UK taxpayers with offshore interests have a limited time to make sure they are meeting their British tax obligations – or risk costly penalties under new rules.
Part of the UK’s new Finance Bill, the ‘Requirement to Correct’ regime gives UK residents with overseas assets a deadline of September 2018 to fix their tax arrangements. Failure to correct inaccurate UK tax declarations – whether intentional or not – can lead to eye-watering penalties of up to three times the tax that should have been paid.
Who is affected?
You should not assume that this measure is only targeting deliberate tax evaders and questionable offshore tax havens. It potentially affects any Briton who owns overseas financial assets and/or receives income outside the UK, including bank accounts, rental income, investments, trusts and property. As such, UK residents with cross-border interests need to take particular care to ensure their tax planning is in order, even if they are non-UK domiciled.
What are the rules?
The new penalties will apply where there is unpaid UK income, capital gains or inheritance taxes on offshore income, assets or activities up to and including April 6, 2017. This could be the result of inaccurate declarations to HM Revenue & Customs (HMRC) or not filing a tax return at all – whether done deliberately, or through carelessness or inappropriate advice.
If irregularities are not corrected by September 30, 2018, a standard penalty of 200% the tax owed applies. Although co-operation with HMRC can potentially reduce this charge, it will not go below 100%. Where underpaid UK tax exceeds £25,000, there will be an additional ‘asset based penalty’ of up to 10% the value of the related assets. This is all on top of the original tax to be paid.
If HMRC determines that you moved assets to another country to avoid liability, you could pay another 50% of the standard penalty charged, generating a potential total bill 300% higher than the original tax owed. Serious cases could even lead to criminal charges.
However, HMRC will consider “reasonable excuses” for non-compliance. This could be, for example, where you have acted on professional advice that unknowingly results in unpaid UK taxes – but it is not that straightforward. You may have no defence, for example, if you receive ongoing advice from the same adviser that set up the non-compliant situation in the first place (an “interested party”).
What you can do?
Even if you believe your house is in order, you may owe taxes without realising it. It is crucial to review your tax planning to make sure you are compliant – not checking could be an expensive mistake to make if you find yourself subject to the penalties of 200%+ in a few months’ time.
If you correct non-compliance before the September deadline, the tax owed and interest will be collected with the existing penalties applied, often as low as 10%.
In any case, you may prefer to make a ‘nil tax’ voluntary disclosure to HMRC about your offshore interests before the September deadline to confirm that your tax obligations have been met.
Increased worldwide scrutiny
The Requirement to Correct is just one part of a range of new tax avoidance measures from the UK government. It has introduced over 100 initiatives since 2010, netting an extra £160 billion in revenue.
The timing of this latest effort is designed to match the date HMRC starts to receive full data under the global ‘automatic exchange of information’ regime. Here, over 100 countries have committed to share information on taxpayers’ financial assets and income. The 54 “early adopters” – including the UK, Portugal, Spain, France, Cyprus and Malta – began sharing data between themselves in September; another 50 – including Switzerland and Monaco – will join them by September 2018.
This means your local tax office will receive financial information about you without having to even ask for it, enabling them to verify whether tax return declarations are accurate.
With today’s heightened scrutiny, it is more important than ever to take care with your tax and financial planning. Remember, it is your responsibility to regularly check you have declared all your worldwide tax liabilities and bring your tax situation up to date if necessary.
But cross-border taxation is highly complex. As well as the changes to UK tax legislation, you need to understand the rules in Portugal or wherever you have financial interests – and how they interact – to make sure you are getting it right.
Taking personalised, professional advice from an adviser with cross-border expertise can help you enjoy favourable tax treatment while offering peace of mind that you are meeting your tax obligations, here and in the UK.
All information in this article is based on Blevins Franks’ understanding of legislation and taxation practice at the time of writing; this may change in the future. It should not be construed as providing personalised taxation, investment or pension advice. You should take advice for your circumstances.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks and has been providing holistic financial planning advice to UK nationals in the Algarve since 2007. Adrian is professionally qualified, holding the Diploma for Financial Advisers.