The RTC rules may impose significant penalties on employment related-trusts which fail to correct by 30 September 2018.
Finance (No2) Act 2017 introduced the new RTC regime. In practice, the legislation operates by imposing severe penalties of up to 200% on a Failure To Correct (FTC) offshore tax non-compliance before 30 September 2018. The minimum possible FTC penalty is 100%.
The detailed mechanics of RTC are set out in our summary here. In essence, any offshore tax non-compliance which is not corrected on or before 30 September 2018 will be subject to the new FTC penalties. Importantly for employment-related trusts, ‘offshore tax non-compliance’ also includes IHT.
The RTC legislation applies in line with the normal time limits for the relevant tax.
For offshore IHT non-compliance, where an IHT account (i.e. a tax return for IHT) has been delivered and payment made and accepted in full satisfaction of the tax due, the time limits are:
However, if no IHT account is submitted, or there is an omission from a submitted account, the time limit is 20 years from the date that the IHT becomes due.
There is no time limit where the failure to submit or the omission is the result of deliberate behaviour.
Where trustees of an employment-related trust are unware that they have an IHT liability, an IHT account is unlikely to have been delivered. In these circumstances, the 20 year time limit will apply as a minimum.
Some of the main risks that trustees of offshore employment-related trusts should consider are as follows:
The window to correct offshore tax non-compliance closes on 30 September 2018. Non-compliance identified after that date will be subject to penalties of up to 200% (with a minimum penalty of 100%). Given the extended window of 20 years that can apply for IHT, now is the time for trustees to ensure that they are fully compliant.
An important point to note is that the legislation does provide some protection against FTC penalties in cases where there is a “reasonable excuse”. However, unlike the general rules, the RTC legislation does not allow reliance on professional advice to constitute a reasonable excuse unless it is given by someone who is not an “interested person”.
Broadly speaking, an interested person will be any advisor who was involved in the set-up of the trust. In practice, this means that if trustees wish to rely on a reasonable excuse defence, they may need to engage an independent advisor now to provide a second opinion. Alternatively, trustees could make a disclosure to HMRC before 30 September 2018 without accepting there is any unpaid liabilities; albeit this may trigger a subsequent enquiry. In such cases, HMRC say that “provided you give HMRC all the relevant information about the matter you will have made a correction under the RTC even if you do not agree that additional tax is due. As you have made a correction no FTC penalty can be due.”
KPMG can assist trustees of employment-related trusts to review their operations, confirm whether historical IHT liabilities have arisen and assist trustees with making a disclosure to HMRC (if one is required). And where KPMG was not the original advisor any advice should also provide a defence against FTC penalties.
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