Introduction Background Note
20.HMRC may charge penalties in cases where income, gains etc. are not declared or notified to HMRC either deliberately or through a failure to take reasonable care. Schedules 24, 41 and 55 of FA 2007 (errors in tax returns etc.), FA 2008 (failure to notify liability) and FA 2009 (returns not filed on time) respectively (“the penalty Schedules”) set out the minimum and maximum penalties that may be charged.
21.In each case the penalty is a percentage of the amount of revenue potentially lost or, in relation to a penalty under Schedule 55 FA 2009, which would have been shown in the return in question. Schedule 10 to FA 2010 amended the penalty Schedules to categorise conduct giving rise to a penalty in relation to income tax or capital gains tax by reference to whether the conduct involved an offshore matter. Maximum penalties are higher for penalties relating to territories falling within categories 2 and 3 than in relation to territories falling within category 1 (which also includes penalties in relation to a “domestic matter”). The legislation provides that a territory falls within category 2 unless designated as category 1 or 3 by Treasury order. Designation of a territory is made by reference to the level of information exchange arrangements (if any) between the UK and the territory. Territories within category 1 (which include EU member States) have entered into arrangements for automatic exchange of information with the UK broadly comparable with information provided automatically to HMRC within the UK. The higher penalties corresponding to categories 2 and 3 reflect the fact that, owing to the inferior level of information exchange arrangements, HMRC is less likely to detect non-compliance and that the choice of such territories by those failing to report accurately their tax obligations may well have been influenced by that factor.
22.This measure makes the tax system fairer, by strengthening civil sanctions for the small minority who evade tax by hiding taxable income, gains and assets offshore, and contributes to building the deterrent effect. This Schedule builds on the increased penalties for offshore non-compliance introduced in FA 2010 in three ways.
23.First, a new category 0 is introduced, having the same penalty levels as the current category 1. The intention is that only overseas territories making arrangements with the UK that meet the new Common Reporting Standard will fall into category 0. The penalty levels in new category 1 are raised slightly, those in categories 2 and 3 will stay the same. It is envisaged that most or all territories currently in category 1 will, over time, make arrangements so as to fall within category 0. Regulations to classify territories will be made in 2016.
24.Second, penalties relating to inheritance tax are brought within the scope of the scheme already existing for income tax and capital gains tax so that penalties involving assets in category 1-3 territories will be higher than those for failures in relation to assets in the UK or category 0 territories.
25.Third, the provisions will cover not only income and gains arising offshore, but also non-compliance in the UK where the payment is made overseas or received in the UK and then moved offshore.