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TAX PENALTIES: OFFSHORE NON-COMPLIANCE

This note describes the personal tax penalty regimes that apply to tax non-compliance involving an offshore jurisdiction. Specifically, it describes how the penalty regimes for errors (inaccuracies) in returns, failure to notify a tax liability and late filing are applied in the context of offshore non-compliance. It also describes the specific penalty regimes aimed solely at offshore non-compliance, including the aggravated penalty for offshore asset moves, asset-based penalties, the strict liability criminal offence and requirement to correct penalties.

The regimes apply for income tax, capital gains tax (CGT) and inheritance tax (IHT) purposes.

For an explanation of the domestic penalty regimes that apply to errors in returns, failure to notify tax liabilities and late filing of a return persisting for 12 months, see Practice note, Tax penalties: direct tax: culpable penalties. For other penalty regimes, including the regimes that apply to other categories of late filing and late payment, see Other penalty regimes.

HMRC guidance on offshore penalties is set out in the Compliance Handbook (CH). HMRC has also published a factsheet on offshore penalties as part of its compliance check series (see HMRC: Compliance checks series: CC/FS17: Higher penalties for offshore matters).

Offshore penalty regime for inaccuracies and failures

The offshore penalty regime increases the penalties that HMRC may assess under the following regimes:

The increased penalty rates are linked to how readily the offshore territory shares information with HMRC.

Penalty rates linked to how offshore territories share information with HMRC

There are currently three categories of offshore territories:

  • Category 1 territories. Penalties of up to 100% apply in relation to territories with which the UK has automatic exchange of information (including the Cayman Islands, Guernsey, the Isle of Man, Liechtenstein, Switzerland, the USA and all the EU member states, except Austria and Luxembourg).
  • Category 2 territories. Penalties of up to 150% may apply where information is exchanged only on request (including Austria, the Bahamas, Belize, Bermuda, the British Virgin Islands, Gibraltar, Jersey, Luxembourg and Singapore).
  • Category 3 territories. Penalties of up to 200% may apply where a territory does not share information with the UK (including Panama and the United Arab Emirates).

Any territory not designated as category 1 or 3 is automatically in category 2. The categories are designated by Treasury order (see Penalties, Offshore Income etc (Designation of Territories) Order 2011 (SI 2011/976)), taking account of a range of factors including the existence and quality of arrangements for exchange of information between the UK and the relevant territory (see Offshore matters and offshore transfers). The list of countries in each category was revised by the Penalties, Offshore Income etc (Designation of Territories) (Amendment) Order 2013 (SI 2013/1618) with effect from 24 July 2013. Switzerland and Liechtenstein moved from category 2 to category 1.

From a date to be appointed by Treasury Order, the three categories of penalties will be increased to four. There will be a new category 0 (with penalties of up to 100%) and the category 1 penalties will increase by 25% to up to 125%. (Category 2 and 3 will remain at 150% and 200%.) The category 0 territories will be designated by regulations. The intention is that only territories that have agreed to automatic exchange under the Common Reporting Standard (CRS) will fall into category 0. (Section 120 and Schedule 20, Finance Act 2015.)

HMRC has historically offered reduced penalty rates under various amnesties and taxpayers were able to benefit from these rates if they complied with the terms of the amnesty. Otherwise, the statutory penalty rates are the appropriate starting point (see Townend v HMRC [2016] UKFTT 276 (TC), discussed in Legal update, Amnesty penalty not starting point for inaccuracy penalty when amnesty terms not met (First-tier Tribunal)).

(Paragraph 21A, Schedule 24, Finance Act 2007, paragraph 6A(7), Schedule 41, Finance Act 2008 and paragraph 6A , Schedule 55, Finance Act 2009.)

Exchange of information

The UK may exchange or receive tax information with another jurisdiction automatically or on request under:

•        A double taxation treaty or a tax information exchange agreement (see Practice notes, Double taxation treaties and agreements (income, capital gains and corporation tax), Double taxation treaties (inheritance tax, capital transfer tax and estate duty) and Tax information exchange agreements).

•        A tax co-operation agreement, such as that concluded between the UK and Switzerland (see Practice note, UK/Switzerland tax co-operation agreement).

•        The US Foreign Account Tax Compliance Act (FATCA) (see Practice note, A guide to Practical Law’s FATCA resources.

•        Agreements with Crown dependencies (see Legal update, Regulations to implement FATCA-style agreements with Crown dependencies and Gibraltar published).

•        Agreements with British Overseas Territories with significant financial centres (see Legal update, British overseas territories agree to exchange information).

From 30 September 2018, automatic exchange is under competent authority agreements with non-EU jurisdictions that have adopted the Common Reporting Standard (CRS), FATCA and for EU jurisdictions under Directive 2014/107/EU, which, broadly, implements CRS in the EU. (For further discussion, see Practice note, CRS, EU administrative co-operation and FATCA: UK implementing regulations.)

 

Offshore matters and offshore transfers

The offshore penalty regime applies where the inaccuracy, failure to notify or late filing involves an offshore matter or offshore transfer.

Definition of offshore matter

An offshore matter is involved if, broadly, the resulting potentially lost revenue is charged to tax on or by reference to any of the following:

  • Income arising from a source in a territory outside the UK (for example, interest arising from an overseas bank account).
  • Assets situated in or held in a territory outside the UK (for example, the disposal of overseas property).
  • Activities carried on wholly or mainly in a territory outside the UK (for example, trading outside the UK).
  • Anything having effect as if it were any of the above.

Definition of offshore transfer

A transfer is an offshore transfer if each of the following is satisfied:

  • It does not involve an offshore matter.
  • It is deliberate and results in a potential loss of revenue.
  • The tax at stake is income tax, capital gains tax or inheritance tax.
  • Some or all of the income, disposal proceeds or assets giving rise to an IHT charge are received in or, as the case may be, transferred (before the applicable date) to, a territory outside the UK.

The applicable date is:

  • For inaccuracy penalties, the filing date of the relevant return.
  • For failure to notify penalties, the date by reference to which the PLR is calculated.
  • For late filing penalties, the date on which the taxpayer becomes liable to penalties.

(Paragraphs 4A and 4AA, Schedule 24, Finance Act 2007, paragraphs 6A and 6AA, Schedule 41 Finance Act 2008 and paragraphs 6A and 6AA, Schedule 55, Finance Act 2009.)

The offshore transfer provisions were introduced by the Finance Act 2015. Before their introduction, anything not involving an “offshore matter” was a domestic matter and subject only to domestic penalties. For example, if profits from a UK trade were deliberately diverted to an offshore account, that was purely a domestic matter. If the interest on the income held offshore was not declared, that would be an offshore matter. The offshore transfer provisions were introduced to ensure that the diversion of profits is subject to the higher offshore penalties.

Inaccuracies in documents

Conditions

A tax-geared penalty applies to inaccuracies in returns (and other documents) involving offshore matters or offshore transfers, where the taxpayer:

(Paragraphs 1 and 3, Schedule 24, Finance Act 2007.)

The penalty is a percentage of the potentially lost revenue (see Potential lost revenue). The percentage is determined by the taxpayer’s behaviour and the overseas territory involved (see Penalty percentage determined by behaviour and jurisdiction).

HMRC may publish details of persons who incur a penalty for deliberate inaccuracies (see Practice note, Tax penalties: direct tax: culpable penalties: Publishing details of deliberate tax defaulters and tax evaders (”naming and shaming”)).

If a taxpayer discovers that an assessment or determination issued by HMRC understates their liability and the taxpayer fails to notify HMRC of the under-assessment within 30 days, the taxpayer is liable to a penalty of 30% of the potential lost revenue (paragraph 2 and 4C, Schedule 24, Finance Act 2007). However, the increased penalty rates discussed in this note do not apply to those penalties and are not, therefore, discussed further in this note.

Commencement

The offshore penalty regime for inaccuracies in tax returns and documents involving an offshore matter commenced for income tax and CGT purposes from 6 April 2011. However, the provisions do not apply to inaccuracies in documents given to HMRC or assessments made by HMRC in relation to a tax period commencing on or before 5 April 2011. (Finance Act 2010, Schedule 10 (Appointed Days and Transitional Provisions) Order 2011 (SI 2011/975).)

The offshore penalty regime was extended by the Finance Act 2015 to include offshore transfers for income tax and CGT purposes for tax years commencing on or after 6 April 2016. Additionally, IHT was brought within the offshore regime for transfers of value made on or after 1 April 2016 (that is, inaccuracies in documents submitted for deaths and chargeable events occurring on or after 1 April 2016). (Finance Act 2015, Schedule 20 (Appointed Days) Order 2016 (SI 2016/456).)

Relevant documents provided by taxpayer

For income tax and CGT purposes, documents include:

  • A personal return (section 8, Taxes Management Act 1970 (TMA 1970)).
  • A trustee’s return (section 8A, TMA 1970).
  • A return, statement or declaration in connection with a claim for an allowance, deduction or relief.
  • Accounts in connection with ascertaining liability to tax.
  • A partnership return.
  • A statement or declaration in connection with a partnership return.
  • Accounts in connection with a partnership return.

For IHT purposes, documents include:

  • Accounts under sections 216 or 217 of IHTA 1984.
  • Information or documents under regulations made under section 256 of IHTA 1984.
  • Statements or declarations in connection with deductions, exemptions and reliefs.

The documents listed above include any document that HMRC may rely on to determine (without further inquiry) a question about:

  • The liability of the person subject to the tax penalty.
  • Payments by the person by way of, or in connection with, tax.
  • Any other payment by the person (including penalties).
  • Repayments or any other kind of payment or credit to the person.

(Paragraph 1, Schedule 24, Finance Act 2007.)

Potential lost revenue

The potential lost revenue (PLR) is the additional amount of tax (including National Insurance contributions (NICs)) due or payable as a result of correcting the inaccuracy (paragraph 5, Schedule 24, Finance Act 2007). This includes amounts payable to HMRC, where HMRC has erroneously made repayments of tax or of an amount that would have been repayable by HMRC had the inaccuracy not been corrected.

Special rules apply where the return or other documents contain multiple inaccuracies and where inaccuracies have resulted in wrongly recorded losses. For discussion, see Practice note, Tax penalties: direct tax: culpable penalties: Potential lost revenue.

For HMRC’s guidance on calculating the PLR, see CH82150.

Penalty percentage determined by behaviour and jurisdiction

The degree of culpability and jurisdiction involved directs the standard amount of the penalty chargeable. The penalty tariffs for inaccuracies in documents for offshore tax matters and offshore transfers are set out below:

Behaviour

 

 Standard (maximum) penalty

 
Careless inaccuracy

 

 30% (category 1)

 

45% (category 2)

 

60% (category 3)

 
Deliberate but not concealed inaccuracy

 

 70% (category 1)

 

105% (category 2)

 

140% (category 3)

 
Deliberate and concealed inaccuracy

 

 100% (category 1)

 

150% (category 2)

 

200% (category 3)

 

Inaccuracy falls within more than one category

If a single inaccuracy falls into more than one category, the inaccuracy is treated as separate inaccuracies and PLR is calculated separately (paragraph 4A(6), Schedule 24, Finance Act 2007).

For HMRC guidance, see CH116100 and CH116500.

Penalty reduction

Penalties may be reduced for disclosure (see Meaning of disclosure). The amount of the reduction will depend on:

Maximum and minimum penalties: table

This table sets out the maximum penalty (the standard penalty) and the minimum penalty with full mitigation in each case.

Behaviour

 

 Standard (maximum) penalty

 

 Minimum penalty: prompted disclosure

 

 Minimum penalty: unprompted disclosure

 
Careless inaccuracy

 

 30% (cat 1)

 

45% (cat 2)

 

60% (cat 3)

 

 15%

 

22.5%

 

30%

 

 0%

 

0%

 

0%

 
Deliberate but not concealed understatement

 

 70% (cat 1)

 

105% (cat 2)

 

140% (cat 3)

 

 45%

 

62.5%

 

80%

 

 30%

 

40%

 

50%

 
Deliberate and concealed understatement

 

 100% (cat 1)

 

150% (cat 2)

 

200% (cat 3)

 

 60%

 

85%

 

110%

 

 40%

 

55%

 

70%

 

For discussion about the different categories, see Penalty rates linked to how offshore territories share information with HMRC.

Meaning of disclosure

For a careless inaccuracy involving an offshore matter, disclosure involves:

  • Telling HMRC about the inaccuracy.
  • Assisting HMRC in quantifying the inaccuracy.
  • Allowing HMRC access to records to ensure that inaccuracy is fully corrected.

(Paragraph 9(A3) and (1), Schedule 24, Finance Act 2007.)

HMRC will weigh these three factors to determine the overall reduction for each of element of disclosure.(see CH82442).

Where the behaviour is deliberate and involves an offshore matter and for any offshore transfers, disclosure involves, in addition to telling, assisting and allowing access to records, providing HMRC with additional information. The additional information is set out in regulations (see Penalties Relating to Offshore Matters and Offshore Transfers (Additional Information) Regulations 2017 (SI 2017/345)) and comprises:

  • Telling HMRC about the involvement of an enabler, including providing HMRC with the enabler’s name and address, and a description of the enabler’s conduct, contact and documents.
  • Telling HMRC if the taxpayer is the beneficial but not legal owner of assets situated overseas, including providing HMRC with details of beneficial owners and their shares, legal owners (including if the legal owner is not an individual, details of the name and business address of directors, senior managers, employees and agents of the legal owner who has advised or assisted the taxpayer), changes in ownership arrangements and documents of title.

(Paragraph 9(1A)-(1C), Schedule 24, Finance Act 2007.)

Timing of disclosure

HMRC will not give full penalty reduction for disclosure if the taxpayer has taken a significant period to disclose or has failed to make use of a disclosure opportunity. HMRC considers a significant period to be three years. Accordingly, for disclosures occurring more than three years after the inaccuracy, the minimum reduction is restricted by 10% (see CH82465).

(Paragraph 9, Schedule 24, Finance Act 2007.)

Prompted and unprompted

Disclosures can be prompted or unprompted. An unprompted disclosure is where the taxpayer making the disclosure has no reason to believe that HMRC has discovered or is about to discover the inaccuracy. (Any disclosures that do not fall to be treated as unprompted disclosures are prompted disclosure.)

The First-tier Tribunal has ruled that a disclosure is prompted if:

HMRC guidance confirms that the test of whether a disclosure is prompted or unprompted is an objective one and does not depend on the belief of the taxpayer (CH82421). It states that a national campaign highlighting an area of the trading community on which HMRC will be concentrating would not stop a disclosure from being unprompted. However, it would be prompted if HMRC had contacted the taxpayer to say they wanted to check the taxpayer’s return. The guidance also confirms that it will be exceptional for a disclosure to be unprompted if a compliance check is in progress. The disclosure will be unprompted only if it is about something the compliance officer has not discovered or is not about to discover.

In a VAT context, HMRC guidance confirms that correcting an error in a later return is not a disclosure for the purposes of the penalty regime (see CH81141). However, this has not been tested judicially and the definition of disclosure is quite wide. Therefore, it is prudent for taxpayers to explain the correction in a covering letter with the return. (For more information on how HMRC will assess disclosure, see CH82449.)

Special circumstances

HMRC has further powers to reduce penalties where it considers the circumstances to be special (paragraph 11, Schedule 24, Finance Act 2007). This includes the power to stay a penalty or agree a compromise in relation to proceedings for a penalty.

Special circumstances do not include ability to pay or circumstances where an understatement has been balanced by an overpayment by another taxpayer.

For further discussion about special circumstances, see Practice note, Tax penalties: direct tax: failure penalties: Reduction in penalties: special circumstances.

Suspended penalties

HMRC may, by notice in writing, suspend all or part of the penalty for a careless inaccuracy where a condition of suspension would help the taxpayer to avoid incurring further penalties (paragraph 14, Schedule 24, Finance Act 2007).

Agents

Special rules apply where an agent is involved.

Taxpayer’s position

Taxpayers are liable for penalties for careless inaccuracies in documents in respect of actions or omissions of agents (for example, inaccuracies in returns submitted to HMRC by agents).

However, the taxpayer is not liable for penalties for actions or omissions of the agent if the taxpayer can demonstrate that they took reasonable care to avoid the inaccuracy (paragraph 18, Schedule 24, Finance Act 2007). For discussion of what counts as reasonable care in these circumstances, see Practice note, Tax penalties: direct tax: culpable penalties: Taxpayer’s position.

Agent’s position

HMRC has confirmed that, although paragraph 1 of Schedule 24 to the Finance Act 2007 seems to encompass both the taxpayer and the adviser, HMRC will not impose a penalty on an adviser under paragraph 1 (see Legal update, HMRC will not impose penalties on advisers under Finance Act 2007 regime).

Assessments and appeals

Assessments

HMRC must assess the penalty, notify the taxpayer of the assessment and state in the notice of assessment the tax period in respect of which the penalty is assessed (paragraph 13, Schedule 24, Finance Act 2007.)

Penalty assessments in respect of inaccuracies in documents are generally treated in the same way as tax assessments and the procedure for issuing penalties is set out in Part 3 of Schedule 24 to the Finance Act 2007.

A penalty assessment must be made within 12 months of the end of the period during which an appeal could be brought against the decision correcting the inaccuracy or, if there is no assessment to the tax concerned within this period, the date on which the inaccuracy is corrected (paragraph 14(4), Schedule 24, Finance Act 2007).

The penalty must be paid within 30 days of the day the penalty notification was issued.

Appeals

A penalty decision by HMRC may be appealed before the First-tier Tribunal (paragraphs 15-17, Schedule 24, Finance Act 2007).

For procedural purposes, an appeal against a penalty decision is generally treated in the same way as an appeal against an assessment to the tax concerned (see Practice notes, Tax appeals: new tribunal system from 1 April 2009 and Tax appeals: lodging an appeal and HMRC internal review).

There is no requirement to pay the penalty before the appeal against the penalty is determined (paragraph 16(2), Schedule 24, Finance Act 2007).The tribunal has the power to:

  • Affirm or cancel HMRC’s decision.
  • Affirm or substitute HMRC’s decision with another decision that HMRC has the power to make (on appeal against the amount of the penalty).
  • Suspend the penalty if it considers HMRC’s decision to be flawed where a taxpayer has appealed against HMRC’s decision not to suspend a penalty or the conditions imposed on suspension. (A flaw is determined by reference to the principles applicable to judicial review proceedings.)
  • Affirm or vary conditions imposed on suspension of penalties.

Penalties for previous convictions

If a taxpayer has been convicted of an offence related to the inaccuracy, the taxpayer is not also liable to penalties (paragraph 21, Schedule 24, Finance Act 2007).

 Failure to notify chargeability to tax (income tax and CGT only)

Conditions

A tax-geared penalty applies if a taxpayer fails to notify HMRC of liability to income tax or CGT involving an offshore matter or offshore transfer.

There are three types of failure:

  • Non-deliberate. This is a failure that does not fall within the following two categories.
  • Deliberate but not concealed (see CH72160).
  • Deliberate and concealed (see CH72120).

(Schedule 41, Finance Act 2008.)

Commencement

The offshore regime for failure to notify involving an offshore matter took effect from 6 April 2011 (but subject to transitional provisions that exclude tax periods commencing on or before 5 April 2011). (Finance Act 2010, Schedule 10 (Appointed Days and Transitional Provisions) Order 2011 (SI 2011/975).)

The regime was extended by the Finance Act 2015 to include offshore transfers for tax years commencing on or after 6 April 2016. (Finance Act 2015, Schedule 20 (Appointed Days) Order 2016 (SI 2016/456).)

Penalty percentages determined by behaviour and jurisdiction

The penalty is a percentage of the potentially lost revenue with the maximum percentage is determined by the taxpayer’s behaviour and the jurisdiction involved:

Behaviour

 

 Standard (maximum) penalty

 
Non-deliberate failure

 

 30% (category 1)

 

45% (category 2)

 

60% (category 3)

 
Deliberate but not concealed failure

 

 70% (category 1)

 

105% (category 2)

 

140% (category 3)

 
Deliberate and concealed failure

 

 100% (category 1)

 

150% (category 2)

 

200% (category 3)

 

(Paragraph 6, Schedule 41, Finance Act 2008.)

For discussion about the categories, see Penalty rates linked to how offshore territories share information with HMRC.

Potential lost revenue

The potential lost revenue (PLR) for failure to notify is, broadly, the amount of any income tax or CGT that is unpaid on 31 January following the tax year in question (paragraph 7, Schedule 41, Finance Act 2008).

The First-tier Tribunal has confirmed that the potentially lost revenue is the difference between the liability shown in the original assessment and what would have been shown had the original assessment been made on the correct basis. Therefore, the payments made by the taxpayer after the original assessment was made but before it was corrected were properly ignored. (See Curtises Ltd v HMRC [2018] UKFTT 227 (TC) discussed in Legal update, Penalty not reduced to reflect additional VAT paid (First-tier Tribunal).)

For HMRC’s guidance on calculating PLR arising from a failure to notify chargeability to income tax or CGT, see CH72700.

Reasonable excuse defence

There is no penalty if the taxpayer satisfies HMRC or the tribunal (on appeal) that he or she has a reasonable excuse for the failure (paragraph 20, Schedule 41, Finance Act 2008).

For discussion about reasonable excuse, see Practice note, Tax penalties: direct tax: failure penalties: Waiver of penalties: reasonable excuse. For HMRC guidance, see CH71540.

Penalty reduction

Penalties can be reduced even if there is no reasonable excuse defence. Specifically, penalties may be reduced for disclosure. The maximum and minimum penalty percentages are prescribed and these bind HMRC and, on appeal, the First-tier Tribunal (see Maximum and minimum amounts: table).

The amount that HMRC will reduce the maximum penalty will depend on:

Maximum and minimum amounts: table

This table sets out the maximum penalty (the standard penalty) and the minimum penalty with full mitigation for each type of behaviour. “Case A” applies if the failure to notify is disclosed less than 12 months after the time when the tax first becomes unpaid. “Case B” applies otherwise.

Behaviour

 

 Standard (maximum) penalty

 

 Minimum penalty: prompted disclosure

 

 Minimum penalty: unprompted disclosure

 
Non-deliberate failure

 

 30% (category 1)

 

 Case A: 10%

 

Case B: 20%

 

 Case A: 0%

 

Case B: 10%

 
45% (category 2)

 

 Case A: 15%

 

Case B: 30%

 

 Case A: 0%

 

Case B: 15%

 
60% (category 3)

 

 Case A: 20%

 

Case B: 40%

 

 Case A: 0%

 

Case B: 20%

 
Deliberate but not concealed failure

 

 70% (category 1)

 

105% (category 2)

 

140% (category 3)

 

 45%

 

62.5%

 

80%

 

 30%

 

40%

 

50%

 
Deliberate and concealed failure

 

 100% (category 1)

 

150% (category 2)

 

200% (category 3)

 

 60%

 

85%

 

110%

 

 40%

 

55%

 

70%

 

Meaning of disclosure

For a non-deliberate failure that involves an offshore matter, disclosure involves:

  • Telling HMRC about it.
  • Assisting HMRC in quantifying the tax unpaid.
  • Allowing HMRC access to records to check the amount unpaid.

(Paragraphs 12(1B)(b) and (2), Schedule 41, Finance Act 2008.)

HMRC will weigh these three factors to determine the overall reduction for each of element of disclosure:

Telling: 30%.

  • Assisting: 40%.
  • Allowing access: 30%.)

(See CH73220 and CH73260.)

For a deliberate failure that involves an offshore matter and for any failure that involves an offshore transfer, disclosure involves, in addition to telling, assisting and allowing access to records, providing HMRC with additional information. The additional information is set out in regulations and comprises:

  • Telling HMRC about the involvement of an enabler, including providing HMRC with the enabler’s name and address, and a description of the enabler’s conduct, the contact between the parties and documents relating to the enabler’s conduct.
  • Telling HMRC if the taxpayer is the beneficial but not legal owner of assets situated overseas, including providing HMRC with details of beneficial owners and their shares, legal owners (including if the legal owner is not an individual, details of the name and business address of directors, senior managers, employees and agents of the legal owner who has advised or assisted the taxpayer), changes in ownership arrangements and documents of title.

(Penalties Relating to Offshore Matters and Offshore Transfers (Additional Information) Regulations 2017 (SI 2017/345) and paragraph 12(2A) to (2E), Schedule 41, Finance Act 2007.)

Timing of disclosure

HMRC will not agree a full reduction for disclosure if it considers that the taxpayer has taken a significant period to correct their non-compliance or the taxpayer failed to make use of an offshore disclosure facility. In such cases, HMRC is unlikely to reduce the penalty more than ten percentage points above the minimum of the statutory range. HMRC considers a “significant period” to be over three years or less where the overall disclosure covers a longer period. See CH73220.

Special circumstances

Both HMRC and the tribunal on appeal are empowered to reduce penalties where they consider the circumstances to be special.

For discussion, see Practice note, Tax penalties: direct tax: failure penalties: Reduction in penalties: special circumstances.

Assessments and appeals

Assessment

HMRC must assess the penalty, notify the taxpayer of the assessment and state in the notice of assessment the tax period in respect of which the penalty is assessed (paragraph 16, Schedule 41, Finance Act 2008).

Penalty assessments for failures to notify are treated in the same way as tax assessments. A penalty assessment must be made within 12 months of the end of the period during which an appeal could be brought against the assessment to tax or, if there is no assessment to tax, the date on which the amount of tax unpaid is ascertained (paragraph 16(4), Schedule 41, Finance Act 2008).

Appeal

A taxpayer may appeal both the imposition of a penalty and the amount (paragraph 17, Schedule 41, Finance Act 2008). The normal appeals process applies (see Practice notes, Tax appeals: new tribunal system from 1 April 2009 and Tax appeals: lodging an appeal and HMRC internal review).

There is no requirement to pay the penalty before the appeal against the penalty is determined (paragraph 18, Schedule 41, Finance Act 2008).

The tribunal has the power to:

  • Affirm or cancel HMRC’s decision (on appeal against a decision that a penalty is payable).
  • Affirm or substitute HMRC’s decision with another decision that HMRC has the power to make (on appeal against the amount of the penalty).

Late filing of a tax return persisting for 12 months

Conditions

A tax-geared penalty applies to returns that are filed more than 12 months late and the taxpayer has deliberately withheld information involving an offshore matter or offshore transfer that would have enabled or assisted HMRC to assess the tax liability (paragraph 6, Schedule 55, Finance Act 2009).

The penalty is a percentage of the tax due. The percentage is determined by the taxpayer’s behaviour and the overseas territory involved (see Penalty percentage determined by behaviour and jurisdiction).

Commencement

The offshore penalty regime for late filing involving an offshore matter took effect for income tax and CGT purposes from 6 April 2011 for returns or other documents required to be delivered to HMRC for tax year 2011-12 or later tax years (see Finance Act 2010, Schedule 10 (Appointed Days and Transitional Provisions) Order 2011 (SI 2011/975)).

The regime was extended by the Finance Act 2015 to include offshore transfers for income tax and CGT purposes for tax years commencing on or after 6 April 2016 (Finance Act 2015, Schedule 20 (Appointed Days) Order 2016 (SI 2016/456)).

The regime is not yet in force for IHT.

Penalty percentage determined by behaviour and jurisdiction

The penalty is the greater of:

  • The percentage (given in the table below) of the tax due.
  • £300.
Behaviour

 

 Category 1

 

 Category 2

 

 Category 3

 
Deliberate but not concealed

 

 70%

 

 105%

 

 140%

 
Deliberate and concealed

 

 100%

 

 150%

 

 200%

 

For discussion about the categories, see Penalty rates linked to how offshore territories share information with HMRC.

(Paragraph 6, Schedule 55, Finance Act 2009.)

Penalty reduction

Penalties may be reduced for disclosure (see Meaning of disclosure).

The amount of the reduction will depend on:

However, penalties may not be reduced below £300.

Maximum and minimum penalties: table

This table sets out the maximum penalty (the standard penalty) and the minimum penalties depending on whether disclosure is prompted or not.

Behaviour

 

 Standard (maximum) penalty

 

 Minimum penalty: prompted disclosure

 

 Minimum penalty: unprompted disclosure

 
Deliberate but not concealed withholding

 

 70% (cat 1)

 

105% (cat 2)

 

140% (cat 3)

 

 45%

 

62.5%

 

80%

 

 30%

 

40%

 

50%

 
Deliberate and concealed withholding

 

 100% (cat 1)

 

150% (cat 2)

 

200% (cat 3)

 

 60%

 

85%

 

110%

 

 40%

 

55%

 

70%

 

Meaning of disclosure

Disclosure involves:

  • Telling HMRC about it.
  • Assisting HMRC in quantifying any tax unpaid due to information being withheld.
  • Allowing HMRC access to records to check the amount unpaid.
  • Providing HMRC with additional information.

The additional information is set out in regulations (Penalties Relating to Offshore Matters and Offshore Transfers (Additional Information) Regulations 2017 (SI 2017/345)) and comprises:

  • Telling HMRC about the involvement of an enabler, including providing HMRC with the enabler’s name and address, and a description of the enabler’s conduct, the contact between the parties and documents relating to the enabler’s conduct.
  • Telling HMRC if the taxpayer is the beneficial but not legal owner of assets situated overseas, including providing HMRC with details of beneficial owners and their shares, legal owners (including if the legal owner is not an individual, details of the name and business address of directors, senior managers, employees and agents of the legal owner who has advised or assisted the taxpayer), changes in ownership arrangements and documents of title.

(Paragraph 14(2A)-(2E), Schedule 55, Finance Act 2009.)

Special circumstances

HMRC, and the tribunal on appeal, is empowered to reduce penalties where it considers the circumstances to be special. For discussion, see Practice note, Tax penalties: direct tax: failure penalties: Reduction in penalties: special circumstances.

Assessments and appeals

Assessment

HMRC must assess the penalty, notify the taxpayer of the assessment and state in the notice of assessment the tax period in respect of which the penalty is assessed (paragraph 18, Schedule 55, Finance Act 2009).

The penalty must be paid within 30 days of the day the penalty notification was issued (paragraph 18(2), Schedule 55, Finance Act 2009).

A penalty assessment must be made within two years of the filing date or, if later, within 12 months of one of the following:

  • The end of the period during which an appeal could be brought against the assessment of the liability to tax that would have been shown in the return.
  • If there is no assessment to tax, the date on which the liability to tax is ascertained or the liability is ascertained at nil.

(Paragraph 19, Schedule 55, Finance Act 2009.)

Appeals

A taxpayer may appeal both the imposition of a penalty and the amount (paragraph 20, Schedule 55, Finance Act 2009).

The normal appeals process applies (see Practice notes, Tax appeals: new tribunal system from 1 April 2009 and Tax appeals: lodging an appeal and HMRC internal review).

There is no requirement to pay the penalty before the appeal against the penalty is determined (paragraph 21, Schedule 55, Finance Act 2009).

The tribunal has the power to:

  • Affirm or cancel HMRC’s decision (on appeal against a decision that a penalty is payable).
  • Affirm or substitute HMRC’s decision with another decision that HMRC has the power to make (on appeal against the amount of the penalty). The tribunal can only substitute its own decision for HMRC’s on special circumstances grounds if it considers HMRC’s decision to be flawed (in the judicial review sense).

  Aggravated penalty for relevant offshore asset moves

Conditions

An additional penalty applies where the following conditions are met:

The aggravated penalty is 50% of the original penalty.

(Paragraphs 1-6, Schedule 21, Finance Act 2015.)

For HMRC’s guidance, see CH119000.

Commencement

The penalty applies to asset moves or transfers occurring on or after 27 March 2015 even if liability for the original penalty arose before that date unless for inaccuracies and failures, the tax that gave rise to the original penalty has been assessed or determined before that date (paragraph 9, Schedule 21, Finance Act 2015.).

Assessments and appeals

Assessment

HMRC must assess the penalty, notify the taxpayer of the assessment and state in the notice the tax period in respect of which the penalty is assessed.

The penalty must be paid within 30 days of the day on which the penalty notice is issued. Interest is payable on late paid penalties (see The Finance Act 2009, sections 101 and 102 (Penalties for Offshore Evasion or Non-Compliance) (Appointed Day) Order 2019 (SI 2019/1238).

A penalty assessment must be made within the same period as allowed for the assessment of the original penalty. If HMRC amends the original penalty it must likewise amend the aggravated penalty assessment.

(Paragraph 7, Schedule 21, Finance Act 2015.)

Appeal

A penalty assessment may be appealed before the First-tier Tribunal (see Practice note, Tax appeals: new tribunal system from 1 April 2009). An appeal against a penalty is generally treated, for procedural purposes, in the same way as an appeal against an assessment to the tax concerned (see Practice note, Tax appeals: lodging an appeal and HMRC internal review). There is no requirement to pay the penalty before the appeal against the penalty is determined.

The tribunal may either affirm or cancel HMRC’s decision.

(Paragraph 8, Schedule 21, Finance Act 2015.)

  Asset-based penalties for offshore inaccuracies and failures

Conditions

An asset-based penalty applies where both of the following conditions are met in relation to a tax year:

The taxpayer is liable for:

  • an offshore penalty (see Offshore penalty regime for inaccuracies and failures) arising from a deliberate failure relating to asset-based income tax, CGT or IHT (see Identification and valuation of assets);
  • a penalty imposed under paragraph 3 of Schedule 25 to the Finance Act 2021 imposed for the withholding of information involving an offshore matter or an offshore transfer and the tax at stake is asset-based income tax or CGT; or
  • (Inserted by paragraph 48 of Schedule 27 to the Finance Act 2021. The provision will take effect from a day appointed by Treasury regulations. For further information about the penalty, see Practice note, Tax penalties: direct tax: failure penalties: New penalty model for deliberately withholding information.)
  • a failure to correct penalty (see Failure to correct past offshore non-compliance) and the taxpayer was aware at any time from 6 April 2017 to 30 September 2018 that they had offshore non-compliance to correct.
  • HMRC’s guidance on the requirement to correct obligation was updated on 21 August 2018 to confirm that HMRC treats a taxpayer as having the requisite awareness if either the original non-compliance was deliberate or the taxpayer became aware at a later point that non-deliberate non-compliance had occurred (see HMRC, guidance: Asset based penalty).
  • (This is the standard penalty.)
  • The offshore PLR exceeds £25,000 (or such other figure as the Treasury specifies). To determine whether the offshore PLR threshold is exceeded, the PLR and liability to tax by reference to which the offshore penalties have been imposed is aggregated.

The penalty is the lower of the following:

  • 10% of the value of the asset that gave rise to the income or gains evaded or, in the case of IHT, the property the disposition of which gave rise to the transfer of value on which IHT was evaded (see Identification and valuation of assets).
  • Ten times the offshore PLR (see Offshore PLR).

Identification and valuation of assets

Part 3 of Schedule 22 to the Finance Act 2016 prescribes rules for valuing the relevant assets. Each asset is identified by reference to the tax that has given rise to the standard penalty and the method of valuation depends on whether and when the asset has been disposed of. For example:

Tax

 

 Asset

 

 Valuation

 
Asset-based income tax

 

 Offshore bank account in respect of undeclared interest

 

 If the taxpayer still owns the asset on the last day of the tax year to which the standard penalty relates, the asset’s market value on that day

 
Asset-based income tax

 

 Offshore property for undeclared rental income

 

 If the taxpayer disposed of the whole asset part way through the tax year to which the standard penalties relates, the asset’s market value on the date of disposal

 
CGT

 

 Asset that is the subject of the disposal (or deemed disposal)

 

 The value that would have been used in the computation of the gain or, for part disposal, the full market value of the asset immediately before the part disposal

 
IHT

 

 Asset is the property that has been transferred

 

 The value used to assess liability to IHT

 

For HMRC’s guidance, see CH122300.

Offshore PLR

The offshore potential lost revenue (PLR) for a tax year is the total for the year of the following:

  • The PLR used to calculate the standard offshore tax penalty under the inaccuracies regime, the failure to notify regime or the failure to correct regime.
  • The liability to tax used to calculate the standard offshore penalty charged under the late filing regime or (from a date to be appointed) under the deliberate withholding of information regime in Schedule 25 of the Finance Act 2021.

If a penalty relates to both domestic and offshore matters (a “combined penalty”), the domestic element is disregarded in calculating the offshore PLR (paragraph 5(3), Schedule 22, Finance Act 2016 and CH122160 and CH122170). Further, special ordering rules apply to calculate the offshore PLR where the combined penalty depends on the order in which income and gains are treated as having been taxed, failing which the offshore PLR is calculated on a just and reasonable basis. Similarly, ordering rules apply if two or more taxes are at stake.

(Paragraph 5, Schedule 22, Finance Act 2016.)

Investigation period

Asset-based penalties are charged by reference to tax years. However, paragraph 6 of Schedule 22 of Finance Act 2016 prevents the same asset from giving rise to multiple asset-based penalties if there has been more than one tax year in the period from commencement of the asset-based penalty regime (see below) and 5 April in the tax year immediately preceding the notification of the penalty. Similarly, a new investigation period starts at the end of the first investigation period. The penalty charged is for the tax year that has the highest offshore PLR.

Commencement

The penalty is effective from 1 April 2017. It applies for income tax and CGT for tax year 2016-17 and subsequent years and for IHT for transfers of value made on or after 1 April 2017 (Finance Act 2016, Schedule 22 (Appointed Days) Regulations 2017 (SI 2017/277)).

Penalty reduction

The penalty may be reduced for disclosure and co-operation and in special circumstances. The maximum amount by which an asset-based penalty may be reduced for disclosure and co-operation is as follows:

  • For unprompted disclosures, 50% of the standard amount.
  • For prompted disclosures, 20% of the standard amount.

(Section 165 and Schedule 22, Finance Act 2016 and Asset-based Penalty for Offshore Inaccuracies and Failures (Reductions for Disclosure and Co-operation) Regulations 2017 (SI 2017/334).)

Assessments and appeals

Assessment

HMRC must assess the penalty and notify the taxpayer of the assessment. The notice must state the tax year to which the penalty relates and the investigation period within which the tax year falls.

The penalty must be paid within 30 days of the day the penalty notification was issued. Interest is payable on late paid penalties (see The Finance Act 2009, Sections 101 and 102 (Penalties for Offshore Evasion or Non-Compliance) (Appointed Day) Order 2019 (SI 2019/1238).)

A penalty assessment must be made within the same period as allowed for the assessment of the standard penalty (or the latest period if the asset-based penalty relates to more than one standard offshore tax penalty).

(Paragraph 15, Schedule 22, Finance Act 2016.)

Appeal

A taxpayer may appeal both the imposition of a penalty and the amount (paragraph 16, Schedule 22, Finance Act 2016). The normal appeals process applies (see Practice notes, Tax appeals: new tribunal system from 1 April 2009 and Tax appeals: lodging an appeal and HMRC internal review).

There is no requirement to pay the penalty before the appeal against the penalty is determined (paragraph 17, Schedule 22, Finance Act 2016).

The tribunal has the power to:

  • Affirm or cancel HMRC’s decision (on appeal against a decision that a penalty is payable).
  • Affirm or substitute HMRC’s decision with another decision that HMRC has the power to make (on appeal against the amount of the penalty). The tribunal can only substitute its own decision for HMRC’s on special circumstances grounds if it considers HMRC’s decision to be flawed (in the judicial review sense).

(Paragraph 18, Schedule 22, Finance Act 2016.)

  Strict liability criminal offence (income tax and CGT)

Conditions

A strict liability criminal offence applies if both of the following conditions are met:

  • A taxpayer has failed to declare offshore income and gains. Specifically, the taxpayer:
  • has failed to give notice of chargeability to income tax or CGT (or both) within the relevant time and the tax is chargeable on or by reference to offshore income, assets or activities (section 106B, TMA 1970);
  • has failed to file a tax return following a notice under section 8 of TMA 1970 within the relevant time and an accurate return would have disclosed liability to income tax or CGT (or both) chargeable on or by reference to offshore income, assets or activities (section 106C, TMA 1970); or
  • is required by notice under section 8 of TMA 1970 to deliver a tax return, has filed an inaccurate return, the correction of which would result in an increase in the amount of income tax or CGT (or both) chargeable by reference to offshore income assets or activities (section 106D, TMA 1970).
  • The tax underpaid or understated is more than £25,000. (This figure may be increased by Treasury Regulation. For the first regulations, setting the threshold at £25,000, see Legal update, Regulations specify “threshold amount” for strict liability offshore tax offences.)

Offshore income, assets or activities means:

  • Income arising from a source in a territory outside the UK.
  • Assets situated in or held in a territory outside the UK.
  • Activities carried on wholly or mainly in a territory outside the UK.
  • Anything having effect as if it were any of the above.

If HMRC or the First-tier Tribunal extends time limits for giving notice or filing a return, the period under the offence is similarly extended.

There is no mechanism for apportioning income and gains between the UK and overseas.

A person guilty of an offence under this measure could receive a fine or a prison sentence of up to six months (12 months if section 285(1) of the Criminal Justice Act 2003 is in force).

Defence

There is no offence if the taxpayer can satisfy the court that they:

  • Took reasonable care to ensure that the return was accurate.
  • Had a reasonable excuse for failing to notify or failing to deliver the return.

The test is an objective one. In Ashton v HMRC [2013] UKFTT 140 (TC), in the context of domestic penalties for inaccuracies in returns, the First-tier Tribunal held that the standard by which reasonable care fell to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question. An error may be innocent, but nevertheless careless. The tribunal in that case also confirmed that it is of the essence of the reasonable care test that in normal circumstances this should avoid simple errors of omission, or mere oversights.

For discussion about reasonable excuse in the context of domestic penalties for failures, see Practice note, Tax penalties: direct tax: failure penalties: Waiver of penalties: reasonable excuse.

Exclusions

The strict liability criminal offence does not apply to trustees or personal representatives when acting as such (section 106E(1), TMA 1970).

Additionally, the offence does not apply to income or gains reportable under the Common Reporting Standard (CRS). This is achieved by regulations that carve out “excluded offshore income tax or capital gains tax” which is defined to include income tax or CGT chargeable on or by reference to offshore income, assets or activities which is reportable to HMRC under CRS (Sections 106B, 106C and 106D of the Taxes Management Act 1970 (Specified Threshold Amount) Regulations (SI 2017/988)). For a list of jurisdictions that have implemented the CRS (or have committed to its implementation), see OECD: CRS automatic exchange portal.

Commencement

The strict liability criminal offence has effect from 6 April 2017 (Finance Act 2016, Section 166 (Appointed Day) Regulations 2017 (SI 2017/970). Accordingly, the earliest the offences will apply is:

  • Failure to notify: 6 October 2018. Taxpayers must notify chargeability within six months from the end of the tax year.
  • Failure to file a return: 6 April 2020. Taxpayers must file returns by the end of the “withdrawal period”, which is two years starting from the end of the tax year to which the notice relates. For tax year 2017-18, the date is 6 April 2020.
  • Inaccuracy in a return: 31 January 2020. Taxpayers may amend tax returns at any time within 12 months of the filing date. For example, for tax year 2017-18, the filing date is 31 January 2019. Accordingly, the return can be amended before 31 January 2020.

(Section 166, Finance Act 2016 introducing sections 106B to 106H, Taxes Management Act 1970.)

Failure to correct past offshore non-compliance

Any person who had “relevant offshore tax non-compliance” at the end of tax year 2016-17 (that is on 5 April 2017) and who failed to correct that non-compliance in the period commencing 6 April 2017 and ending on 30 September 2018, is liable to a penalty subject to meeting a reasonable excuse defence (section 67 of, and paragraph 1, Schedule 18, Finance (No.2) Act 2017).

This measure was intended to underpin the final disclosure facility for disclosure of offshore tax evasion, which was introduced to encourage disclosure before full exchange of financial account information occurred under the CRS (see Legal update, HMRC announces worldwide disclosure facility and consults on new penalties for failing to correct past offshore non-compliance and Practice note, CRS, EU administrative co-operation and FATCA: UK implementing regulations).

HMRC published (and revised) guidance on the measure, see Legal updates:

The Chartered Institute of Taxation also published guidance (in conjunction with the Association of Tax Technicians) (see CIOT: Requirement to correct offshore tax non-compliance: Practical notes for CIOT and ATT members).

HMRC also provided specific guidance on the correct procedure to follow to benefit from the extended time limits when making requirement to correct disclosures of IHT liabilities (see Legal update, HMRC confirms correct requirement to correct process for IHT disclosures).

Necessary correction

The necessary correction is, broadly, the provision of information to HMRC (paragraph 13, Schedule 18, Finance (No.2) Act 2017). HMRC gives examples how to make a correction in its guidance (see HMRC: Requirement to Correct tax due on offshore assets: Penalties and other sanctions).

Offshore tax non-compliance

Offshore tax non-compliance is defined by reference to the failure in question. This may consist of one of the following:

  • Failure to notify chargeability to income tax or CGT.
  • Failure to deliver a return (and related documents) that would have enabled or assisted HMRC to assess the person’s liability to income tax, CGT or IHT.
  • Delivering an inaccurate return (and related documents) where the inaccuracy relates to information that would have enabled or assisted HMRC to assess the person’s liability to income tax, CGT or IHT.

The tax non-compliance must involve either an offshore matter or an offshore transfer (see Offshore matters and offshore transfers).

(Paragraphs 7, 9, 10 and 11, Schedule 18, Finance (No.2) Act 2017.)

Relevant offshore tax non-compliance

Offshore tax non-compliance is “relevant” if the following three conditions are met:

  • It was not fully corrected by 5 April 2017.
  • It involved a potential loss of revenue (PLR) when it was committed. (For the rules for calculating PLR for inaccuracies, see Potential lost revenue and for failures to notify, see Potential lost revenue. For late filing, the PLR is the amount of tax due.)
  • On 6 April 2017 (income tax and CGT) and 17 November 2017 (IHT), HMRC would have been able to raise an assessment to tax on the person who should have corrected the non-compliance.
  • For HMRC’s time limits for raising an assessment for income tax and CGT, see CH56100.
  • For example, if a taxpayer carelessly submitted an inaccurate tax return for tax year 2009-10, the last day for raising an assessment is 5 April 2016. The taxpayer is not liable for a failure to correct penalty.
  • If HMRC could assess on 6 April 2017 or 17 November 2017 (as the case may be), provision is made extending the period within which HMRC may make an assessment to tax in respect of relevant offshore tax non-compliance (to 5 April 2021) if the period for assessment would otherwise have expired before that date. (Paragraph 26, Schedule 18, Finance (No.2) Act 2017.) For example, if a taxpayer carelessly submits an inaccurate tax return for tax year 2011-12, HMRC has until 5 April 2018 to raise the assessment under normal rules. That period is extended to 5 April 2021 under the RTC legislation.
  • On 11 March 2021, the ATT announced that HMRC has started making protective assessments in respect of offshore tax disclosed to them because HMRC’s extended time limit for making an assessment is imminent (5 April 2021) (see ATT, Worldwide Disclosure Facility: HMRC issuing Protective Assessments).

(Paragraphs 3-6, Schedule 18, Finance (No.2) Act 2017.)

Tax

Tax is defined to mean income tax, CGT (but not non-resident CGT payable by companies) and IHT (paragraph 12, Schedule 18, Finance (No.2) Act 2017).

However, the requirement to correct provisions do not apply to employers withholding income tax under PAYE. HMRC has provided an example illustrating this in its guidance (see HMRC: Requirement to correct tax due on offshore assets: Time limits: Example 7B).

Penalty amount

The amount of the penalty is set at 200% of the PLR. The penalty percentage applies irrespective of behaviour or the offshore jurisdiction involved.

Penalty reduction

There is provision for the PLR to be pro-rated on a just and reasonable basis where the taxpayer is liable to a penalty in respect of two or more inaccuracies in a return or other document.

The penalty percentage may be reduced for disclosure (but not below 100%). If disclosure is prompted, HMRC will not reduce the percentage below 150%.

Disclosure

Disclosure involves:

  • Telling HMRC.
  • Assisting HMRC.
  • Allowing HMRC access to records.

HMRC guidance confirms that the reductions will depend on how much assistance is given and full reduction is available only if additional information about the involvement of others who enabled the offshore non-compliance is given (see HMRC: Requirement to correct tax due on offshore assets). The suggested percentages are:

  • Telling: 30% of the maximum reduction.
  • Helping: 40% of the maximum reduction.
  • Giving access to records: 30% of the maximum reduction.

(Paragraphs 14 -17, Schedule 18, Finance (No.2) Act 2017.)

Reasonable excuse

Liability to a penalty does not arise if the taxpayer has a reasonable excuse for the failure to correct. This defence is not available if, among other reasons, the excuse is reliance on advice and that advice is “disqualified”. Disqualified advice is defined to mean advice that satisfied, or advice given by an adviser who satisfied, one of the following conditions:

  • The adviser lacked independence (because the adviser participated in the avoidance scheme or, for consideration, facilitated the taxpayer’s entering the scheme).
  • The advice was given as a result of arrangements between the adviser and a person who participated in the avoidance scheme or, for consideration, facilitated the taxpayer’s entering the scheme (for example, the adviser was instructed by such a person).
  • The adviser lacked expertise.
  • The advice was not bespoke.
  • The advice was given to a third party.

However, advice that would be disqualified under the first four bullets is not disqualified if the taxpayer had taken reasonable steps to find out whether the advice is disqualified and reasonably believed that it was not.

(Paragraph 23, Schedule 18, Finance (No.2) Act 2017.)

HMRC provides guidance including examples of when relying on professional advice may or may not provide a reasonable excuse (see HMRC: Requirement to correct tax due on offshore assets: Penalties and other sanctions).

Special circumstances

Both HMRC and the tribunal on appeal are empowered to reduce penalties where they consider the circumstances to be special (paragraph 17, Schedule 18, Finance (No.2) Act 2017).

For discussion, see Practice note, Tax penalties: direct tax: failure penalties: Reduction in penalties: special circumstances.

No penalty where information provided later than 30 September in certain circumstances

HMRC confirms that a taxpayer will not be liable to penalties for failing to correct by 30 September in the following circumstances:

  • If, by midnight on 30 September 2018, the taxpayer has notified intention to make a disclosure via the Worldwide Disclosure Facility (WDF) by registering via HMRC’s Digital Disclosure Service (DDS). Penalties will not be levied if the disclosure process is completed fully and accurately within the 90-day time limit required by the WDF. No account will be taken of any extensions to the 90-day time limit if the extension reaches beyond 29 December 2018. If HMRC’s acknowledge letter is issued after 30 September 2018, penalties will not be levied if the disclosure process is completed fully and accurately within the 90-day time limit set out in the letter.
  • If, on or before 30 September 2018, the taxpayer has emailed a completed form CDF1 to HMRC at centre.cop9@hmrc.gsi.gov.uk and informed HMRC that they wish to make a disclosure of deliberate behaviour involving offshore tax non-compliance via HMRC’s Contractual Disclosure Facility (CDF) process. Penalties will not be levied if the request is agreed and the taxpayer submits the outline disclosure within the 60-day CDF time limit.
  • If HMRC is already undertaking an enquiry into the taxpayer’s affairs and on or before midnight 30 September 2018 the person conducting the enquiry is informed that the taxpayer wishes to make a disclosure of offshore tax non-compliance. Penalties will not be levied if the taxpayer submits an outline disclosure to that person by 29 November 2018. HMRC’s guidance updated on 21 August 2018 makes clear that penalties will only be avoided if the taxpayer continues to co-operate fully with the enquiry to its conclusion.

(See HMRC: Requirement to correct tax due on offshore assets.)

Assessment and appeals

Assessment

HMRC must assess the penalty and notify the taxpayer of the assessment. The notice must confirm the uncorrected relevant offshore tax non-compliance and the tax period to which the penalty relates.

The penalty must be paid within 30 days of the day the penalty notification was issued. Interest is payable on late paid penalties (see The Finance Act 2009, Sections 101 and 102 (Penalties for Offshore Evasion or Non-Compliance) (Appointed Day) Order 2019 (SI 2019/1238).)

(Paragraph 18, Schedule 18, Finance (No.2) Act 2017.)

The penalty assessment must be made before the end of the relevant period for the non-compliance in question:

  • Failure to notify. The relevant period is 12 months beginning with the end of the appeal period for the assessment of tax unpaid due to the failure (or if there is no assessment, the date on which the unpaid tax is ascertained).
  • Late filing of a return. The relevant period is 12 months beginning with the end of the appeal period for the assessment of the liability to tax that would have been shown in the return (or if there is no assessment, the date on which the liability for tax is ascertained).
  • Inaccuracy in a return. The relevant period is 12 months beginning with the end of the appeal period for the decision correcting the inaccuracy (or if there is no assessment to the tax concerned, the date on which the inaccuracy is corrected).

Appeals

A taxpayer may appeal both the imposition of a penalty and the amount (paragraph 20, Schedule 17, Finance (No.2) Act 2017). The normal appeals process applies (see Practice notes, Tax appeals: new tribunal system from 1 April 2009 and Tax appeals: lodging an appeal and HMRC internal review).

There is no requirement to pay the penalty before the appeal against the penalty is determined (paragraph 17, Schedule 22, Finance Act 2016).

The tribunal has the power to:

  • Affirm or cancel HMRC’s decision (on appeal against a decision that a penalty is payable).
  • Affirm or substitute HMRC’s decision with another decision that HMRC has the power to make (on appeal against the amount of the penalty). The tribunal can only substitute its own decision for HMRC’s on special circumstances grounds if it considers HMRC’s decision to be flawed (in the judicial review sense).

(Paragraphs 20 – 22, Schedule 18, Finance (No.2) Act 2017.)

Interaction with other regimes

A taxpayer subject to a failure to correct penalty may also be subject to penalties under the aggravated and asset-based penalty regimes (see Aggravated penalty for relevant offshore asset moves and Asset-based penalties).

(Paragraphs 27 and 28, Schedule 18, Finance (No.2) Act 2017.)

Naming and shaming

HMRC may publish details of certain taxpayers liable for a failing to correct penalty. Broadly, naming and shaming applies if:

  • The penalty has been assessed (or HMRC and the taxpayer has entered into a contract settlement) and the offshore potential lost revenue in relation to the penalty (or aggregate penalties if more than one) exceeds £25,000.
  • The taxpayer has incurred five or more relevant penalties (even if not assessed).

(Paragraph 30, Schedule 18, Finance (No.2) Act 2017.)

Enablers of offshore tax evasion or non-compliance

Increased sanctions (including penalties and naming) apply to persons (including agents) who “enable” offshore tax evasion and non-compliance (section 162 and Schedule 20, Finance Act 2016).

Conditions

The sanctions apply if a person (P) has enabled (encouraged, assisted or otherwise facilitated) another person (Q) to carry out offshore tax evasion or non-compliance, P knew that its actions enabled (or were likely to enable) that evasion or non-compliance and condition B (see below) is satisfied.

Q carries out offshore tax evasion or non-compliance if Q commits a specified offence or engages in conduct by reason of which Q is liable to a relevant civil penalty.

The specified offences are:

The relevant civil penalties are those described in Offshore penalty regime for inaccuracies and failures and Aggravated penalty for relevant offshore asset moves. From a date to be appointed, the Finance Act 2021 extends the civil penalties to include a penalty under paragraph 3 of Schedule 25 to the Finance Act 2021 (penalties for deliberately withholding information) involving an offshore activity. (For further discussion about Schedule 24, see Practice note, Tax penalties: direct tax: failure penalties: New penalty model for deliberately withholding information).

Condition B is met if Q is convicted of the relevant specified offence (which conviction must be for the full offence) and the conviction is final or the relevant civil penalty has been assessed on Q and the penalty is final (or Q and HMRC have entered into a contract settlement agreement under which HMRC undertakes not to assess the penalty).

Penalty

The amount of the penalty is the higher of 100% of the potential lost revenue and £3,000 (potential lost revenue is defined by reference to the type of offence or penalty in question). (The maximum penalty where the relevant civil penalty relates to relevant offshore asset moves is the higher of 50% of the potential lost revenue and £3,000.)

Penalties may be reduced for disclosures (the reduction depending on whether disclosure is prompted or unprompted and the quality and timing of the disclosure) and for special circumstances.

HMRC has published a factsheet that provides more information about reductions for disclosure (see HMRC, Compliance checks: Penalties for enablers of offshore tax evasion or non-compliance: CC/FS17a).

Penalties must be assessed and may be appealed. Interest is payable on late paid penalties (see The Finance Act 2009, Sections 101 and 102 (Penalties for Offshore Evasion or Non-Compliance) (Appointed Day) Order 2019 (SI 2019/1238).)

HMRC’s information gathering powers in Schedule 36 to the Finance Act 2008 apply to suspected enablers.

Naming

If P is penalised under this provision (and the penalty is final), HMRC may publish information about P if either of the following applies:

  • The potential lost revenue in question exceeds £25,000.
  • P incurs five or more enabler penalties in any five-year period.

However, HMRC may not publish information if the penalty has been reduced in specified circumstances.

Commencement

The measure took effect from 1 January 2017 (see Legal update, Offshore tax evasion penalties in force on 1 January 2017).

HMRC guidance

HMRC guidance on the enablers offshore tax evasion penalties is available at HMRC: Compliance Manual CHM12400.

  HMRC’s offshore tax compliance strategy

HMRC published its offshore tax compliance strategy on 13 March 2019 (HMRC: No Safe Havens 2019). Part of that strategy embraces penalties. While HMRC promises to monitor its approach and implement reforms “where appropriate”, the strategy did not suggest that any specific measures were being considered.

However, on 23 March 2021, HMRC published stage one consultations on Helping taxpayers get offshore tax right and Preventing and collecting international tax debt. In the latter discussion document, HMRC states that it would like to explore approaches including penalties and sanctions to encourage the payment of international tax debt. The closing date is 15 June 2021.

  Other penalty regimes

For other penalty regimes, see Practice notes:

For a discussion of penalties within other regimes, see Practice notes:

 

 

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