The Requirement to Correct legislation was introduced by Finance Act (No.2) 2017). The legislation was drafted to:
- Catch most people with offshore interests
- Specifically require tax irregularities to be corrected
- Give the responsibility to the taxpayer whether there is a requirement to correct.
The legislation was accompanied by significant penalties if that person had to correct but didn’t. It followed legislation introduced by Finance Act 2016, which delivered civil penalties for ‘enablers’ of offshore tax evasion. The legislation was also accompanied by the offshore criminal offence.
Offshore Criminal Offence
The offence is currently set out as a failure to give notice of being chargeable for a year of assessment and
“(a) the tax in question is chargeable (wholly or in part) on or by reference to offshore income, assets or activities, and
(b) the total amount of income tax and capital gains tax that is chargeable for the year of assessment on or by reference to offshore income, assets or activities exceeds the threshold amount.”
The threshold is not be less than £25,000 and may be set by regulation by the Treasury.
The legislation defines “by reference to offshore income, assets or activities” as:
“(a) income arising from a source in a territory outside the United Kingdom,
(b) assets situated or held in a territory outside the United Kingdom, or
(c) activities carried on wholly or mainly in a territory outside the United Kingdom.”
The wide meaning could catch an array of historic structures that face dispute. What is particularly concerning is that offshore structures often work around anti avoidance legislation, which is very complicated. At its simplest form consider the transfer of asset abroad legislation which was “revised” when enacted into ITA 2007. In particular the definition of associated operations was drastically revised although the profession did not consider this to have retrospective effect. HMRC are however, challenging pre-2007 structures on whether the new definition of associated operations applies. If it does, has there been a criminal offence? There are numerous other circumstances that an offshore structure could be argued to be within the remit of the criminal offence based on a technical difference if it were not for reasonable excuse or taking reasonable care.
Reasonable Excuse
The term reasonable excuse is not defined in the legislation. The meaning arises from court decisions although is summarised in Rowland v HMRC (2006) as “in light of all the circumstances of the particular case”.
HMRC’s ever useful guidance defines a reasonable excuse as “an unexpected or unusual event that is either unforeseeable or beyond the person’s control, and which prevents the person from complying with an obligation to notify when they would otherwise have done” and assess whether a taxpayer exercised “reasonable foresight and due diligence” that would be expected of a prudent taxpayer.
Many may suggest that they relied on an adviser and that constitutes reasonable excuse. HMRC will not normally accept reliance on a third party as a reasonable excuse unless he took reasonable care to avoid the failure.
Reasonable Care
HMRC consider reasonable care to be a standard of care undertaken by a prudent reasonable person although also taking into consideration the person’s ability and circumstances. The case of Blyth v Birmingham Waterworks Co described the standard as:
“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a prudent and reasonable person would have done, or did that which a person taking reasonable care would not have done.”
It is therefore likely that the following would be asked:
- Would a prudent reasonable person consider it likely that tax would be legitimately avoided by the transactions undertaken?
HMRC consider it a question of examining what the person did or failed to do and ask whether a prudent and reasonable person would have done that or failed to do that in those circumstances. They also consider it correct to consider a particular person’s abilities and circumstances. For example a person with a high degree of education and professional qualifications may be regarded as knowing more and understanding the complexities in more depth.
It will be necessary to provide evidence of what other people in the circumstances did or would have done. Whilst a lot of people undertook the establishment of offshore structures, I would argue that far more with similar circumstances and background did not.
It will be necessary to find somebody who can testify as to what was widely accepted practice and evidence it. Maybe some of those politicians on the Swiss HSBC list will come in useful after all.
Enablers Of Offshore Tax Evasion
An enabler is a person that has encouraged, assisted or otherwise facilitated conduct that constitutes offshore tax evasion or non-compliance. The enabler’s penalty is directly targeted at professionals advising in relation to the act potentially giving rise to tax evasion or non-compliance and those professionals merely assisting the act. The enabler legislation therefore encouraged professionals to advise their clients to consider the Requirement to Correct legislation. An adviser may have even been inclined to find a reason to correct so as not to be an enabler.
The objective of the Requirement to Correct legislation was to enable and incentivise persons with UK tax irregularities relating to offshore interests to regularise their tax affairs. The Requirement to Correct period ended on 30 September 2018 and now tougher sanctions have been introduced.
The issue that many advisers or persons that benefited from such structures had was realising that most offshore tax planning has sat in an area of law with many potential challenges. The tax advantages were unlikely to have ever been a given and would have almost always been subject to potential challenge.
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