Nichola Ross Martin's Tax Consultancy

At a glance

From 6 April 2011 increased tax-geared penalties apply in relation to errors and failures relating to offshore income and capital gains. They increase the penalties charged for:

• Errors in a return or document
• Failure to notify liability or chargeability to tax
• Failure to make a return on time.

These provisions are found in S35 and Sch 10 FA 2010

These increased penalties are applied to different Categories of domestic and offshore income

The Categories add new stages when calculating tax-geared penalties in offshore cases.

Categories are determined as follows:

Overview and FAQs

Selecting categories

Step 1: does the penalty relates to a domestic or offshore matter?

• A matter is an “offshore matter” if it relates to a potential loss of revenue that is charged on or by reference to:
  • Income arising from a source in a territory outside the UK.
  • Assets situated 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 income, assets or activities of a kind described above.
  • A “domestic matter” relates to any other potential loss of revenue.

If the penalty relates to a domestic matter it is Category 1.

Step 2: if the matter falls outside of Category 1, is it a Category 2 or 3 matter?

Where the matter is an offshore matter and it relates to income tax or CGT the appropriate category is determined by territory.

• Territories are categorised by Treasury order with regard to the quality and quantity of Tax Information Exchange Agreements that determine the level of tax transparency between a territory and the UK. For a list of the countries see Designated Territories, below

Where a matter is an offshore matter and it relates to a tax other than income tax or CGT it will be treated as Category 1 matter.

Where there is single failure in more than one Category in calculating a tax-geared penalty any loss of tax is apportioned on a just and reasonable basis between the relevant Categories.

The increased penalties in practice

Error or mistake (increased penalties for offshore income and CGT)

From 6 April 2011: increased penalties apply when an errors relates to offshore income and gains arising in a territory that falls into Category 2 or 3 (see New categories for domestic and offshore income, above)

Penalties:

The maximum penalty is reduced depending on the quality of disclosure made to HMRC, see Error or mistake made by a taxpayer, above.

Failure to notify (increased penalties for offshore income and CGT)

From 6 April 2011: increased penalties apply for failure to notify chargeability in relation to offshore income and gains. These penalties are calculated in the same way as for Category 1 territory offences (domestic and other offshore taxes) however they are increased as follows:

Category 2 territories

Category 3 territories

Late filing (increased penalties for offshore income and CGT)

From 6 April 2011: Sch 55 FA 2009 is amended to introduce tougher penalties for Category 2 and 3 offences (those relating to offshore income and gains) as follows:

Reductions apply for prompted and unprompted disclosures and telling, giving and helping

Small print & links

Designated Territories

It is proposed that the following territories are to be categorized by Treasury Order in 2011 as follows. This list will change as tax agreements are created over time.