Tax abroad.
- Those with offshore income and gains (e.g. a property rented out abroad or sold and not reported to HMRC, or income made in the UK and transferred to an offshore account)
Foreign income includes:
- Wages for anyone that works abroad but it a UK resident
- Rental income or the sale of an overseas property
- Foreign savings accounts, investments, pensions and inheritance
If you are not sure whether or not you need to declare any form of income, the best thing to do is to contact HMRC and discuss your personal circumstances. It is always better to find out sooner rather than later, to avoid harsher penalties.
What would count as offshore tax non-compliance?
There are plenty of different variations on what would count as non-compliance meaning that if you aren’t sure it’s really best to check with HMRC. However, everything usually falls under one of these three categories:
- Failure to give notice of obligation to pay tax on your assets, under section 7 of TMA 1970
- Failure to file a return or submit other documents with HMRC, that you are obligated to.
- Delivering an inaccurate tax return or any other document with HMRC. This is particularly focused on returns which either understate the tax that you are liable to pay, or overinflates a loss to minimise the tax that you need to pay.
Are there any reasonable excuses?
HMRC will require anyone who failed to correct before 30th September 2018 to pay a penalty unless they have a reasonable excuse. It is at the discretion of HMRC whether or not they accept an excuse so it all comes down to the individual situation. However, HMRC are not willing to accept excuses where:
- Tax was not paid or reported under advice from another party.
- Tax was not paid or reported due to lack of funds (unless insufficient funds were caused by circumstances outside of your control).
- Financial matters were left up to another person.
A reasonable excuse may be accepted for the time period that the excuse covers (for example, if you were seriously ill or suffering a disability) but this must be corrected as soon as this problem ceases. So, for example, if you went into hospital for a long time and did not report tax or file a return during this time, you need to get in touch with HMRC as soon as you are out of hospital and file your return as soon as possible. HMRC would not accept you leaving it for a year after you have returned to work because you missed the deadline.
What are the penalties?
If you owe tax for offshore assets and have not informed HMRC then there will be a penalty. The minimum for this is 100% of the tax that has gone unrecovered, and the maximum is 200%. In cases where income and assets have been deliberately covered up, HMRC may even initiate a criminal prosecution.
HMRC intend to chase up all unrecovered tax but this will take some time as there is a sizeable amount of tax to deal with. They are giving themselves up to four years to claim back the tax from anyone whose mistake was not down to careless or deliberate behaviour. For those who have been deliberately hiding wealth, HMRC are allowing 20 years to work out and make a claim for this tax, as well as any penalties. However, for those who did correct this before 30th September 2018, there is no penalty, and they will just be asked to pay back the that they owe.
Further information and help
An Accounting Gem can talk you through all the options available to you regarding the Requirement to Correct Legislation. Please call us on 01473 744 700 or email us on email@example.com to find out more.