Section 35 and Schedule 10: Penalties: Offshore Income Etc
Summary
1.Section 35 and Schedule 10 amend the level of penalties that may be charged in cases where certain offshore income, gains or assets have not been declared to HM Revenue & Customs (HMRC). The existing penalty levels apply where the offshore matter concerns a jurisdiction which automatically exchanges information with the UK. For other jurisdictions, for income tax and capital gains tax (CGT) only, the penalties are increased by a factor of 1.5 or 2 depending on the tax transparency of the jurisdiction concerned.
Details of the Section
2.Subsection (2) provides for the Schedule to come into force on a day appointed by the Treasury by order.
3.Subsection (3) provides that an appointed day order may contain different provisions for different purposes as well as transitional provisions and savings.
4.Subsection (4) provides that the Treasury may make orders containing provisions that supplement the Schedule.
5.Subsection (5) provides that an order under subsection (4) may make different provision for different purposes as well as provision amending, revoking or repealing other legislation.
6.Subsection (6) provides that orders under subsection (2) or (4) must be made by statutory instrument and subsection (7) that they are made subject to the negative resolution procedure.
Details of the Schedule
7.Paragraph 1 provides for Schedule 24 to the Finance Act (FA) 2007 to be amended. That Schedule imposes penalties for errors in a tax return or other document submitted to HMRC that leads to a loss of tax.
8.Paragraph 2 substitutes new paragraphs 4, 4A, 4B, 4C and 4D for existing paragraph 4 of Schedule 24 to FA 2007. New paragraphs 4 and 4A relate to penalties incurred under paragraph 1 of Schedule 24 (errors in taxpayer’s document). New paragraphs 4B, 4C and 4D relate to penalties under paragraphs 1A and 2 of Schedule 24 (error in taxpayer’s document attributable to another person and under-assessment by HMRC).
9.Sub-paragraph (1) of new paragraph 4 provides for the following sub-paragraphs to set out the revised penalty structure for penalties under paragraph 1 of Schedule 24. In place of one category of inaccuracy with a penalty level for each of three types of behaviour (careless action, deliberate but not concealed action and deliberate and concealed action), there are now three categories of inaccuracy each with a penalty level reflecting behaviour. So, in total there are nine distinct penalty levels.
10.Sub-paragraph (2) sets out three levels of penalty for a category 1 inaccuracy.
11.Sub-paragraph (3) sets out three levels of penalty for a category 2 inaccuracy. They are 1.5 times the levels in category 1.
12.Sub-paragraph (4) sets out three levels of penalty for a category 3 inaccuracy. They are double the levels in category 1.
13.Sub-paragraph (5) refers to new paragraph 4A which defines the three new categories of inaccuracy.
14.Sub-paragraph (1) of new paragraph 4A defines a category 1 inaccuracy. It includes all errors involving either a domestic matter, or an offshore matter relating to a category 1 territory or relating to taxes other than income tax and CGT.
15.Sub-paragraph (2) defines a category 2 inaccuracy. It must involve an offshore matter relating to a category 2 territory and one of the specified taxes (income tax and CGT)
16.Sub-paragraph (3) defines a category 3 inaccuracy. It must involve an offshore matter relating to a category 3 territory and one of the specified taxes. The taxes specified are the same for both category 2 and 3.
17.Sub-paragraph (4) explains what is meant by an inaccuracy which “involves an offshore matter”. It includes offshore income, assets and activities.
18.Sub-paragraph (5) explains what is meant by the phrase “involves a domestic matter”.
19.Sub-paragraph (6) provides that a single inaccuracy is to be treated as separate inaccuracies where it relates to more than one category (the relevant category). This is so the total tax attributable to the inaccuracy may be apportioned between the relevant categories.
20.Sub-paragraph (7) cross-refers to the definitions of “category 1 territory”, “category 2 territory” and “category 3 territory” that are inserted into Schedule 24 to FA 2007 by paragraph 5 of this Schedule.
21.Sub-paragraph (8) defines the term “assets” which is used in the definition of an offshore matter.
22.New paragraphs 4B, 4C and 4D simply repeat what is in paragraph 4(1A), (2) and (3) of Schedule 24 which are replaced by paragraph 2 of this Schedule. These provisions relate to penalties under paragraphs 1A and 2 of Schedule 24 to FA 2007 which are unaffected by the other material in this Schedule.
23.Paragraph 3 substitutes new paragraph 10 for existing paragraph 10 of Schedule 24 to FA 2007. This sets out the amount by which the penalties under new paragraph 4 are to be reduced to take account of disclosure. Paragraph 9 of Schedule 24 explains what is meant by disclosure and whether a disclosure is prompted or unprompted.
24.Sub-paragraph (1) of new paragraph 10 introduces a Table which in the first column sets out the nine possible penalty levels mentioned in paragraph 4. These are called “standard percentages”. The standard percentages must be reduced to take account of disclosure.
25.Sub-paragraph (2) explains that the second and third column in the Table set out the minimum percentage level for a prompted and unprompted disclosure respectively.
26.Paragraph 4 substitutes new paragraph 12(4) and (5) for existing paragraph 12(4). These provisions concern how penalties under paragraph 1 of Schedule 24 to FA 2007 (as revised) interact with penalties under paragraph 1A of Schedule 24.
27.New paragraph 12(4) provides that where penalties under both paragraphs 1 and 1A are imposed for the same inaccuracy then the total penalties must not exceed the “relevant percentage” of the potential lost revenue.
28.New paragraph 12(5) defines “relevant percentage”. The three levels of relevant percentage correspond to the maximum penalty for each category of inaccuracy.
29.Paragraph 5 inserts new paragraphs 21A and 21B into Part 5 of Schedule 24 to FA 2007 which contains definitions.
30.Sub-paragraph (1) of new paragraph 21A defines a category 1 territory as one so designated by Treasury order.
31.Sub-paragraph (2) defines a category 2 territory. Category 2 is a sweep-up of territories that are neither category 1 nor category 3.
32.Sub-paragraph (3) defines a category 3 territory as one so designated by Treasury order.
33.Sub-paragraph (4) sets out factors that the Treasury must have regard to in classifying territories.
34.Sub-paragraph (5) provides that an order under paragraph 21A is to be made by statutory instrument.
35.Sub-paragraph (6) provides that, subject to sub-paragraph (7), orders will be made subject to the negative resolution procedure.
36.Sub-paragraph (7) provides that the first such order under both sub-paragraphs (1) and (2) is subject to the affirmative resolution procedure.
37.Sub-paragraph (8) provides that an order only applies to inaccuracies from the date on which the order comes into force.
38.Sub-paragraph (1) of new paragraph 21B provides that the Treasury may make regulations concerning the location of assets, income or activities for the purposes of Schedule 24 to FA 2007. This power would be used, for example, in circumstances where there may uncertainty as to the territory in which an asset is located.
39.Sub-paragraph (2) allows regulations made under this paragraph to provide different rules for different cases and taxes.
40.Sub-paragraph (3) provides for regulations to be made by statutory instrument and sub-paragraph (4) says that regulations will be made subject to the negative resolution procedure.
41.Paragraph 6 inserts a new paragraph 23B into Schedule 24 to FA 2007. It defines the term “UK”.
42.Paragraph 7 provides for Schedule 41 to FA 2008 to be amended. That Schedule imposes penalties for failing to notify liability to tax. The changes made to Schedule 41 mirror the changes made to Schedule 24 to FA 2007 by creating increased penalties for failures involving certain offshore matters.
43.Paragraph 8 substitutes new paragraphs 6, 6A, 6B, 6C and 6D for existing paragraph 6 of Schedule 41. New paragraphs 6 and 6A relate to penalties incurred under paragraph 1 of Schedule 41 to FA 2008 (failure to notify). New paragraphs 6B, 6C and 6D relate to penalties under paragraphs 2 (issue of invoice showing VAT by unauthorised person), 3 (putting product to use that attracts higher duty) and 4 (handling goods subject to unpaid excise duty) of Schedule 41.
44.Sub-paragraph (1) of new paragraph 6 provides for the following sub-paragraphs to set out the revised penalty structure. In place of one category of failure with a penalty level for each of three types of behaviour (deliberate and concealed failure, deliberate but not concealed failure and other cases), there are now three categories of failure each with a penalty level reflecting behaviour. So, in total there are nine distinct penalty levels.
45.Sub-paragraph (2) sets out three levels of penalty for a category 1 failure.
46.Sub-paragraph (3) sets out three levels of penalty for a category 2 failure. They are 1.5 times the levels in category 1.
47.Sub-paragraph (4) sets out three levels of penalty for a category 3 failure. They are double the levels in category 1.
48.Sub-paragraph (5) refers to new paragraph 6A which defines the three categories of failure in a similar way to that done by paragraph 2 above.
49.Sub-paragraph (1) of new paragraph 6A defines a category 1 failure. It includes all failures involving either a domestic matter, or an offshore matter relating to a category 1 territory or relating to taxes other than income tax and CGT.
50.Sub-paragraph (2) defines a category 2 failure. It must involve an offshore matter relating to a category 2 territory.
51.Sub-paragraph (3) defines a category 3 failure. It must involve an offshore matter relating to a category 3 territory.
52.Sub-paragraph (4) explains what is meant by the phrase “involves an offshore matter”.
53.Sub-paragraph (5) explains what is meant by the phrase “involves a domestic matter”.
54.Sub-paragraph (6) provides that a single failure is to be treated as separate failures where it relates to more than one category. This is so the total tax attributable to the failure may be apportioned between the relevant categories on a just and reasonable basis.
55.Sub-paragraph (7) attracts the classification of territories set out in new paragraph 21A of Schedule 24 to FA 2007. It also provides that an order under that paragraph does not apply where the obligations are to be complied with before the order comes into force.
56.Sub-paragraph (8) provides that regulations under new paragraph 21B of Schedule 24 to FA 2007 apply to this Schedule.
57.Sub-paragraph (9) defines the terms “assets” and “UK”.
58.New paragraphs 6B, 6C and 6D simply repeat what is in paragraph 6(1) (except so far as it relates to paragraph 1), (2) and (3) of Schedule 41 to FA 2008 which are replaced by paragraph 8 of this Schedule. These provisions relate to VAT and excise penalties under paragraphs 2, 3 and 4 of Schedule 41 which are unaffected by the other material in this Schedule.
59.Paragraph 9 substitutes new paragraph 13 for existing paragraph 13 of Schedule 41 to FA 2008. This sets out the amount by which the penalties under new paragraph 6 are to be reduced to take account of disclosure. Paragraph 12 of Schedule 41 explains what is meant by disclosure and whether a disclosure is prompted or unprompted.
60.Sub-paragraph (1) of new paragraph 13 introduces a Table which in the first column sets out the nine possible penalty levels mentioned in new paragraph 6. These are called “standard percentages”. The standard percentages must be reduced to take account of disclosure.
61.Sub-paragraph (2) explains that the second and third column in the Table set out the minimum percentage level for a prompted and unprompted disclosure respectively.
62.Sub-paragraph (3) provides that the minimum percentage levels in the case of non-deliberate failures vary according to whether HMRC become aware of the failure less or more than 12 months after the relevant tax first becomes unpaid.
63.Paragraph 10 provides for Schedule 55 to FA 2009 to be amended. That Schedule imposes penalties for failing to make returns within the required period. The changes made to Schedule 55 broadly mirror the changes made to Schedules 24 to FA 2007 and Schedule 41 to FA 2008 by creating increased penalties for the withholding of information involving certain offshore matters.
64.Sub-paragraph (1) of paragraph 11 provides for the following sub-paragraphs to set out the revised penalty structure in cases where the failure continues for 12 months after the penalty date. In place of one category of withholding information there are now three, relating to jurisdiction to which the information relates. For each category (1, 2 and 3) there is a penalty level for each of three types of behaviour (deliberate and concealed withholding, deliberate but not concealed withholding and other cases). In contrast to Schedules 24 to FA 2007 and 41 to FA 2008 the percentage penalty level for non-deliberate cases is fixed at 5 per cent of the tax (or £300 if greater). So there is one penalty level for non-deliberate behaviour and six penalty levels for deliberate behaviour.
65.Sub-paragraph (2) replaces “100 per cent” in paragraph 6(3)(a) of Schedule 55 with “the relevant percentage”.
66.Sub-paragraph (3) inserts sub-paragraph (3A) into paragraph 6 of Schedule 55 to FA 2009. It sets out the three relevant percentages for the purposes of paragraph 6(3)(a), one for each category of information withheld.
67.Sub-paragraph (4) replaces “70 per cent” in paragraph 6(4)(a) of Schedule 55 with “the relevant percentage”.
68.Sub-paragraph (5) inserts sub-paragraph (4A) into paragraph 6 of Schedule 55 to FA 2009. It sets out the three relevant percentages for the purposes of paragraph 6(4)(a), one for each category of information withheld.
69.Sub-paragraph (6) refers to new paragraph 6A which defines the three categories of information.
70.Paragraph 12 inserts new paragraph 6A into Schedule 55 to FA 2009.
71.Sub-paragraph (1) of new paragraph 6A says that category 1 includes all information involving either a domestic matter, or an offshore matter involving a category 1 territory or relating to taxes other than income tax and CGT.
72.Sub-paragraph (2) defines category 2 information. It must involve an offshore matter relating to a category 2 territory.
73.Sub-paragraph (3) defines category 3 information. It must involve an offshore matter relating to a category 3 territory.
74.Sub-paragraph (4) explains what is meant by the phrase “involves an offshore matter”.
75.Sub-paragraph (5) explains what is meant by the phrase “involves a domestic matter”.
76.Sub-paragraph (6) provides that if the information withheld relates to more than one category then the failure is treated as if it were separate failures. This is so the total tax attributable to the failure may be apportioned between the categories on a just and reasonable basis.
77.Sub-paragraph (7) attracts the classification of territories set out in new paragraph 21A of Schedule 24 to FA 2007. It also provides that an order under that paragraph does not apply to a failure if the filing date is before the date on which the order comes into force.
78.Sub-paragraph (8) provides that regulations under new paragraph 21B of Schedule 24 to FA 2007 apply to this Schedule.
79.Sub-paragraph (9) defines the terms “assets” and “UK”.
80.Sub-paragraph (1) of paragraph 13 provides for paragraph 15 of Schedule 55 to FA 2009 to be amended.
81.Sub-paragraph (2) substitutes new sub-paragraphs (1) and (2) for existing sub-paragraphs (1) and (2). This sets out the amount by which the penalties under paragraph 6 of Schedule 55 to FA 2009 are to be reduced to take account of disclosure. Paragraph 14 of Schedule 55 explains what is meant by disclosure and whether a disclosure is prompted or unprompted.
82.New sub-paragraph (1) introduces a Table which in the first column sets out the six possible penalty levels mentioned in paragraph 6(3A) and (4A). These are called “standard percentages”. The standard percentages must be reduced to take account of disclosure.
83.New sub-paragraph (2) explains that the second and third column in the Table set out the minimum percentage level for a prompted and unprompted disclosure respectively.
84.Sub-paragraph (3) omits paragraph 15(3) and (4).
85.Paragraph 14 amends paragraph 17 of Schedule 55 to FA 2009. It provides that where penalties under more than one paragraph of Schedule 55 are imposed then the total penalties must not exceed the “relevant percentage” of the tax according to the category of information which is defined in new sub-paragraph (4).
Background Note
86.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. Schedule 24 to FA 2007 (errors in tax returns etc), Schedule 41 to FA 2008 (failure to notify liability) and Schedule 55 to FA 2009 (returns not filed on time) set out the minimum and maximum penalties that may be charged.
87.In each case the penalty is a percentage of the amount of tax that has been lost. For example, where income in omitted from a return, then in addition to recovering the tax and interest thereon, a penalty may be charged in the range 0 per cent to 30 per cent where the error is due to a failure to take reasonable care, 20 per cent to 70 per cent where the understatement is deliberate and 30 per cent to 100 per cent where a deliberate understatement is aggravated by concealment.
88.The percentage ranges set out above will continue to apply where the tax involved is not income tax or CGT. They will also continue to apply where the non-compliance either relates to a domestic matter (UK income, gains etc), or to non-compliance involving an overseas jurisdiction with automatic exchange of information with the UK (a “category 1 territory”).
89.Where the non-compliance involves either a jurisdiction that only exchanges information with the UK on request or has no arrangements to exchange information with the UK, then the percentages will be increased by a factor of either 1.5 or 2 depending on whether a category 2 or 3 territory is involved. Jurisdictions will be classified by Treasury order into category 2 or 3 taking account of the existence and quality of arrangements to exchange information and whether the UK would benefit from arrangements in cases where none exist.
90.This means, for example, that in a case involving income tax or CGT, a penalty of 200 per cent of the tax lost could be charged for a serious case of failing to declare income or assets in a jurisdiction without information exchange arrangements. The higher penalties reflect the fact HMRC is less likely to detect the non-compliance and that the choice of jurisdiction may well have been influenced by that factor.
