Taxpayers in offshore funds caught out by requirement to correct legislation
Hundreds of thousands of investors with holdings in offshore fund hotspots, such as Dublin and Luxembourg, could find themselves unexpectedly hit with fines and named and shamed when new rules take effect this weekend. From Sunday, legislation called the Requirement to Correct (RTC) forces taxpayers to tell HM Revenue & Customs about any offshore tax liabilities relating to UK income tax, capital gains tax or inheritance tax. Any individuals who have paid the incorrect amount of tax on overseas income in previous years must have corrected their tax returns by the September 30 deadline, or the potential fine will double to 200 per cent of tax owed.
Wealth managers and accountants warned that many UK taxpayers who think they have paid the correct amount of tax will be caught out by the new rules. Investors in offshore funds, which are commonly held within pension funds and Isas, could be affected. This is because the income that arises in some offshore funds is rolled up but not always distributed to the person who invests in the fund. Known as “excess reporting income”, it should be reported on the investor’s personal tax return, according to HMRC rules. “Many investors will be unaware that they have a taxable event because they logically believe that HMRC taxes them only on income they receive,” said Nimesh Shah, partner at Blick Rothenberg, the accountancy firm.
“The real sting is that while investors don’t think they have anything to declare the tax rules say otherwise. The rules stipulate that taxpayers need to put ‘excess reporting income’ on to their tax return and pay tax on it, even if the fund has chosen not to distribute it to the investor.” The RTC legislation is aimed at anyone with offshore interests who has not fully declared income and gains. “The new rules do not account for individuals who are not aware that they have done anything wrong. That is the concern for taxpayers — that they may unknowingly have this income that they did not pay tax on and could face a penalty as well as the risk of being named and shamed,” said Mr Shah. The rules are focused on income tax, capital gains tax and inheritance tax and place a great onus on individuals to review their personal tax affairs. However, advisers have warned that awareness of RTC is still low, despite a series of letters from HMRC urging people to declare any “overseas income or gains, including investments and accounts” by the end of September to avoid paying higher tax penalties.
Since 2010, HMRC has raised £160bn by tackling avoidance, evasion and non-compliance. This includes £2.8bn from offshore compliance and initiatives. HMRC said: “UK taxpayers have until September 30 to come forward and declare any foreign income or profits on offshore assets to avoid new higher tax penalties that come into force on October 1.”