Correcting historic tax liabilities

Although tax may be automatically deducted from wages, pensions and savings, the onus is on the taxpayer to self-assess and inform HMRC of anything which is untaxed or under-taxed

04 September 2019

Nowhere to hide 

There is a common misconception that wealth can be hidden offshore, out of sight of the tax authorities. Whether or not this was ever the case in the past, an international drive to tackle tax evasion and money laundering means that it is becoming increasingly easy for governments to obtain details of residents’ assets located in other jurisdictions. The UK has implemented a network of agreements for the automatic exchange of information with a host of other countries, including the majority of the offshore financial centres such as the Channel Islands, the Isle of Man, the British Virgin Islands, the Cayman Islands and The Bahamas. HMRC is developing sophisticated systems to process the information it receives and identify possible tax evasion.

Don’t “brush it under the carpet” – the importance of unprompted disclosure

There are many ways in which individuals, companies and trustees may find themselves with historic unreported tax liabilities, such as inadequate advice, oversight, ignorance of the rules or a series of poor decisions. Some inadvertently become associated with an arrangement set up by a spouse or relative who was non-compliant. Whatever the reason, it may seem tempting to remain silent and hope the problem never comes to light.  However, doing so would be a mistake. In addition to the fact that interest on any unpaid tax liability will continue to mount until it is paid, penalties will be more severe if HMRC discovers the issue than if the taxpayer makes a voluntary, unprompted disclosure.

By way of example, HMRC can impose penalties at rates of between 10% and 30% of the tax due where a taxpayer comes forward of his own volition to notify HMRC of a taxable item which, due to a failure to take reasonable care, was not reported in time. However, where the disclosure has been “prompted” by HMRC – that is, if the taxpayer had reason to believe that HMRC was about to discover the unpaid tax – the penalty can never be less than 20%. 

The jurisdiction in which the assets associated with the tax liability are situated is also relevant: the range of penalties is lower where the jurisdiction in question has agreed to the automatic exchange of information with the UK (known as a Category 1 territory), compared to one which has not (a Category 3 territory), or which only does so on request (a Category 2 territory). The 10% to 30% penalty range mentioned above applies where a Category 1 territory is involved, whereas the same facts could result in penalties between 20% and 60% in the case of a Category 3 territory. The categories can be found on the Government’s website here.

Where the non-compliance relates to an offshore matter and pre-dates 5 April 2017, it may fall within the ambit of the Failure to Correct (FTC) legislation, which could entail penalties of 200% of the tax due, or 300% where assets have been moved to evade detection. In certain cases HMRC can apply an additional penalty of up to 10% of the value of the assets connected to the non-compliance. Please see our article for details of the FTC. Where the FTC applies, voluntary disclosure can reduce the penalty to 100% of the tax due.

Depending on the nature and circumstances of the omission, HMRC can go back four, six, 12 or 20 years in assessing unpaid tax and imposing penalties. 

In addition to penalties, HMRC has the power to publish the names of deliberate tax defaulters – known as “naming and shaming”. In the most serious of cases, where the conduct involved is seen to justify it or if HMRC wants to send a strong deterrent message, then criminal proceedings can also be initiated.

The penalties and other punitive measure mentioned above can all be substantially mitigated by a timely disclosure conducted in an open and cooperative manner.

How to set things straight

Over the past ten years or so, HMRC has sought to encourage taxpayers to disclose historic tax liabilities by running a number of “disclosure facilities”, structured disclosure programmes which offer generous terms to those who make use of them.

The attractive disclosure facilities have now come to an end and the only facility which is currently available is the Worldwide Disclosure Facility (the WDF). The WDF does not promise particularly advantageous treatment, but it does provide a streamlined approach via an online portal which can make a disclosure more efficient. However, whilst the WDF may be appropriate in some cases, in others the rigid format and fixed timeframe may cause problems.

Assuming that it is too late to file an amended tax return, the main alternative to the WDF is to write to HMRC. There is no clear channel for doing this, so there is a possibility of delay whilst HMRC allocates the matter to an Officer in the appropriate department. Writing to HMRC lacks the clear structure of a disclosure facility, but it may be preferable in cases where greater flexibility in the form of the disclosure is desirable.

Careful consideration needs to be taken as to the best approach. HMRC encourages use of the WDF, but it cannot force taxpayers to take this route.

How can Burges Salmon help?

Time is of the essence in disclosing a tax liability, but it is also vital to go about it in the right way. The approach that is adopted can significantly impact the sanctions which HMRC ultimately imposes.  Although it is not possible to “do a deal” with HMRC to pay less tax than would have been paid had the taxpayer been fully compliant, where there are missing records, legal uncertainty or areas of ambiguity then the disclosure may entail an element of negotiation. This is particularly the case where penalties are in issue, as these require an assessment of the taxpayer’s behaviour.  Understanding HMRC’s powers and the taxpayer’s rights is also essential.

Burges Salmon advises individuals and entities on tax compliance and has extensive experience assisting with disclosures of all types. Should you wish to discuss this please contact John Barnett or Berry Bloomberg in our Tax, Trusts and Family team.

This article was written by Berry Bloomberg.

Key contact

John Barnett

John Barnett Partner

  • Head of Private Client Services
  • Head of Partnerships
  • Tax

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