At a glance

A new system of increased tax-geared penalties was introduced from 6 April 2011 in respect of errors and failures relating to offshore income and capital gains tax (CGT).

From 6 April 2016 these penalties also apply to Inheritance Tax (IHT) and they extend to offshore transfers (aimed at transfers by trusts).

Increased levels of penalties are 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 were introduced by S35 and Sch 10 FA 2010 and were extended to IHT and trusts by Sch 20 and 21 FA 2015.

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:

Category 0 Category 1 Category 2 Category 3

Category 1 countries who have signed up to the common reporting standard

A domestic matter, or 

An offshore matter: income tax, CGT or IHT relating to a category 0 territory; or

An offshore matter other than income tax, CGT or IHT.

Maximum penalty is 100% of the tax.

Only applies post April 2016: prior to that Category 1 applied.

 

An offshore matter: income tax, CGT or IHT relating to a category 1 territory.

 

Maximum penalty is 100% of the tax. 

 

An offshore matter: income tax, CGT or IHT relating to a category 2 territory.

 

Maximum penalty is 150% of the tax.

 

An offshore matter: income tax, CGT or IHT relating to a category 3 territory.

Maximum penalty is 200% of the tax.

 

What's new?

Finance (No.2) Act 2017

Schedule 18 of Finance (No.2) Act 2017 introduces:

  • A Requirement to correct (RTC) undeclared UK tax liabilities in respect of offshore issues at 5 April 2017 by 30 September 2018
  • Severe tax geared penalties if taxpayers falling within the RTC do not correct by 30 September 2018:

    • The maximum penalty will be 200% of the tax not corrected.
    • The minimum penalty will be 100% of the tax not corrected regardless of behaviour unless the disclosure is not voluntary in which case it will be 150%.
    • Reductions to penalties will depend on how much assistance is given to HMRC:

      • For telling: up to 30% of the maximum reduction
      • For helping: up to 40% of the maximum reduction
      • For giving access to records: up to 30% of the maximum reduction
    • There will be asset based penalties where the tax in any one year was over £25,000.
    • Naming and shaming in the most serious cases.
    • Enhanced penalties of 50% of the standard penalty if assets or funds are moved to attempt to avoid the RTC.

Criminal Finances Act (CFA) 2017

From 30 September 2017 the CFA 2017 introduced:

  • This applies to:
    • Companies, partnerships and LLPs.
  • For it to apply:
    • There must be criminal tax evasion under either UK law or foreign law.
    • It must be enabled by the business' employee, agent or those performing services to the business.
    • The business must have failed to prevent that person from enabling the crime.
  • If convicted a business will face an unlimited fine in respect of the acts of its employees.
  • It does not apply not to individuals, as they can be prosecuted under existing laws.

Finance Act 2016 

Sections 162 - 166 and Schedules 20 - 22 of Finance Act 2016 introduce:

  • A new criminal offence for tax evasion
  • Civil penalties for enablers of offshore tax evasion
  • Publishing details of enablers of offshore tax evasion
  • Publishing details of deliberate tax defaulters
  • Increased penalties in connection with offshore matters and transfers
  • Asset based penalties for offshore inaccuracies and failures

Finance Act 2015 measures

Schedule 51 FA (No.2) 2015 adds a requirement for advisers to write to clients with offshore assets, see Client notification for offshore bank account holders.

Schedule 20 Finance Act 2015 widened the scope of penalties in respect of offshore offences by:

  • Adding a new Category 0 for countries taking part in the new Common Reporting Standard.
  • Bringing inheritance tax (IHT) into scope.
  • Including situations where the proceeds of UK non-compliance are hidden offshore.

Schedule 21 FA 2015 introduced a new penalty for movement of offshore assets.

Several conditions must be met:

  • HMRC has found out about the assets
  • A penalty for deliberate behaviour is due
  • There must have been a relevant offshore asset move
  • That move was to prevent or delay HMRC discovering the asset

The Schedule 21 penalty is 50% of tax lost. This only applies where assets are moved to certain territories as specified by SI 2015/866 'Offshore Asset Moves Penalty (Specified Territories) Regulations 2015'.

Overview and FAQs

Finance Act 2016 changes

Criminal offence for tax evasion

The following are criminal offences, punishable by a fine (unlimited for England and Wales, up to £5,000 in Scotland and Northern Ireland) or up to six months in prison.  There is no need to prove any intent.

  • Failure to notify chargeability
  • Failure to deliver a return
  • Delivery of an inaccurate return

The tax in question must

  • Exceed £25,000
  • Be income tax or capital gains tax
  • Relate to offshore income, assets or activities

Exclusions

  • Trustees of settlements
  • Executors or administrators of deceased persons
  • Persons with a reasonable excuse

Civil penalties for enablers of offshore tax evasion

A penalty is payable by a person (P) who enables another (Q) to carry out offshore evasion when the following conditions are met:

  • P knew that their actions would be likely to enable Q to carry out offshore tax evasion or non-compliance, and
  • Q has been convicted of the relevant offence or found liable for the relevant penalty.

Where the offence relates to the movement of offshore assets (Schedule 21 FA 2015) the penalty is the higher of

  • 50% of potential lost revenue, and
  • £3,000

For other offences, the penalty is the higher of

  • 100% of potential lost revenue, and
  • £3,000

Penalties can be reduced by making a disclosure or providing assistance.

Penalties are applicable in relation to income tax, capital gains tax and inheritance tax. See our subscriber guide Penalties: Enablers of Tax Avoidance for more details.

Publishing details of enablers of offshore tax evasion

HMRC can publish details of those enablers found liable to civil penalties, where

  • The potential lost revenue in relation to a penalty exceeds £25,000, or
  • The enabler has incurred five or more penalties in a five year period.

Details will not be published if the penalty has been reduced to the minimum allowed for making a disclosure or providing assistance.

Publishing details of deliberate tax defaulters

HMRC already have the power to publish details of deliberate tax defaulters where the potential loss revenue is more than £25,000 through FA 2009 section 94.

Section 94 will be amended to enable HMRC to publish details of an individual who controls a company or partnership, or the trustee of a settlement, where

  • The entity concerned has been found liable to a penalty for deliberate inaccuracy or deliberate failure to notify, and
  • The individual obtains a tax advantage, and
  • The failure or inaccuracy involves an offshore matter or transfer.

Details will not be published if the penalty has been reduced to the minimum allowed for making a disclosure or providing assistance.

Increased penalties in connection with offshore matters and transfers

Where penalties relate to offshore matters or transfers:

  • Minimum penalties for deliberate failure to notify chargeability, deliberate failure to file a return and deliberate inaccuracies in a return are increased.
  • The discounts available for prompted and unprompted disclosures are decreased.
  • The taxpayer has to provide additional information to HMRC, beyond that which is required to fully disclose the inaccuracy, in order to receive the maximum discount.
  • HMRC must make regulations setting out what is meant by “additional information”.
  • Penalties for genuine mistakes and careless errors are not affected.
  • Penalties are applicable in relation to income tax, capital gains tax and inheritance tax.
 

The commencement date for these measures is 1 April 2017 except:

  • For income tax and capital gains it is periods commencing on or after 6 April 2016 i.e. 2016/17 onward.
  • For  IHT it applies to transfers of value made on or after 1 April 2017.
  • For other taxes it is 8 March 2017.

Asset based penalties for offshore inaccuracies and failures

A taxpayer becomes liable for an additional asset based penalty when all of the following conditions are met:

  • He is liable to a penalty for failure to notify chargeability, failure to file a return or inaccuracies in a return.
  • The failure or inaccuracy was deliberate.
  • The potential lost revenue in terms of income tax, capital gains tax or inheritance tax is more than £25,000.
  • The failure or inaccuracy involves an offshore matter or transfer.

The amount of the penalty is the lower of:

  • 10% of the value of the asset, and
  • Ten times the potential lost revenue.

HMRC must reduce the standard amount of the penalty where the taxpayer

  • Makes a disclosure of the inaccuracy or failure, and
  • Provides HMRC with a reasonable valuation of the asset, and
  • Provides HMRC with information or access to records that HMRC requires for the purposes of valuing the asset.

The commencement date for these measures is 1 April 2017 except:

  • For income tax and capital gains it is periods commencing on or after 6 April 2016 i.e. 2016/17 onward.
  • For  IHT it applies to transfers of value made on or after 1 April 2017.
  • Penalty reductions for disclosure and co-operation apply from 8 March 2017.

Finance (No.2) Act 2017 changes

Finance (No2) Act 2017 introduced a Requirement to correct (RTC) undeclared UK tax liabilities in respect of offshore issues existing up to an including 2016/2017:

  • Non compliance to be corrected by 30 September 2018. There is no new process for this; HMRC expect that the majority of taxpayers use the Worldwide Disclosure Facility (WDF) or the online Digital Disclosure Service (DDS).  
  • Severe tax geared penalties if taxpayers falling within the RTC did not correct by 30 September 2018:
    • The maximum penalty will be 200% of the tax not corrected.
    • Reductions will be available for disclosure and cooperation, including whether a disclosure was prompted or unprompted.
    • The minimum penalty will be 100% of the tax not corrected regardless of behaviour.
    • An asset based penalty of up to 10% of the value of the asset where the tax in any one year was over £25,000.
    • Naming and shaming in the most serious cases and where over £25,000 per investigation is involved.
    • Enhanced penalties of 50% of the amount of the standard penalty if assets or funds are moved to attempt to avoid the RTC
  • No penalty will be charged where there is a reasonable excuse for a Failure to Correct.

Penalties: 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.
  • An offshore transfer involves income or sales proceeds or any part thereof which are received abroad or transferred abroad.

If the penalty relates to a domestic matter it is Category 0 (Category 1 pre April 2016).

Step 2: if the matter is not domestic, is it a Category 0,1,2 or 3 matter?

Where the matter is an offshore matter and it relates to income tax, CGT or IHT 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, CGT or IHT it will be treated as Category 0 matter (Category 1 pre April 2016).

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, CGT and IHT)

Increased penalties apply when an error:

  • From 6 April 2011: relates to offshore income and gains.
  • From 6 April 2015 relates to IHT.


Penalties:

Category 0 (from 1 April 2016)

Error in a taxpayer’s document
Behaviour that led to error Maximum

Unprompted (minimum)

Prompted (minimum)

Genuine mistake: despite taking reasonable care

0% 0% 0%

Careless error:
if the inaccuracy is due to failure to take reasonable care

30% 0% 15%

Deliberate error but not concealed: the inaccuracy is deliberate but no arrangements made to conceal it

70% 20% 35%

Deliberate error and concealed

100% 30% 50%

 

For category 1 territories prior to 1 April 2016 see Penalties: errors in returns and documents

Category 1 (from 1 April 2016)

Error in a taxpayer’s document
Behaviour that led to error Maximum

Unprompted (minimum)

Prompted (minimum)

Genuine mistake: despite taking reasonable care

0% 0% 0%

Careless error:
if the inaccuracy is due to failure to take reasonable care

37.5% 0% 18.75%

Deliberate error but not concealed: the inaccuracy is deliberate but no arrangements made to conceal it

87.5% 25% 43.75%

Deliberate error and concealed

125% 40% 62.5%

 

Category 2

Error in a taxpayer’s document

Behaviour that led to error

Maximum

Unprompted (minimum)

Prompted (minimum)

Genuine mistake: despite taking reasonable care

0%

0%

0%

Careless error:
if the inaccuracy is due to failure to take reasonable care

45%

0%

22.5%

Deliberate error but not concealed: the inaccuracy is deliberate but no arrangements made to conceal it

105%

30%

52.5%

Deliberate error and concealed

150%

45%

75%

 

 

Category 3

Error in a taxpayer’s document

Behaviour that led to error

Maximum

Unprompted (minimum)

Prompted (minimum)

Genuine mistake: despite taking reasonable care

0%

0%

0%

Careless error:
if the inaccuracy is due to failure to take reasonable care

60%

0%

30%

Deliberate error but not concealed: the inaccuracy is deliberate but no arrangements made to conceal it

140%

40%

70%

Deliberate error and concealed

200%

60%

100%

 

Schedule 21 Finance Act 2016 includes provision to reduce the discount for disclosure from 1 April 2017.

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

Increased penalties apply  for failure to notify chargeability:

  • From 6 April 2011 relates to offshore income and gains.
  • From 6 April 2015 relates to IHT.

Category 0 territories (from 6 April 2016)

Behaviour governing failure to notify Maximum

Unprompted (minimum)

Prompted (minimum)

Not deliberate: notified in less than 12 months

30%

0% 10%

Not deliberate: notified in more than 12 months

10% 20%

Deliberate, but without concealment

70% 20% 35%

Deliberate with concealment

100% 30% 50%

 

Category 1 territories (from 6 April 2016)

Behaviour governing failure to notify Maximum

Unprompted (minimum)

Prompted (minimum)
Not deliberate: notified in less than 12 months 37.5%

0%

12.5%
Not deliberate: notified in more than 12 months

12.5%

25%
Deliberate, but without concealment 87.5%

25%

43.75%
Deliberate with concealment 125%

40%

62.5%

For category 1 territories prior to 6 April 2016 see: Penalties: failure to notify

Category 2 territories

Behaviour governing failure to notify

Maximum

Unprompted (minimum)

Prompted (minimum)

Not deliberate: notified in less than 12 months

 

45%

0%

15%

Not deliberate: notified in more than 12 months

15%

30%

Deliberate, but without concealment

105%

30%

52.5%

Deliberate with concealment

150%

45%

75%

 

Category 3 territories

Behaviour governing failure to notify

Maximum

Unprompted (minimum)

Prompted (minimum)

Not deliberate: notified in less than 12 months

 

60%

0%

20%

Not deliberate: notified in more than 12 months

20%

40%

Deliberate, but without concealment

140%

40%

70%

Deliberate with concealment

200%

60%

100%

Schedule 21 Finance Act 2016 includes provision to reduce the discount for disclosure from 1 April 2017.

 

Late filing (increased penalties for offshore income, CGT and IHT)

Increased penalties apply for late filing of returns:

  • From 6 April 2011: relates to offshore income and gains.
  • From 6 April 2016 relates to IHT.

Lateness and Category

Deliberate, not concealed

Deliberate and concealed

Category 0 (from 6 April 2016)

12 months or longer and the taxpayer deliberately withholds information

  • 20% to 70% of tax due, or £300 if greater.
  • 30% to 100% of tax due, or £300 if greater.

Category 1 (from 6 April 2016)

12 months or longer and the taxpayer deliberately withholds information

  • 25% to 87.5% of tax due, or £300 if greater.
  • 40% to 125% of tax due, or £300 if greater.

Category 2

12 months or longer and the taxpayer deliberately withholds information

  • 30% to 105% of tax due, or £300 if greater.

 

  • 45% to 150% of tax due, or £300 if greater

Category 3

12 months or longer and the taxpayer deliberately withholds information

  • 40% to 140% of tax due, or £300 if greater.

 

  • 60% to 200% of tax due, or £300 if greater

 

For category 1 territories prior to 6 April 2016 see Penalties: late filing

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

Schedule 21 Finance Act 2016 includes provisions to reduce the discount for disclosure from a date yet to be appointed.

Updates

01 November 2016 note revised and updated, tables updated to show new category 0.

20 September 2016 updated for publication of Finance Act 2016

16 June 2016 added links to guides for category 1 territory penalties.

5 April 2016 Updated following publication of the Finance Bill 2016 to include details of the proposals in the At a glance and Overview tabs.  The Designated Territories section was brought up to date and the small print and links tab extended to include a summary of relevant Finance Acts and amendments.

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Very useful summary

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