What is the Requirement to Correct?
The UK Government has tried for several years to encourage UK taxpayers to regularise their UK tax affairs by making available a number of disclosure programmes which offered (relatively) favourable terms on which non-compliant taxpayers could come clean.
The era of favourable disclosure programmes is ending. To put it bluntly, with so much information now available to HMRC, they don't need to play nice any more. Instead, they are introducing much more draconian penalties, which will apply to anyone who has failed to correct UK tax non-compliance, even where that failure was simply careless. This new "Requirement to Correct" regime serves a dual purpose; it is a way to penalise those who didn't come forward when they could have and to dissuade future non-compliance.
Who needs to worry about it?
RTC will apply to anyone who has outstanding UK tax liabilities relating to offshore matters, where that liability arose on or before 5 April 2017. This will include trustees who have outstanding UK tax issues relating to their settlements (which might have arisen, for example, in connection with inheritance tax anniversary or exit charges, income tax arising at trust level from UK rental income, etc).
Trustees will not be accountable, under RTC, for the UK tax affairs of non-compliant beneficiaries. However, trustees should bear in mind the enabler offences (considered at the end of this briefing).
When does RTC kick in?
Trustees have until 30 September 2018 to "correct" past non-compliance without the new penalties being applied.
How far back will HMRC go?
Depending on the circumstances, HMRC could look back up to 20 years prior to 2017. This means that in some instances HMRC in 2021 could be looking at what was happening in 1997. HMRC have a four-year window to open enquiries (i.e. until April 2021 for liabilities arising in 2016/2017).
But I'm a good trustee with honest clients – surely I'm okay?
Of course, we are not suggesting that your trusts have outstanding UK tax liabilities which you have tucked away in an old filing cabinet and simply ignored. However, even the most diligent professional trustees have a significant job on their hands to understand and stay up-to-date with the incredible amount of legislative and procedural changes to UK tax law that have been made over the past two decades.
The picture gets even more complicated when you factor in issues such as questions over a settlor's domicile status, loans made on non-commercial terms or the computation of UK rental profit from an underlying company, all of which could affect the trustees' tax liability without them necessarily being aware of it.
Oh dear. What happens if RTC applies?
Where there has been a "failure to correct", the standard financial penalty will be 200% of the tax due. This can be reduced by good behaviour on the part of the non-compliant trustee (pro-actively assisting HMRC with information), but there is a minimum penalty of 100% of tax due. Where offshore assets have been moved in an attempt to avoid disclosure under information exchange agreements, the penalty rate can increase to 300%.
For the most serious cases, HMRC can also impose a penalty of 10% of the value of the offshore asset linked to the non-compliance.
In certain circumstances, HMRC have the power to "name and shame" the taxpayer on a public register; obviously this public scrutiny could have particularly acute ramifications for trustees.
What should I be doing?
Trustees need to tackle head-on the question of whether or not their trusts have any unaddressed UK tax issues, and they should start that process as far ahead of 30 September as possible.
It would be sensible for trustees to obtain a professional "health check" of their trusts' UK tax position. A health check will either provide comfort that no UK tax is due, or it will identify non-compliance and, where necessary, guide trustees with making an appropriate disclosure to HMRC.
If trustees obtain a health check from a suitably qualified, independent professional, they are likely to be able to rely on the "reasonable excuse" defence, which means they would not be exposed to penalties for failing to correct non-compliance before 30 September 2018. Although any outstanding tax and interest would remain payable, the "reasonable excuse" defence is potentially a very useful way to mitigate the total amount due to HMRC. (It also takes the non-compliance out of the scope of the enabler legislation – see below.)
What's this other thing I've heard about enablers – that's definitely not me?
The UK Government introduced legislation in 2016 to impose penalties on anyone who has encouraged, assisted or otherwise facilitated offshore tax evasion or non-compliance.
Immediately you will be imagining these rules will apply only to whispered conversations held behind closed doors between a morally dubious trustee and his wayward beneficiary. This is, of course, a world away from how you and your colleagues behave as professional trustees.
However, take a brief moment to consider the wider potential impact. The enabler penalties can kick in whenever there is a penalty imposed for non-compliance. In the brave new world of RTC, it is easy to imagine a situation in which a beneficiary could face a penalty for careless non-compliance. If you as a trustee knew that your actions enabled or were likely to enable that beneficiary's non-compliance, you could be caught by the enabler rules.
I still don't think I'm an enabler, but what would the consequences be?
The default penalty is 100% of the tax due, although in some cases it can be mitigated. There is also scope to "name and shame" the enabler. Again, this naming and shaming could have severe reputational consequences for a trustee.
How can I make sure I am not enabling non-compliance inadvertently?
You will already have a robust compliance framework in place, with systems to ensure good governance and, we don't doubt, a healthy dose of common sense that will spot most issues before they have time to turn into full-blown non-compliance. However, if any non-compliance has been overlooked inadvertently, it can be useful to obtain a health check of the tax situation and, where necessary, to make a pro-active disclosure to HMRC. Where the "reasonable excuse" defence applies, there is no RTC penalty, and consequently the enabling rules are not engaged.
With great experience in trust structuring and tax, we are well placed to assist with providing a health check for trusts and any tax planning that has been implemented. We can also provide advice in relation to HMRC disclosures and responding to enquiries.
This publication is a general summary of the law. The law and rates of tax referred to are correct at June 2018. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2018