Offshore tax penalties in the UK to double

Penalties for people who fail to declare money in offshore accounts in countries that do not share information with the UK taxman are set to double.

HMRC has announced that from 06 April the level of fines for failing to declare money held in offshore accounts, for the purposes of income tax or capital gains tax, will be linked to the tax transparency of that state.

Under the new rules those who fail to declare tax on money held in countries that refuse to exchange information with HMRC face fines of 200% of their tax bill, up from 100%. Those with money in states that share information with the UK could see a possible penalty of 150%.

The penalty for incomplete or inaccurate declarations on money held in the UK will remain at 100% of tax due, with fines liable to reduction depending on how helpful the individual is in establishing the correct amount of tax due.

‘The game is up for those going offshore to evade tax. With the risk of a penalty going up to 200% of the tax evaded, they have a great incentive to get their tax affairs in order,’ said Treasury exchequer secretary David Gauke.

‘We are serious about tackling offshore evasion. Hiding tax liabilities offshore believing you will never be discovered is no longer a realistic hope,’ he added.

The first Self Assessment returns affected will be for the 2011/12 tax year, with paper returns due to be filed by October 31, 2012, and electronic returns by January 31, 2013. The legislation can be found in Schedule 10 of Finance Act 2010.

The new penalty is an enhancement of the penalties for failure to notify; inaccuracy on a return; and failure to file a return on time.

Under the new legislation, these penalties will be linked to the tax transparency of the territory in which the income or gain arises. Where it is harder for HMRC to get information from another country, the penalties for failing to declare income or gains arising in that country will be higher.

There will be three new levels of penalty: where the income or gain arises in a territory in 'category 1', the penalty rate will be the same as under existing legislation; where the income or gain arises in a territory in 'category 2', the penalty rate will be 1.5 times that in existing legislation, up to 150% of tax; where the income or gain arises in a territory in 'category 3', the penalty rate will be double that in existing legislation, up to 200% of tax.

The Treasury has laid legislation before Parliament which describes which territories are in 'category 1' and 'category 3'. All other territories, except the UK, are in 'category 2'.

All existing safeguards will still apply. There will be no penalty if a person can demonstrate they have taken reasonable care to get their tax right or have a reasonable excuse for a failure to notify taxable income.

Where penalties are due, HMRC can reduce them depending on how helpful the individual is in assisting it to establish the correct amount of tax due. The largest reductions will be for unprompted disclosures. Unprompted means when a person tells HMRC about a tax issue they have no reason to believe Revenue and Customs has discovered or is about to discover.