The enormous uncertainty around a new regime that may incur severe penalties to HNWs is baffling advisers and clients alike, writes Sophie Mazzier
The confusing messages which emanated from President Trump’s recent visit to this sceptred isle reminded me of the equally confusing statement by the then US Secretary of Defense Donald Rumsfeld, namely, 'There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don't know. But there are also unknown unknowns. There are things we don't know we don't know.' And it is these things that 'we don’t know that we don’t know' that professional advisers are attempting to address before 30th September 2018 when the 'Requirement to Correct' (RTC) rules come into force.
The RTC provisions were introduced by the Finance (No 2) Act 2017 and require taxpayers who may have outstanding UK tax liabilities which were in existence as at 5 April 2017 relating to offshore interests, to come forward to correct their filing and tax position before 30 September 2018. Those who fail to do so face severe financial penalties for non-compliance under the Failure to Correct (FTC) regime, in addition to the payment of the outstanding tax liability.
The introduction of the regime follows the global move towards increased tax transparency and the introduction of the Common Reporting Standard. As HMRC is now receiving information from multiple jurisdictions, it will be easier for them to detect taxpayer non-compliance (whether accidental, careless or deliberate) and pursue the recalcitrant tax payer. The consequences of falling into the FTC regime are eye-wateringly punitive; a standard penalty of between 100 per cent and 200 per cent of the tax not corrected; in addition to the standard penalty, a potential asset based penalty of up to 10 per cent of the value of the relevant asset where the tax at stake is more than £25,000 in any tax year; potential 'naming and shaming' where more than £25,000 of tax per investigation is involved and a potential additional penalty of 50 per cent of the amount of the standard penalty, if HMRC can show that the assets or funds had been moved to avoid the RTC.
It is right and proper that individuals should pay the tax they owe, and liability to a penalty does not arise if the taxpayer can satisfy HMRC that there is a reasonable excuse for the failure to correct. HMRC’s guidance provides:
HMRC recognises that there are circumstances when a person takes advice in good faith but then has tax non-compliance that should be corrected because the advice was wrong.
However, the RTC legislation contains additional provisions governing situations when you cannot claim to have a reasonable excuse because you relied on advice that turned out to be wrong, referred to as 'disqualified advice'. Broadly, this is where the person giving the advice did not have the required expertise; the advice did not take into account all relevant circumstances – the adviser must have been given full and accurate details of all relevant matters and care should have been taken in case the actual circumstances had changed by the time the advice was implemented; the advice was not given to the person that is seeking to rely on it, and was instead given to someone else; or the advice was given by an 'interested person'*, where in all circumstances it would be reasonable to conclude that the main purpose (or one of the main purposes) was to obtain a tax advantage.
But the actual wording of the implementing regulation is woolly to say the least, leaving advisers and clients alike worrying about the unknown unknowns as well as the known unknowns.
* An 'interested person' is someone who participated in an arrangement, or received consideration for facilitating entry into that arrangement. This should not catch established practices which HMRC has indicated it will accept. This may have the effect that the advice given by a suitably qualified adviser can be disregarded when they were involved in putting the relevant arrangements in place and advised on related tax compliance matters.
Sophie Mazzier is Counsel at boutique private wealth law firm Maurice Turnor Gardner LLP