Requirement to Correct: New penalty regime applicable to historic tax non-compliance

What is it?

Individuals and trustees have until 30 September 2018 to disclose historic offshore tax non-compliance to HM Revenue & Customs (HMRC) or face new 'failure to correct' penalties for the non-compliance.

The penalties are significant and start at 200% of the outstanding tax due. In serious cases the penalty is up to 10% of the offshore asset value, with the possibility of public naming and shaming.

The new penalty regime applies to offshore non-compliance outstanding as at 6 April 2017 for income tax and capital gains tax (16 November 2017 for inheritance tax). Under the new penalty regime, the 200% default penalty can be reduced to a minimum of 100% depending on the timing, nature and extent of the disclosure.

Previous tax advice may need to be reviewed

The new penalty regime significantly restricts the circumstances in which a taxpayer can argue that a defence of 'reasonable excuse' applies. Previously, a taxpayer who had taken tax advice from a suitably qualified professional (such as a lawyer, accountant or tax adviser) might be able successfully to claim a defence of 'reasonable excuse' in order to prevent penalties applying.

However, under the new penalty regime, the defence of reasonable excuse is no longer available in certain circumstances, such as where tax advice turns out to be incorrect, where:

• the advice was given by a tax adviser, accountant or lawyer who advised on both the tax advice and its subsequent implementation;
• trustees or an individual have relied on advice addressed to a third party (such as advice to a settlor of a trust which trustees administer);
• if the person giving the advice did not have the appropriate expertise; or
• where the advice failed to take account of all relevant circumstances.

Advice that cannot be relied on because of these rules is referred to as 'disqualified'. Advice will not be disqualified if a taxpayer takes reasonable steps to ascertain whether advice is disqualified and reasonably concludes that it is not.

What action should trustees take?

Trustees should therefore review historic tax planning that has been undertaken, especially where planning was undertaken historically on the basis of a reasonable view of the law at the time, but where a case decided subsequently has determined that such arrangements are not in fact effective.

We recommend trustees ensure that they have carried out a 'requirement to correct' risk assessment in respect of all structures they administer with a UK connection, to ensure that trustees have complied with their UK tax obligations.

If trustees wish to rely on existing tax advice where there is a particular concern or where tax advice was addressed to a third party (such as a settlor or beneficiary) rather than the trustees, they should consider obtaining a second opinion. Trustees should be especially careful to ensure that they are fully compliant, particularly in the area of inheritance tax or where there has been UK source income or UK situated assets within the structure.

We will be very happy to discuss further, including undertaking a 'health check' where there is any doubt about existing advice, the options for arranging a second opinion from external counsel, or carrying out a disclosure where a correction is required.