September 2018 marked the end of disclosure opportunities for taxpayers to bring their US and UK tax affairs up to date voluntarily. Those who failed to comply leave themselves open to potential criminal action and/or substantial civil penalties.
What is Facta?
The Foreign Account Tax Compliance Act (Fatca) and the Common Reporting Standard (CRS) were designed to improve global tax compliance and transparency, and co-operation between tax authorities.
Fatca is intended to increase transparency for the US Internal Revenue Service (IRS) with respect to US persons investing and earning income through non-US institutions.
Under Fatca, the IRS has obtained information relating to offshore accounts, which has been used to identify potential non-compliant individuals. In accordance with CRS, more than 100 countries have agreed to share information on residents’ assets and incomes.
For example, overseas financial institutions will be required to report financial information relating to customers who appear to be tax resident outside of the country/ jurisdiction where they hold their accounts.
They may then share that information with the tax authority where the customer is believed to be tax resident. The UK’s HM Revenue & Customs (HMRC) is due to receive such financial information from overseas tax authorities before end 2018.
Implications for US taxpayers
The IRS closed the 2014 Offshore Disclosure Programme (OVDP) on 28 September 2018.
The OVDP was available to taxpayers who faced potential criminal liabilities and/or substantial civil penalties due to a wilful failure to report foreign financial assets and pay all tax due in respect of those assets.
Under the OVDP, taxpayers were protected from criminal liability and paid a fixed penalty.
For taxpayers whose failure to comply was non-wilful, however, the IRS confirmed the following disclosure options are still available:
- IRS-Criminal Investigation Voluntary Disclosure Programme
- Streamlined Filing Compliance Procedures
- Delinquent FBAR Submission Procedures
- Delinquent International Information Return Submission Procedures.
Implications for UK taxpayers
The UK introduced legislation in late 2017 called ‘Requirement to Correct’ (RTC).
In summary, if you did not correct a historical UK tax error before 30 September 2018, and HMRC later discovers the mistake, through information received under the CRS sharing regime, for example, there will be crippling penalties: 200% of the tax plus 10% of the value of any related assets.
In addition, HMRC may publish your details on its website, which is watched closely by the media.
The RTC legislation does not just affect UK residents. If you are an individual, trustee or director/shareholder of a non-UK company and have consistently resided outside of the UK, you may still have a UK tax problem.
Prior to 30 September 2018, anyone who wanted to disclose a UK tax liability that related wholly or partly to an offshore issue could have used the 2016 Worldwide Disclosure Facility (WDF), but this option is now closed.
Draconian measures
The US and UK tax systems have far-reaching tentacles, so if you have any connection to these countries – in whatever capacity you are acting – you should check the position carefully, just to make sure that nothing was missed and that you fully complied with all your tax reporting obligations.
Post September 2018, after the IRS and HMRC abolished its disclosure opportunities, US and UK taxpayers face draconian assessment and penalty powers and, in the worst-considered cases, criminal action with the potential loss of liberty and assets.
Offshore issues
An offshore issue includes unpaid or omitted tax relating to the following:
- Income arising from a source in a territory outside the UK.
- Assets situated or held in a territory outside the UK.
- Activities carried out 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.
- It also includes funds connected to unpaid or omitted UK tax not included above, that have been transferred to or are owned in a territory outside the UK.
Further reading:
Offshore tax measures behind UK evasion spike
By Mark Taylor, head of tax investigations and dispute resolution, Buzzacott
