The taxman declares war on hidden foreign assets
HMRC threatens large penalties for those who fail to declare overseas property or income, says Adam Williams
Taxpayers who have hidden assets or income overseas could be hit with fines worth twice the amount of tax owed under strict new rules introduced by HMRC. The “requirement to correct” (RTC) legislation comes into force tomorrow and requires taxpayers to declare any foreign assets that could affect their UK income tax, capital gains tax or inheritance tax.
Those who notify HMRC before the deadline will be given 90 days to disclose fully any offshore assets and pay the tax due. Relevant assets could include overseas properties, investments or other income.
The taxman has sent individuals warning letters stating that those who do not correct their tax returns for previous years could face a fine worth 200pc of the tax owed, plus the tax itself.
This is twice the size of fine that can currently be levied and represents the latest assault by HMRC on those who have sought to avoid tax.
Dominic Lawrance, a tax expert at legal firm Charles Russell Speechlys, said: “This ‘war on offshore’ is intensifying. HMRC now has a nuclear weapon against offshore non-compliance in the form of the requirement to correct legislation.
“If a taxpayer allows this deadline to pass and errors in reporting are subsequently identified relating to non-UK income or assets, draconian penalties may be imposed, on top of the tax that is due.”
Mr Lawrance said taxpayers who were caught out by the rules could also be “named and shamed” by the taxman, as well as being forced to pay any fines. He added that while the rules would help flush out tax evaders who were illegally shielding their wealth overseas, they would also increase the burden on law-abiding citizens.
“The changes mean accidental noncompliance can also result in heavy penalties,” Mr Lawrance said. “Nondoms are particularly at risk, thanks to the complexities of the tax rules applicable to them and the fact that such individuals are intrinsically more likely than UK-domiciled taxpayers to have foreign assets.”
The Sept 30 deadline has been imposed because from October HMRC will be able to access much more information about assets that are held overseas.
The “common reporting standard”, which allows tax bureaus to see what assets are held in other jurisdictions, will be extended to cover countries such as Australia, Singapore and Switzerland.
It brings the total number of countries sharing information to more than 100. The taxman has been able to access information about assets in countries including France, Germany and Spain since last year.
“The zero-tolerance message from HMRC is that tax liabilities relating to non-UK assets or income won’t be forgotten and inaccurate reporting won’t be forgiven,” Mr Lawrance said.
Crunch for loan charge payments
A second change to come into force tomorrow will affect thousands of self-employed taxpayers who paid themselves using loans from trusts. These controversial arrangements reduced the amount of tax owed and were generally considered legal at the time, but have since been challenged by the taxman.
Rangers Football Club, which previously paid managers and players in this way, was among those caught out by the crackdown.
Those who structured their finances using loans now face huge tax bills, sometimes of hundreds of thousands of pounds. About 50,000 people have fallen foul of the changes.
HMRC had originally set a deadline of May 31 for those affected to agree a settlement, but it was extended to Sept 30 after just 5,000 cut a deal with the taxman. Those who have not agreed to settle will face a “loan charge” in the 2019-20 tax year, when the cost of the original tax bills will be combined into a single tax year.
HMRC said it would “endeavour to help” taxpayers looking to reach a settlement after tomorrow’s deadline, but said it could not guarantee that any deal would be agreed.
The taxman has also alerted people to the forthcoming deadline to register for self-assessment. Anyone who needs to submit a return for the first time must register with HMRC by Oct 5 to file a return for the 2017-18 tax year. The tax return itself must then be completed by Jan 31 2019.
Among those who may need to register for the first time are parents who received child benefit while earning more than £50,000 a year.
Contractors who face massive fines after using offshore loans to reduce tax are being offered more dubious schemes to undo the damage. About 50,000 self-employed people used these arrangements, widely accepted to be legal at the time, and now face a “loan charge” that could put some into bankruptcy.
There are at least five companies offering new schemes that claim to get around the loan charge. Tax experts warned contractors they could be saddled with even bigger fines in future if they use them.
Phil Manley, of the advisory firm DSW Tax Resolution, said the taxman had not done enough to crack down on promoters and instead saw the contractors themselves as easy targets.
“HMRC is attacking the wrong people,” he added. “It is saying these schemes never work – so why doesn’t it shut them down on day one?” HMRC said it had achieved successful prosecutions of promoters in the past, although a spokesman was unable to provide an example.
Rhys Thomas, of tax advisory firm WTT Consulting, said he was concerned that contractors could be led into further entanglement. One scheme replaces the original loans with new tax-free loans. In emails to a potential client, a promoter claims that the new loans would not need to be declared to HMRC.
Mr Thomas said this risked doubling the tax charge, as HMRC could seek tax on the new loans as well as the original outstanding loans.
He added: “Even if the scheme does successfully mitigate the loan charge, you still need to deal with the original inquiry and tax liability.”
The tax office said it had stopped several promoters in the past two years and forced about 30 to hand over details of their schemes.
It has also successfully reported three companies to the advertising watchdog for making misleading claims over tax.
A spokesman said: “Any loan repayments connected to one of these tax avoidance arrangements will be ignored and the loan charge will still apply, despite [taxpayers] being left out of pocket by promoter fees.”
‘Liabilities won’t be forgotten and inaccurate reporting won’t be forgiven’
Countries such as Australia, Singapore and Switzerland have signed up to an agreement to let tax authorities share information