HMRC Powers

The relationship between HMRC and the tax payer has often been seen as one of cat and mouse.

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Penelope Lang
Published: 19 Aug 2019 Updated: 13 Jun 2022

HMRC has become increasingly frustrated by perceived tax avoidance which has received much publicity over recent years. In particular HMRC and parliament believe there are large amounts of overseas wealth on which no tax has been paid by UK taxpayers.

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Not content with pursuing non-payment of tax from offshore income, there has been a significant increase in the powers available to HMRC. This has seen measures such as, forcing taxpayers to pay disputed tax up front, where the individual has been involved in an avoidance scheme, the ability to recover debts from the bank accounts of tax payers, and the use of follower notices in cases where one member of a tax scheme has been selected, and the scheme has not succeeded in the Courts. All others using the scheme are then also treated as having fallen foul of tax legislation. These notices not only include the estimated tax loss, but can also include significant penalties as well.

Other examples are penalties for late submission of tax returns, where no tax is due and penalties for late submission of Annual Tax on Enveloped Dwellings Returns where reliefs are available and, again, no tax is due.

Where tax returns are late through no fault of anyone penalties can still be applied based on the tax due. There are limited grounds of appeal.

Offshore accounts were long seen by some as being a useful means by which UK residents could shield funds away from the view of the UK tax authorities. Agreements (such as under the Common Reporting Standard (CRS)for the exchange of information with other territories mean that this is no longer the case, and HMRC is able to glean information about UK tax payers from many of the destinations that were previously seen as tax havens.

HMRC believes that by imposing severe penalties they can influence and change the behaviour of taxpayers.

HMRC has a significant addition to their suite of powers which took effect on 1st October 2018 – the Requirement to Correct provisions, known as RTC. RTC is aimed at tackling offshore tax non-compliance, in other words, income that should have been declared to HMRC but hasn’t been. HMRC sees RTC as a significant advance in their armoury, and one which will greatly increase its ability to detect offshore income that should have been reported to them. In recent months HMRC has been busy sending letters to those that they think may be affected by this legislation, encouraging them to report details of previously undeclared income. The tone of these strongly worded letters has raised eyebrows amongst both tax payers and tax agents in the UK.

The new regulations cover income tax, capital gains tax and inheritance tax relating to offshore matters, and in broad terms non-compliance that occurred prior to 6 April 2017.

HMRC summarises tax non-compliance as relating to “unpaid tax charged on or by reference to:

  • income arising from a source in a territory outside the UK
  • assets situated in a territory outside the UK
  • activities carried on wholly or mainly in a territory outside the UK or
  • anything having effect as if it were income, assets or activities of a kind described above.”

HMRC has of course always had the ability to take action against non-compliance. However the new rules not only provide the increased ability to obtain information from other jurisdictions, but also increase the level of penalties and sanctions that HMRC is able to impose.

The penalties (referred to by HMRC as FTC – failure to correct) are significantly higher than has historically been the case. The “standard penalty” as HMRC refer to it is 200% of the unpaid tax liability– and of course if the tax involved was significant, the penalties will make a huge difference to the amount owed to HMRC.

The penalty can be reduced by factors such as

  • the level of co-operation with HMRC
  • the quality of disclosure to HMRC

but no matter how helpful the tax payer has been, the lowest level of penalty available is 100% of the tax liability (and this level rises to 150% of the tax involved in cases where HMRC has become aware of the undeclared income matters rather than the tax payer advising them without prompting e.g. through CRS).

As if the above penalties do not encourage compliance, then there are other measures available to HMRC if the tax involved exceeds £25,000 in any one tax year. In these cases a penalty of up to 10% of the value of the assets can also be imposed.

HMRC gave until 30 September 2018 for disclosures to be made. However for anyone aware they have undisclosed foreign income, gains or inheritance tax, they should seek professional advice as soon as possible to make sure the correct disclosures are made and any penalties mitigated as far as possible.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.

The tax treatment depends on the individual circumstances of each client and may be subject to change in future.


This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.