Original requirement to correct guidance

Question 1

Part One: the legislation and its application

Accepted Answer

The purpose of the legislation

The purpose of the requirement to correct legislation is to require those with undeclared offshore tax liabilities (relating to Income Tax, Capital Gains Tax or Inheritance Tax for the relevant periods) to disclose those to HMRC on or before 30 September 2018.

This will allow HMRC to take the appropriate action, for example, the collection of tax, interest and any penalties due under the appropriate legislation currently in force. This will make sure that those with offshore interests pay the correct amount of tax. Where taxpayers are unsure if they have undeclared offshore tax they will need to review their affairs to check if action is needed to comply with the requirement.

30 September 2018 was chosen as the final date for corrections as this is the date by which more than 100 countries will exchange data on financial accounts under the common reporting standard.

The common reporting standard data will significantly enhance HMRC’s ability to detect offshore non-compliance and it is in taxpayers’ interests to correct any non-compliance before that data is received.

To make sure there is an incentive for taxpayers to correct any offshore tax non-compliance on or before 30 September 2018 there are increased penalties for any failures to correct by that date.

The requirement to correct rule

This new legal requirement is included at Section 67 and Schedule 18 of the Finance (No. 2) Act 2017 and creates an obligation for anyone who has undeclared UK tax liabilities that involve offshore matters or transfers to disclose the relevant information about this non-compliance to HMRC by 30 September 2018.

Failure to disclose the relevant information to HMRC on or before 30 September 2018 will result in the person becoming liable to a new penalty as a result of their failure to correct. The new failure to correct penalty is likely to be much higher than the existing penalties, with a minimum penalty of 100% of the tax involved.

To avoid becoming liable to these new higher penalties, a person must correct the position by no later than 30 September 2018. If they do this, the tax and interest will be collected and the existing penalty rules will apply. This guidance explains in more detail what must be done by 30 September 2018.

If taxpayers are unsure if they have undeclared UK tax liabilities that involve offshore matters or transfers, they should check their affairs and if necessary put things right before they become liable to the new failure to correct penalties that will come into force on 1 October 2018.

The scope of the requirement to correct rule

The rule relates to liabilities to Income Tax, Capital Gains Tax and Inheritance Tax involving offshore matters or transfers. It tackles offshore tax non-compliance.

Only tax non-compliance committed before 6 April 2017 falls within the requirement to correct (see the sections on timing and time limits for more detail).

For tax non-compliance to be within scope of the rule, HMRC must have been able to make an assessment to recover the Income Tax or Capital Gains Tax in question on 6 April 2017 or make a determination to recover the Inheritance Tax in question on 17 November 2017, the day after Royal Assent was received for the new provisions.

There are a small number of exceptions to these rules.

If you have other undeclared income not directly covered by the rule to disclose to HMRC, you should do so as soon as possible as this will help to reduce any penalties that HMRC charge.

Find out more information on undeclared income.

Offshore non-compliance

Offshore non-compliance occurs when there is tax owed to HMRC as a result of tax non-compliance and that non-compliance involves either an offshore matter or an offshore transfer.

The tax non-compliance involves an offshore matter if the unpaid tax is charged on or by reference to:

income arising from a source in a territory outside the UK
assets situated in a territory outside the UK
activities carried on wholly or mainly in a territory outside the UK or
anything having effect as if it were income, assets or activities of a kind previously described

The tax non-compliance involves an offshore transfer if it is not an offshore matter, but the income (or sale proceeds in the case of a capital gain), or any part of the income, was either received abroad or was transferred abroad before 6 April 2017.

For inheritance tax, the tax non-compliance involves an offshore transfer if it is not an offshore matter, but the disposition that gives rise to the transfer of value involves a transfer of assets, and after that disposition, but on or before 5 April 2017, the assets, or any part of the assets, are transferred to a territory outside the UK.

In all cases, references to the income, proceeds or assets transferred includes any assets derived from or representing the income, proceeds or assets.

If the non-compliance meets these definitions, the rule applies and failure to correct the position will result in the new tougher failure to correct penalties.

All examples in this guidance assume that there is an offshore matter or transfer involved unless otherwise stated.

Example 1 — offshore non-compliance: Income Tax

Alan has received cash payments whilst running his business in the UK. He has failed to declare these cash receipts and instead has opened a bank account overseas and paid the money into that account as it arose.

He has also received interest on his overseas bank account but he has not declared this income to HMRC. He has submitted inaccurate tax returns for each tax year from 2011 to 2012 through to 2015 to 2016.

The failure to declare the interest on the overseas bank account is non-compliance involving an offshore matter as it is income arising from a source in a territory outside the UK.

The failure to declare the cash receipts is not an offshore matter, but it is an offshore transfer because the money was transferred abroad before 6 April 2017.

Both the failure to declare his cash receipts and the bank interest must be corrected under the requirement to correct rule.

Example 2 — offshore non-compliance: Income Tax and Capital Gains Tax

Emma has a holiday home in Spain. In 2008 to 2009, Emma started to rent out the holiday home during periods when she was not using it. The income she received from the rental of this property was never declared to HMRC.

In tax year 2012 to 2013, Emma sold her property, making a £200,000 gain on the sale. This was not declared to HMRC either.

The failure to declare the rental income on the overseas property is non-compliance involving an offshore matter as it is income arising from a source in a territory outside the UK.

The failure to declare the gain from the sale of the property is also an offshore matter as it is a gain arising on an asset held in a territory outside the UK.

Both the failure to declare her rental income and the gain from the sale of the property are offshore matters and must be corrected under the rule.

Example 3 — offshore non-compliance: Inheritance Tax

Peter was domiciled in the UK at the time of his death on 1 June 2012. Peter’s son Henry was his sole heir and executor of Peter’s estate. Peter’s estate which was inherited by Henry included £200,000 in a bank account in the Cayman Islands.

As part of his inheritance, Henry took control of the account following Peter’s death. Henry did not disclose the money in the Cayman Islands as part of Peter’s estate when it was declared to HMRC.

Henry’s failure, as executor, to disclose the cash as part of Peter’s estate is an offshore matter as the property was held in a territory outside the UK.

The failure to declare the property as part of Peter’s estate must be corrected under the requirement to correct.

Example 4 — offshore non-compliance: non-resident landlord

David moved to Switzerland in 2011 and is the 100% owner of a Swiss company that owns a number of UK properties that it rents out through a letting agent. The letting agent deducts basic rate tax and passes the balance of the rents to the company.

HMRC have served the company a notice to complete a return every year from 2011 to 2012 through to 2015 to 2016, but the company has not completed the returns and has not therefore accounted for the further Income Tax that is due.

The company’s failure to submit the returns is non-compliance involving an offshore transfer as the income from a UK source has been transferred to Switzerland before 6 April 2017.

The company’s failure to submit the returns must be corrected under the requirement to correct.

Non-compliance for the purposes of the requirement to correct

The legislation refers to offshore tax non-compliance and this means any of the following:

(a) a failure to comply with an obligation to give notice of chargeability to Income Tax or Capital Gains Tax (under section 7 TMA 1970)

(b) a failure to comply with an obligation to deliver to HMRC a return or certain other documents - there are different rules relating to Inheritance Tax

(c) delivering to HMRC a return or other specified document that contains an inaccuracy - the inaccuracy must amount to or lead to an understatement of a liability to tax or a false or inflated statement of a loss or a false or inflated claim to repayment of tax

A full list of the documents that are covered by (b) and (c) are at paragraphs 8 (3) and (4) of Schedule 18 of the Finance (No. 2) Act 2017.

The timing of non-compliance for the purposes of the requirement to correct

The requirement only applies if the non-compliance was committed before 6 April 2017. When non-compliance was committed depends on the nature of the failure or inaccuracy.

Failing to notify chargeability occurred before 6 April 2017 if the notification should have been made on or before 5 April 2017. A person who has not been issued with a return by HMRC is obliged to notify HMRC if they have a liability to Income Tax or Capital Gains Tax. This notification should be made no later than 5 October after the end of the relevant tax year.

Anyone who has failed to notify chargeability involving offshore matters or transfers for any year up to and including 2015 to 2016 will have failed to do so on or before 5 April 2017. They’re required to correct the position on or before 30 September 2018.

Failing to make a return takes place the day after the final day on which the return should have been delivered to HMRC.

Example 5 — timing of a failure to make a return

Ajit was served with a notice requiring a return by HMRC for the tax year 2015 to 2016. The notice was issued to Ajit on 1 May 2016 and the return should have been submitted to HMRC by 31 January 2017.

Ajit failed to submit the return on time and his offence was committed on 1 February 2017. If Ajit has still has not submitted the return by 6 April 2017, he is required to correct this on or before 30 September 2018. If he does not he will become liable to the failure to correct penalties.

Example 6 — failure to submit an account for Inheritance Tax purposes

Robert is the trustee of a Jersey resident settlement made by his UK-resident brother James. James was also domiciled in the UK when he created the trust.

James settled the trust on 18 November 2004, giving the trustee a villa in Italy and a portfolio of investments. The property and investments were together worth in excess of the nil-rate band at the 10 year anniversary of the settlement, 18 November 2014.

A relevant property charge arose for Inheritance Tax purposes on the latter date, and an account should have been submitted by Robert, as trustee, on or before 18 May 2015. Robert did not submit this account.

If Robert has still not submitted an account by 6 April 2017, he is required to correct his failure to submit an account on or before 30 September 2018. If he does not, he will become liable to the failure to correct penalties.

Submitting a return or document containing an inaccuracy takes place on the day that the inaccurate return or document is delivered to HMRC. If the inaccurate document or return is delivered to HMRC on or before 5 April 2017, the requirement to correct rule will apply and the position must be corrected on or before 30 September 2018, and if it is not, failure to correct penalties will be due.

Time limits governing if HMRC can make an assessment to recover tax on 6 April 2017

The requirement to correct only applies if HMRC is able to raise an assessment to recover the unpaid tax on 6 April 2017. Normal assessing rules apply to decide if HMRC is able to raise an assessment on 6 April 2017.

A full list of these time limits for Income Tax and Capital Gains Tax and time limits for Inheritance Tax are available in HMRC’s Compliance Handbook, but the most relevant time limits are:

Type of assessment	Last date for making the assessment
Assessment where the loss of tax is not due to careless or deliberate behaviour	4 years from the end of the tax year of assessment in which the tax loss arises
Assessment where the loss of tax is due to careless behaviour	6 years from the end of the tax year of assessment in which the tax loss arises
Assessment where the loss of tax is due to deliberate behaviour	20 years from the end of the tax year of assessment in which the tax loss arises

If there is a failure to notify chargeability the time limits are different. You can find out about:

Exceptions to this criteria

The requirement to correct rule only applies if one of the specific failures or inaccuracies has occurred. It does not apply to any other failure.

For example, a penalty can be charged if you fail to notify HMRC of an underassessment to tax. A person who has offshore non-compliance as a consequence of such a failure should still contact HMRC to put matters right. Any such corrections will be subject to the existing penalty regime and not to the tougher failure to correct penalties.

Companies normally pay Corporation Tax instead of Capital Gains Tax. However, there are circumstances in which a company might be liable to Capital Gains Tax.

The rule does not apply to non-resident Capital Gains Tax payable by companies but does apply if a company is otherwise liable to Capital Gains Tax. A company may also be liable to Capital Gains Tax if the chargeable gain accrues to the company in a fiduciary or representative capacity.

The requirement to correct does not apply to any tax non-compliance to the extent that it has already been put right.

Example 7 — partially corrected non-compliance

Chi Wing has submitted incorrect tax returns for the tax years 2012 to 2013 and 2013 to 2014. He omitted income from abroad on both returns as follows:

2012 to 2013 — rental income of £10,000 from a property overseas
2013 to 2014 — rental income of £20,000 from 2 properties overseas

HMRC found out about one of the properties and challenged Chi Wing. He admitted having failed to return income of £10,000 in each year from that property but failed to mention the income from the other property. He has made a full correction in relation to the 2012 to 2013 return and has no further obligation in relation to that return under the requirement to correct.

He has only made a partial correction in relation to his 2013 to 2014 return. To the extent that he has not corrected the position, he must make a further correction on or before 30 September 2018 in relation to the £10,000 of rental income from his second property.

If he fails to do this, he will face the new tougher failure to correct penalties and a minimum penalty of 100% of the tax due in addition to having to pay the tax and interest due.

Any non-compliance that does not involve offshore non-compliance is not subject to the requirement to correct and failure to correct penalties will not apply.

The requirement to correct rule does not apply to liabilities incurred as an employer because of a failure to operate PAYE correctly.

Example 7A — offshore non-compliance: business visitor to the UK

Michelle has lived in Bermuda for many years where she has been employed by a Bermudan company which has no presence in the UK. Each year she travels to the UK on business for between 35 and 40 days. She has not declared the employment income relating to her UK workdays to HMRC. There is no double taxation treaty between the UK and Bermuda to exempt her employment income from UK tax.

Michelle’s failure to declare the employment income relating to her UK workdays is non-compliance involving an offshore transfer as the income was received in a territory outside the UK.

The failure to notify chargeability must be corrected under the requirement to correct.

Example 7B — offshore non-compliance: business visitor to the UK, failure to operate PAYE

Ravi has lived in Bermuda for many years where he has been employed by a Bermudan company which has a branch in the UK. Each year he travels to the UK on business for between 35 and 40 days. He has not declared the employment income relating to his UK workdays to HMRC and the UK branch has not applied PAYE. There is no double taxation treaty between the UK and Bermuda to exempt his employment income from UK tax.

Whilst Ravi should have reported his UK employment income there is an important difference in relation to Example 7A. This is that the UK branch also has an obligation to apply PAYE, albeit that it has failed to do so. Accordingly, whilst the UK branch should regularise its PAYE position this matter falls outside the requirement to correct rules.

Ravi should also report his UK taxable income to HMRC but he should note that his Bermudian employer has a UK branch and that the PAYE owed by the branch will normally discharge the tax arising on this income.

Any person, including any company, that has undeclared tax liabilities not covered by the requirement should contact HMRC to correct the position without delay. Such corrections will be dealt with under the usual rules covering tax, interest and any penalty due. Find out more information about undeclared tax liabilities.

Penalties and other sanctions for not correcting on or before 30 September 2018

If you fail to correct on or before 30 September 2018, you will be liable to the new, tougher failure to correct penalties. There are a number of elements to these penalties:

Standard Penalty

In all cases where a penalty applies, there will be a standard penalty equivalent to 200% of the tax liability which should have been disclosed to HMRC under the requirement to correct but was not. This penalty can be reduced to reflect any combination of the following factors:

your level of co-operation with HMRC
the quality of your disclosure to HMRC (including telling HMRC of anyone who helped enable your non-compliance)

The reduction will take account of if you came forward voluntarily to tell HMRC of your failure but the reduction cannot reduce the penalty to less than 100% of the tax involved.

When calculating penalties for your failure to correct we’ll take into account if you came forward voluntarily to tell us about your failure. If you have not come forward voluntarily to disclose the failure we will restrict the amount of reduction given for disclosure. If you have not come forward voluntarily the penalty will not be reduced below 150% of the tax involved.

So, if you do come forward voluntarily the penalty can be reduced from 200% to a minimum of 100% but if you have not the minimum penalty will be 150%. In either case, how much of this reduction you actually receive will depend on our view of how much assistance you give us. We refer to this assistance as the ‘quality of disclosure’ or as ‘telling, helping and giving’. Examples of telling, helping and giving include:

telling us about, or agreeing that there is something wrong and how and why it happened
telling us everything you can about the extent of what is wrong as soon as you know about it
telling and helping us by answering our questions in full
helping us to understand your accounts or records
helping us by replying to our letters quickly
helping us by agreeing to attend any meetings, or visits at a mutually convenient time
helping us by checking your own records to identify the extent of the inaccuracy
helping us by using your private records to identify sales or income not included in your tax return
giving us access to documents we’ve asked for without unnecessary delay
giving us access to relevant documents we may not know about, as well as those that we ask to see

The reduction you will receive will depend on how much assistance you give us. For:

telling we give up to 30% of the maximum reduction
helping we give up to 40% of the maximum reduction
giving access to records we give up to 30% of the maximum reduction

To receive the full reduction you must also provide additional information to us about anyone who encouraged, assisted or facilitated you to carry out offshore tax evasion or non-compliance.

We will take this information into account when calculating the penalty and reduction we’ll give you for the quality of disclosure.

If you did not involve an enabler, then by telling us this you will have met the requirement to provide this additional information.

Asset Based Penalty

In the most serious cases, where the tax involved exceeds £25,000 in any tax year, and you knew you had relevant offshore non-compliance and did not correct it the asset based penalty at Schedule 22 to Finance Act 2016 will apply.

This means a penalty of up to 10% of the value of assets connected to the failure will be charged. This is in addition to the standard penalty previously detailed.

HMRC will consider that you will have known you had relevant offshore tax non-compliance to correct if either:

your original non-compliance was deliberate
you became aware at a later point that non-deliberate non-compliance had occurred

Offshore Asset Moves Penalty

Schedule 21 to Finance Act 2015 introduced a new enhanced penalty for cases where it can be shown that you moved assets to avoid having details reported to HMRC under international agreements on exchange of information.

The penalty is equivalent to 50% of the amount of the standard penalty and is charged in addition to the standard penalty. This enhanced penalty provision applies to the requirement to correct rule and will be equivalent to 50% of the failure to correct penalty.

In more serious cases and in addition to the penalties previously detailed, if more than £25,000 tax per investigation is involved and you knew you had relevant offshore non-compliance and did not correct it, HMRC may publish your details.

The detailed rules are similar to those at section 94 of Finance Act 2009 (Publishing Details of Deliberate Tax Defaulters).

Extension of period for assessment of offshore tax

The requirement to correct legislation allows for a longer period for HMRC to take action to recover any tax that is subject to the requirement to correct rule.

This means that for any offshore tax that is subject to the requirement, we will continue to be able to assess that tax until the later of 5 April 2021 or the date on which an assessment can be raised using the normal rules.

Example 8 — extended time limits for assessing tax

Henry submitted incorrect tax returns for the tax years 2008 to 2009, through to 2015 to 2016.

Henry’s behaviour was careless meaning that the normal time limit for making an assessment applies and HMRC was required to raise any assessment no later than 6 years from the end of the year of assessment in which the tax loss arose.

The last dates on which HMRC could raise assessments under normal rules are:

Tax year	Final date for raising assessment
2008 to 2009	5 April 2015 (6 years after 5 April 2009)
2009 to 2010	5 April 2016 (6 years after 5 April 2010)
2010 to 2011	5 April 2017 (6 years after 5 April 2011)
2011 to 2012	5 April 2018 (6 years after 5 April 2012)
2012 to 2013	5 April 2019 (6 years after 5 April 2013)
2013 to 2014	5 April 2020 (6 years after 5 April 2014)
2014 to 2015	5 April 2021 (6 years after 5 April 2015)
2015 to 2016	5 April 2022 (6 years after 5 April 2016)

Henry is only required to make a correction for the tax years in relation to which HMRC is able to raise an assessment to recover the tax on 6 April 2017.

Because Henry’s behaviour was careless, by 6 April 2017, HMRC cannot raise an assessment for the tax years 2008 to 2009, 2009 to 2010 and 2010 to 2011. Henry does not need to make a correction for those years.

Henry should make a correction for the tax years 2011 to 2012 through to 2015 2016, but does not do so. In February 2020, HMRC receive information about Henry’s offshore assets and identify that Henry’s returns are incorrect.

HMRC open an enquiry and establish that Henry has submitted incorrect returns. By July 2020, HMRC have all the information to raise assessments.

Under normal time limit rules, by July 2020, HMRC would be unable to raise assessments for tax years 2011 to 2012, 2012 to 2013 and 2013 to 2014. However, because the liabilities were subject to the requirement to correct rule, HMRC has until at least 5 April 2021 to raise the assessments.

Tax year	Final date for raising assessment	Explanation
2008 to 2009	5 April 2015 (6 years after 5 April 2009)	HMRC unable to assess on 6 April 2017, therefore outside the scope of the requirement to correct.
2009 to 2010	5 April 2016 (6 years after 5 April 2010)	HMRC unable to assess on 6 April 2017, therefore outside the scope of the requirement to correct.
2010 to 2011	5 April 2017 (6 years after 5 April 2011)	HMRC unable to assess on 6 April 2017, therefore outside the scope of the requirement to correct.
2011 to 2012	5 April 2018 (6 years after 5 April 2012)	HMRC able to assess on 6 April 2017, therefore within the scope of the requirement to correct and time limit extended to 5 April 2021.
2012 to 2013	5 April 2019 (6 years after 5 April 2013)	HMRC able to assess on 6 April 2017, therefore within the scope of the requirement to correct and time limit extended to 5 April 2021.
2013 to 2014	5 April 2020 (6 years after 5 April 2014)	HMRC able to assess on 6 April 2017, therefore within the scope of the requirement to correct and time limit extended to 5 April 2021.
2014 to 2015	5 April 2021 (6 years after 5 April 2015)	Inside scope of requirement to correct but no need to extend time limit.
2015 to 2016	5 April 2022 (6 years after 5 April 2016)	Inside scope of requirement to correct but no need to extend time limit.

HMRC can therefore still raise assessments for all of the tax years that were subject to the requirement to correct and impose failure to correct penalties.

Reasonable excuses

The penalties will be chargeable if you fail to correct, unless you can demonstrate you had a ‘reasonable excuse’ for not meeting your obligation.

If you fail to make a correction but have a reasonable excuse for not doing so, you will not face an failure to correct penalty but will still have to pay any tax that is owed along with interest.

You may still face a penalty under the existing rules for the original non-compliance that was not corrected.

HMRC will follow existing models and established principles from case law that provide guidance on the application of a reasonable excuse provision as the basis for its application to the requirement to correct.

The requirement to correct legislation specifically states circumstances that cannot be taken to be a reasonable excuse:

an insufficiency of funds is not a reasonable excuse, unless attributable to events outside your control
where you relied on any other person to do anything, that cannot be a reasonable excuse unless you took reasonable care to avoid the failure
where you had a reasonable excuse but the excuse has ceased, you are only to be treated as continuing to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased
relying on advice in certain circumstances

Some of these circumstances are explored more fully in part two of the guidance.

Question 2

Part Two: the requirement to correct in practice — what to consider

Accepted Answer

The scope of the requirement to correct

Anyone who owns or has an interest in assets held offshore or has had a source of income that is offshore, or has moved income or the proceeds of capital gains offshore is potentially affected.

If you are in that position you should check that you have declared all tax liabilities that arise as a result of these assets and if you find that you have unpaid tax liabilities you should come forward and correct them as soon as possible and in any case no later than 30 September 2018.

Examples of assets include:

art and antiques
bank and other savings accounts
boats
cash
debts owed to you
gold and silver articles
government securities
jewellery
land and buildings, including holiday timeshare
life assurance policies and pensions
other accounts, such as stockbroker’s or solicitors’
other bond deposits and loans including personal portfolio bonds
rights or intellectual property including image rights
stocks and shares
trusts including employee benefit trusts and self-employed persons trusts
vehicles

This list is not exhaustive and any asset held offshore, however they are held, may lead to a requirement to correct. In particular more complex structures will create a requirement including those where the purported tax advantages are reliant on commerciality or the interpretation of complicated anti avoidance provisions.

Requirement to correct rule for those who are uncertain regarding their position with respect to offshore investments

If you have any doubt, you should review your UK tax affairs so that you can make any necessary correction by 30 September 2018.

The requirement to correct provides a window of opportunity for you to correct any issues you have with your offshore interests and you should take this opportunity to review your position to satisfy yourself you are fully compliant. The rules applying to offshore transfers and structures can be very complicated and it may be prudent for you to instruct an independent specialist tax adviser to consider if you have a requirement to correct.

If you do not take this opportunity, HMRC will be using the information provided under the Automatic Exchange of Information agreements to identify non-compliance involving offshore matters or transfers and when you are caught you will face the higher failure to correct penalties, and you could also face criminal sanctions.

Deciding the right period to review for your offshore affairs

You only need to make a correction if HMRC can raise an assessment to recover the relevant tax on 6 April 2017.

The period you need to review will therefore depend on if any non-compliance is as a result of deliberate behaviour, careless behaviour or if you took reasonable care to get your tax affairs right.

It will also depend on if your non-compliance is as a result of you failing to notify your chargeability to tax. You should refer to the section on time limits to decide the period you need to review.

Relying on professional advice

HMRC recognise 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.

The requirement to correct contains specific rules governing when you cannot claim to have a reasonable excuse because you relied on advice that turned out to be wrong or if HMRC challenge and establish a liability.

In some circumstances, if you relied upon advice to complete tax returns and similar you may have a reasonable excuse so you will not be liable to a failure to correct penalty for not correcting the position on or before 30 September 2018.

However, the requirement to correct rules specify you cannot rely on advice as providing a reasonable excuse in certain circumstances:

if the advice is given by an interested person, or as a result of arrangements made between an interested person and the person giving the advice
if the person giving the advice did not have the appropriate expertise
where the advice failed to take account of all your relevant circumstances or
if the advice was addressed to, or was given to, a person other than you

Advice that cannot be relied on because of these rules is referred to as disqualified. These circumstances are explored more fully in the following paragraphs and examples.

You can claim to have a reasonable excuse if you have relied on and followed advice that is not disqualified and it does not matter if this advice was given when the original non-compliance took place or as part of a review when considering if a correction needs to be made.

Definition of an interested person

An interested person is someone who either participated in relevant avoidance arrangements or who received consideration for facilitating your entry into the relevant avoidance arrangements. It is important to note that the interested person concept only applies to advice relating to avoidance arrangements.

For these purposes, avoidance arrangements are any arrangements where in all the circumstances it would be reasonable to conclude that the main purpose, or one of the main purposes, of the arrangements is the obtaining of a tax advantage.

Advice from an interested person that accords with established practice that HMRC had indicated its acceptance of will not be disqualified as the legislation specifically states that in these circumstances they are not avoidance arrangements.

Ian was unsure as to his correct domicile status and sought advice from a large firm of accountants. The firm thoroughly reviewed his circumstances and advised that in their view he was not domiciled in the UK for tax purposes.

The firm then advised Ian on how to structure his affairs to pay less tax on his foreign income. Ian did not make a correction under the requirement to correct because he believed, based on the advice he had received, that he had no correction to make.

Some years later HMRC challenged Ian’s domicile status and after a lengthy enquiry established that he was actually domiciled in the UK.

Because of this Ian owed tax in relation to his offshore income for tax years 2013 to 2014, 2014 to 2015 and 2015 to 2016. Ian should have made a correction under the requirement to correct.

Ian claimed that he had a reasonable excuse because he had taken and followed appropriate advice and claimed that the incorrect advice is not disqualified. The incorrect advice related to his domicile status.

The advice was given by someone with the appropriate expertise, took account of all of his relevant circumstances and did not relate to avoidance arrangements. The advice was not therefore disqualified and Ian did have a reasonable excuse.

It is important that the inaccurate advice related to Ian’s domicile status but that the domicile status did not involve avoidance arrangements facilitated by the advisor. Ian did not take any steps to alter his domicile status based on the advice.

In these circumstances his domicile status does not fall within the definition of avoidance arrangements. Although the subsequent steps do fall within the definition of avoidance arrangements, the advice relating to the avoidance arrangements was correct.

Example 10 — disqualified advice given by an interested person

Peter wanted to structure his affairs to make sure he paid the minimum amount of tax required by the law. He approached a specialist firm who, after reviewing his circumstances, advised him to set up an offshore trust to hold some of his assets and investments.

The firm also advised Peter on how to complete his tax return. Peter accepted the advice and instructed the firm to put the arrangements in place.

Peter did not make a correction under the requirement to correct because he believed, based on the advice he had received, that he had no correction to make.

Some years later HMRC challenged Peter’s return and after a lengthy enquiry established that more tax was due on the assets and investments in the offshore trust. Because of this Peter owed tax in relation to his offshore income for tax years 2013 to 2014, 2014 to 2015 and 2015 to 2016. Peter should have made a correction under the requirement to correct.

Although the advice was given by someone with the appropriate expertise and took account of all of his relevant circumstances, because it was advice concerning avoidance arrangements and was given by someone who facilitated the arrangements it is disqualified.

The firm is an interested person and Peter cannot rely on the advice he received to show he had a reasonable excuse for his failure to correct.

Example 10A — independent advice, not from an interested person (not disqualified)

The position is similar to the previous example but on this occasion after the arrangements had been put in place, Peter provided full details of the arrangements to another accountant and asked him to advise how he should complete his tax return.

The accountant told him that he agreed with the advice given by the specialist firm and helped Peter complete his return accordingly.

Again, some years later following a lengthy enquiry, HMRC established that more tax was due on the assets and investments in the offshore trust.

Because of this Peter owed tax in relation to his offshore income for tax years 2013 to 2014, 2014 to 2015 and 2015 to 2016. Peter should have made a correction under the requirement to correct.

Again the advice from the specialist firm was disqualified. However the advice from the accountant was from someone who was not involved in the facilitation of the arrangements who had the appropriate expertise and took account of all of his relevant circumstances.

Consequently the advice from the accountant was not disqualified and Peter could rely on it to show he had a reasonable excuse for his failure to correct.

If the advice you intend to rely on is disqualified as it was given by an interested person, or someone who has made arrangements with the interested person, you should consider either disclosing the matter to HMRC so it has been corrected and no failure to correct penalty could be due, or taking further advice from a person who did not participate in, and was not involved in facilitating, the avoidance arrangements.

In particular, taxpayers with more complex structures including those where the purported tax advantages are reliant on commerciality or the interpretation of complicated anti avoidance provisions are encouraged to consider seeking specialist tax advice from someone not involved in the original arrangements. This will enable them to identify the potential risks associated with a structure to identify if there is an obligation to correct. By taking these steps, a taxpayer may well assist any future reasonable excuse claim should a challenge by HMRC be forthcoming.

HMRC’s view is that when considering who the interested person is, person includes a body of persons both corporate or unincorporate. It therefore follows that the interested person might be an individual, or an organisation such as a limited company, firm of accountants or a limited liability partnership.

HMRC accepts that if a person gives all of the advice after all of the avoidance arrangements have taken place that advice cannot relate to the facilitation of those avoidance arrangements and will not be disqualified on the grounds of it being from an interested person (as long as the adviser did not participate in the relevant avoidance arrangements).

HMRC will also not seek to argue that the new advice is disqualified because it is as a result of arrangements made between an interested person and the person who gave the advice.

There will be cases where HMRC have agreed the correct treatment for an issue (for example during the course of an enquiry, through a ruling).

Provided there has been no material change to the relevant facts or legislation and that all relevant information requested at the time was provided, HMRC will accept that any returns subsequently submitted in line with the agreed treatment were made in accordance with established practice and the arrangements concerned will not be considered avoidance arrangements for the purposes of the requirement to correct. This is in line with the acceptance of established practice in relation to advice from an interested person.

Further advice from the same adviser

The legislation makes it clear that advice given to the taxpayer as a result of arrangements made between an interested person and the person who gave the advice is disqualified.

You should therefore take care when seeking further advice to make sure it is not disqualified on this basis.

The appropriate level of expertise for advisers

If a person has the appropriate expertise to give advice will vary depending on the precise circumstances involved.

HMRC will accept that anyone who is a member of a UK-recognised legal, accountancy or tax advisory body will have the appropriate expertise to give advice on UK tax matters.

Advice needs to take account of all of the taxpayer’s relevant circumstances

You can only claim that you have a reasonable excuse for not making a correction because you relied on advice if the advice that you are relying on takes account of all your relevant individual circumstances. This means that the adviser must have been given full and accurate details of all matters that are relevant to the issue.

Care should be taken if you have relied on advice that was given before the transactions took place. Such advice runs the risk of failing to take account of all of your relevant circumstances.

If you rely on advice that was given before the transactions took place and the transactions then took place in a slightly different way and that slight difference means tax is due, it will be HMRC’s position that the advice failed to take account of all of your relevant circumstances. This will particularly be the case if you have failed to correctly follow the advice.

If advice takes account of all your relevant individual circumstances is a continuing requirement. For example, if advice that takes account of all your circumstances was taken in 2011, it is reasonable for you to be able to rely on that advice when completing your next tax return.

However, as time passes it is increasingly likely that your circumstances, or the legislation that the advice is based on, will have changed and the advice may no longer be correct.

If you rely on advice that, whilst originally accurate, becomes wrong because of a change in your circumstances or a change in the legislation you cannot claim to have a reasonable excuse based on the advice that has become out of date.

For this reason, if you are relying on old advice, you should check your position carefully before deciding if a correction is needed.

Example 11 — Disqualified advice: failing to take account of all circumstances and lacking appropriate expertise

John sold a property in Florida in 2014 and at that time took advice from a friend who worked in the property business but who had no tax qualifications or experience.

He told his friend about the sale and also told him that he was unsure about his domicile status. His friend advised him that there was no tax to pay on the capital gain that arose because as John was born in Canada he was not domiciled in the UK.

The advice John received is disqualified for a number of reasons. His friend who gave the advice did not have the appropriate expertise to give the advice. The advice did not take account of all John’s individual circumstances as it did not take account of other factors that might impact on the question of his domicile.

Ultimately the advice was wrong because when further facts were taken into account John was domiciled in the UK. John does have a tax liability and must make a correction under the requirement to correct.

If he does not he will be liable to failure to correct penalties and will not have a reasonable excuse as the advice he took was not from a person with the appropriate expertise and did not take account of all of his relevant circumstances.

Example 12 — further advice, not from an interested person (not disqualified)

Ken approached a specialist trust company in 2011 and was advised that he could pay less tax if he set up a complex offshore structure involving trusts and companies.

The specialist trust company was paid a commercial fee for the work setting up the structure. Ken did not tell his accountant about the structure because he was happy to rely on the advice from the trust company.

In 2018, Ken decided to get a financial health check to make sure he did not need to make a correction under the requirement to correct.

He explained what had happened to his accountant and supplied all of the relevant information to him. The accountant said that the matter was not free from doubt but agreed that no tax was payable and that Ken had no need to make a correction.

Sometime later HMRC found out about the structure and opened an enquiry. The matter was complex but eventually HMRC established that the structure did not successfully avoid tax and that further tax was due. Ken should have made a correction and had not. Ken had to pay the tax and interest that was due.

However, HMRC accepted that because Ken had obtained, and followed, independent advice about the avoidance arrangements from someone with the appropriate expertise and the advice took account of all of his relevant individual circumstances he had a reasonable excuse for not making the correction and no failure to correct penalty applied.

If Ken had relied solely on the original advice he would not have had a reasonable excuse as the advice would have been disqualified as it was given by an interested person because the specialist trust company was involved in facilitating the avoidance arrangements and was paid a fee for that work.

Example 13 — disqualified advice: failure to take account of all circumstances

Larry is not domiciled in the UK and took advice from an accountant in 2006 about what tax he should pay on his foreign income. He was correctly advised on how to structure his affairs and what income to declare if he did this.

Larry followed this advice and completed his return for tax year 2006 to 2007 and subsequent years accordingly but never took any further advice.

Because of changes to the rules on tax payable by people who are not domiciled in the UK, all of Larry’s returns since tax year 2008 to 2009 have been incorrect. Larry was unaware of the changes, and did not make a correction under the requirement to correct.

In 2019 HMRC opened an enquiry and established the correct position. Larry has not acted deliberately but cannot be said to have taken reasonable care in relation to his returns submitted some years after the advice was taken.

His failure to take further advice means he has been careless and should have corrected his non-compliance for the tax years 2011 to 2012 through to 2016 to 2017. Larry cannot claim to have a reasonable excuse as the advice that he relied on failed to take account of all of his relevant circumstances.

Ways of making a correction under the requirement to correct rule

You can correct any offshore tax non-compliance on or before 30 September 2018 in a number of ways:

Regardless of the nature of the non-compliance you can correct by:

using HMRC’s Digital Disclosure Service as part of the Worldwide Disclosure Facility or any other service provided by HMRC as a means of correcting tax non-compliance
either:
- telling an officer of HMRC in the course of an enquiry into your affairs
- any other method agreed with HMRC

Depending on the nature of your non-compliance, the following methods can also be used if your non-compliance involves:

a failure to comply with an obligation to give notice of chargeability to Income Tax or Capital Gains Tax (under section 7 TMA 1970), you can correct by giving the requisite notice to HMRC and also giving HMRC the information that enables or assists it to calculate the offshore tax due
a failure to comply with an obligation to deliver to HMRC a return or certain other documents, you can correct by making or delivering the requisite return or document so that HMRC has the information that enables or assists it to calculate the offshore tax due
delivering to HMRC a return or other specified document that contains an inaccuracy (and the window for correction remains open) you can correct by amending the return or document or delivering a new return or document so that HMRC has the information that enables or assists it to calculate the offshore tax due

In summary, you are required to supply HMRC with the information it needs to be able to calculate the tax due as a result of your non-compliance. You are required to supply this information on or before 30 September 2018. It is your responsibility to make sure that you do everything required by 30 September 2018.

For example, if you decide to correct your offshore non-compliance involving a failure to comply with an obligation to give notice of chargeability to Income Tax by giving HMRC that notice and providing the information needed to calculate the offshore tax due, you will need to start the process some time before 30 September 2018 to make sure that the process will be completed in time. HMRC strongly urge you to come forward and make your correction as soon as possible to avoid any situation whereby you are prevented from completing your correction on time.

You will not be liable to penalties for failing to correct by 30 September 2018 in the following limited scenarios where information is provided later.

Scenario 1

If by midnight on 30 September 2018, you notify your intention to make a disclosure through HMRC’s Worldwide Disclosure Facility by registering through HMRC’s Digital Disclosure Service:

you will not be liable to penalties for any failure to correct provided the disclosure process is completed fully and accurately within the 90 day time limit required by the Worldwide Disclosure Facility
no account will be taken of any extensions to the 90 day time limit (for example because the case is complex or a Non Statutory Clearance application is made) to the extent it reaches beyond 29 December 2018 when considering failure to correct penalties

Anyone wishing to register for the Worldwide Disclosure Facility by telephone must do so by 4pm on 28 September 2018. Anyone registering for the Digital Disclosure Service on or before 30 September 2018 must supply all of the required information by 29 December 2018 at the latest (or, in the limited number of cases where the HMRC acknowledgement letter issues after 30 September, within the 90 day limit).

Scenario 2

On or before 30 September 2018, you email a completed form CDF1 to HMRC at centre.cop9@hmrc.gsi.gov.uk and inform HMRC that you wish to make a disclosure of deliberate behaviour involving offshore tax non-compliance through HMRC’s Contractual Disclosure Facility process (see section on ‘owning up to tax fraud voluntarily’ in this guidance):

you must tell HMRC that your disclosure of deliberate behaviour involves offshore tax non-compliance by completing the appropriate box on form CDF1
if your request is agreed you should submit your outline disclosure within the 60 day time limit stipulated in the process and continue to fully comply with the Contractual Disclosure Facility process you will not be liable to penalties for the failure to correct any issue detailed in the outline disclosure

Scenario 3

If HMRC is already undertaking any enquiry or intervention into your affairs and on or before 30 September 2018:

you inform the person conducting the enquiry that you wish to make a disclosure of offshore tax non-compliance and you then submit an outline disclosure to that person by 29 November 2018:
you will not be liable to penalties for the failure to correct any issue detailed in the outline disclosure provided you continue to fully co-operate with the enquiry to its conclusion

The outline disclosure must provide:

details of the offshore tax non-compliance you have committed
the years involved
a summary of how the non-compliance came about
the amounts of tax that you believe you owe
a summary of the records that are available to help you make your disclosure

Example 13A — deadline when notification made close to 30 September

Imran used HMRC’s online portal to notify his intention to make a disclosure through the Worldwide Disclosure Facility on 29 September. HMRC acknowledged this by letter on 4 October and told him that he had to complete his disclosure by 2 January 2019 (that is 90 days after the date of the letter). Provided Imran completes his disclosure by 2 January 2019 HMRC will not seek to charge Failure to Correct penalties. Imran may be allowed extra time to make his disclosure if it is complex but HMRC will take no account of that extension when considering if failure to correct penalties are due. The deadline for Imran to submit his disclosure if he wants to avoid the penalties will remain at 2 January 2019.

Example 13B — deadline when notification is before 30 September and an extension is requested

Karen notified her intention to make a disclosure through the Worldwide Disclosure Facility on 1 August 2018. HMRC acknowledged this by letter on 4 August and told her that she had to complete her disclosure by 2 November 2018. On 15 September Karen contacted HMRC and explained that her disclosure was complex and she needed more time. She asked for a 90 day extension. HMRC agreed to allow her an additional 90 days to complete the disclosure under the Worldwide Disclosure Facility but told her that the deadline for submitting the disclosure to avoid the failure to correct penalties will be 29 December 2018. Karen could now make her disclosure at any time up to 31 January 2019 but if she submits her disclosure after 29 December 2018 HMRC will impose failure to correct penalties.

Example 13C — deadline when the CDF form is requested

On 27 September 2018, Jordan emailed a completed form CDF1 to HMRC at centre.cop9@hmrc.gsi.gov.uk to inform HMRC that he wished to make a disclosure of deliberate behaviour involving offshore tax non-compliance through HMRC’s Contractual Disclosure Facility process. HMRC decided to accept Jordan into the process and wrote to him on 22 October asking him to make his outline disclosure by 21 December 2018. Provided Jordan makes his outline disclosure by 21 December 2018 HMRC will not seek to impose penalties for the failure to correct any issue detailed in the outline disclosure. In no circumstances will HMRC extend this deadline and if the disclosure is made after 21 December failure to correct penalties will be due.

Example 13D — deadline when ongoing enquiry taking place

On 17 March 2018, HMRC opened an enquiry into Luke’s tax return. On 26 September Luke’s accountant telephoned the HMRC caseworker and informed her that Luke wished to make a disclosure to satisfy his requirement to correct. Luke now has until 29 November 2018 to supply details of the offshore tax non-compliance he has committed; the years involved; a summary of how the non-compliance came about; the amounts of tax that he believes he owes and a summary of the records that are available to help him make his disclosure. Provided Luke provides this information by 29 November HMRC will not seek to impose penalties for the failure to correct any issue detailed by him. In no circumstances will HMRC extend this deadline and if the information is provided after 29 November failure to correct penalties will be due.

HMRC will not extend these deadlines in any circumstances.

In the instances previously detailed the act of notification (under the Worldwide Disclosure Facility), emailing (under the Contractual Disclosure Facility) and informing an officer of HMRC (in an enquiry) are not the supply of the relevant information under the requirement to correct legislation, merely a commitment to do so. Taking the first step of the 3 actions outlined are not in themselves sufficient to avoid Failure to Correct penalties. It is only the provision of the full relevant information in line with the agreed timetable in each case which will allow the taxpayer to avoid failure to correct penalties.

You cannot make a correction under the requirement to correct by including information in a tax return for any tax year other than the tax year that the non-compliance relates to.

Example 14 — making a correction

Mike has been receiving rental income from his French property since 2012 but has failed to tell HMRC about this and has submitted incorrect tax returns for tax years 2012 to 2013 through to 2015 to 2016.

It is now 1 February 2018 and Mike wants to make a correction under the requirement to correct as he does not want to face the failure to correct penalties. HMRC have not opened an enquiry into Mike’s affairs.

The time limit for amending any of his returns has passed. Mike needs to supply HMRC with the information it needs to calculate the tax that is due as a result of his non-compliance. The simplest way for him to do this is by making a disclosure through the Digital Disclosure Service. As part of the digital disclosure process Mike will have to pay interest and penalties but the penalties will be lower because he has made a voluntary, unprompted disclosure.

Example 15 — making a correction when there is an open enquiry

Neil’s position is similar to Mike’s but HMRC are carrying out an enquiry into his 2015 to 2016 return. Neil should inform the officer who is carrying out the enquiry about the income he has not declared for all years.

The officer will then make sure that the correct tax, interest and penalties are charged. Neil will pay a higher penalty than Mike because his disclosure is prompted but the fact that he has provided the information and co-operated will be taken into account.

Professional advice which leaves you uncertain about making a disclosure

If after taking advice, you are unsure as to if you need to make a correction, you have a number of options.

If the advice you have received is disqualified advice, you could take further advice from a person with appropriate expertise but who was not involved in facilitating your avoidance arrangements.

Provided the further advice you receive takes account of all your relevant circumstances and you follow the advice you will have a reasonable excuse if it is later found that you should have made a correction.

If the advice you have received is that no further tax is due, but the matter is not clear cut, you can use the internet to provide HMRC with the relevant information without accepting that you have unpaid liabilities.

To do this you should register to make an offshore disclosure through HMRC’s Digital Disclosure Service. Once you have done this you will be sent a Disclosure Reference Number.

The disclosure reference number will consist of the letters ‘WDF’ followed by a series of numbers. When you receive your reference number you should then complete the disclosure process on the Digital Disclosure Service showing that you owe no tax.

At the same time as you submit your disclosure through the Digital Disclosure Service you should send a report that contains all of the relevant information to ocu.hmrc@hmrc.gsi.gov.uk.

Your email must include your disclosure reference number and the words ‘Requirement to Correct’ in the subject heading.

Provided you give HMRC all the relevant information about the matter, you will have made a correction under the requirement to correct, even if you do not agree that additional tax is due. As you have made a correction no failure to correct penalty can be due.

HMRC will then consider the information you have provided to decide if they agree that no tax is due. What HMRC will accept as all the relevant information in these circumstances is covered in the next section.

Information you must supply when making a disclosure that no tax is due

HMRC can see no reason for you to make a disclosure that no tax is due except where you have doubt about if tax is correctly due.

When making such a disclosure you should therefore set out a full explanation of why you have doubt about if tax is due and set out all of the relevant facts that you took into account in deciding that no tax is due.

You should also provide an indication of the amount of income, gains and similar that you think are not liable to tax as a result of your decision. You do not have to carry out precise calculations for this purpose. HMRC are willing to accept an indication of the amounts involved by stating which of these 4 categories the tax involved falls into:

less than £10,000
between £10,000 and £75,000
between £75,000 and £500,000
more than £500,000

If you do this, provided the information you supply is accurate, the penalties for a Failure to Correct will not be due if it later transpires that additional tax is due as a result of the issue you have told us about (other existing penalties may apply).

HMRC will acknowledge the information has been supplied but the offer to pay no tax will not be formally accepted. HMRC will only contact you for further information if they are concerned that your conclusion is incorrect.

What to expect after making a disclosure under the requirement to correct

If you make your correction during the course of an enquiry, the caseworker will discuss any concerns they have as part of that enquiry.

If you make your correction in any other way (for example by amending a tax return that you have submitted or by using the Digital Disclosure Service) HMRC will review the information you have supplied in line with its normal processes and may decide to ask you for further information to clarify the position. When you make a correction it will be necessary to consider if a penalty is also due.

If you make your disclosure using the Digital Disclosure Service you will be able to self-assess your penalty as part of that process. If you use any other method, HMRC will probably need to contact you to obtain information required to establish the correct level of penalties due.

HMRC recommends that you use the Digital Disclosure Service and we expect the majority of disclosures made through this route to be accepted without an in depth enquiry. But, if we cannot accept your disclosure we will write to you for further information or explanations as provided for in existing legislation.

HMRC reserves complete discretion to conduct a criminal investigation in relation to your disclosure, if it appears to be complete or incomplete. However, when considering if a case should be subject of a criminal investigation, one factor will be if you have made a complete and unprompted disclosure of the offences committed.

If a disclosure leads to a criminal investigation then the HMRC criminal investigation policy will apply. If a disclosure under the requirement to correct results in a criminal trial then the original requirement disclosure may be adduced in evidence.

Onshore and offshore income

The obligation under the requirement to correct only applies to liabilities to Income Tax, Capital Gains Tax and Inheritance Tax which result because of non-compliance that involve offshore matters or transfers.

However when you make a disclosure under the requirement you should, at the same time, make a full disclosure of all irregularities if they relate to offshore matters or transfers or to UK income and gains. If you do this you will have to pay the outstanding tax plus any interest and penalty that is due.

If you come forward voluntarily to disclose the liabilities and then fully co-operate with any subsequent enquiry your disclosure will be treated as unprompted and you will be subject to lower penalties than if we have to contact you or if you do not co-operate fully.

HMRC will consider all disclosures it receives and may enquire into any disclosure if it wants more information or suspects that it is incomplete. If any such enquiries establish further liabilities that have not been disclosed, if they be offshore liabilities or not, you will almost certainly face paying higher penalties than if you had disclosed them at the outset.

Question 3

Part Three: future changes to this guidance

Accepted Answer

HMRC intends to update this guidance as and when required to aid understanding of the Requirement to Correct rule and the way it operates in practice. HMRC welcomes comments and contributions from users of the guidance.

These can be submitted by email to Graham Davies and Geoff Lewis at consult.nosafehavens@hmrc.gsi.gov.uk.

Use the subject heading ‘Requirement to Correct Guidance’ in your email.

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