Offshore Evasion: HMRC Gets Tough

Offshore Evasion: HMRC Gets Tough

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Key Points

  • HMRC will receive more information from overseas territories from 2016 under UK FATCA arrangements
  • This will include details of bank accounts, trusts and companies involving UK residents
  • UK FATCA applies to British Overseas Territories and Crown Dependencies
  • Disclosure facilities exist that can remedy any tax problems efficiently
  • Our special questionnaire can help identify at risk clients

Earlier this year, HMRC launched an advertising campaign aimed at people evading UK tax by holding money in offshore accounts. This was followed in April 2014 by a press release updating HMRC’s strategy for tackling offshore tax evasion.

This was front page news, thanks in no small part to the announcement of new criminal sanctions against offshore tax evaders. Here, we summarise HMRC’s most recent approaches to offshore evasion, its success to date and what the future holds for UK resident taxpayers who evade tax using offshore investments or structures.

AUTOMATIC INFORMATION EXCHANGE AGREEMENTS: THE “FATCA” MODEL

It is now 2 years since the UK became the first jurisdiction to sign an enhanced agreement to automatically exchange tax information with the United States. Based on its Foreign Account Tax Compliance Act (FATCA) legislation, the US has since negotiated several more agreements based on this model and is in negotiations with over 75 jurisdictions in total to develop similar agreements. Foreign financial institutions that fail to provide the requisite information about US resident account holders to the US authorities face, from 1 July 2014, a punitive US withholding tax on their US source investment income.

In 2013 the UK followed suit, signing automatic exchange agreements with the UK’s overseas territories with financial centres (Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Monserrat and Turks and Caicos) and the UK’s Crown Dependencies (Isle of Man, Jersey and Guernsey).

A new “Global Standard” for automatic exchange of information between countries has been developed by the OECD, based on the US FATCA model. To date, 44 countries have signed up to adopt this new standard as soon as possible, including the above financial centres. HMRC say these agreements mean that if a UK resident has an overseas bank account or interest in a qualifying trust, partnership or other legal arrangement (or is the beneficial owner of any of the above, even if not held in their name), then HMRC will be provided with their name, address, account number, balance and details of the income arising. It is envisaged that information collected from a starting date of July 2014 onwards will be provided by the offshore jurisdictions to the UK authorities by 30 September 2016. For subsequent years, the deadline will be 9 months after the end of the calendar year. All “Reporting Financial Institutions” in the territories that have signed up to the agreement will need to adhere to these rules; this includes banks, portfolio management companies and certain insurance companies.

Added to existing Tax Information Exchange Agreements (TIEAs), information received on EU bank accounts operated by UK residents under the EU Savings Directive and existing powers under many Double Tax Treaties, the UK now has a comprehensive range of information exchange pathways with overseas jurisdictions.

The Swiss situation
Very broadly, the UK : Swiss agreement, ratified in 2011, required UK resident Swiss bank account holders to authorise the release of their details to the UK authorities or suffer both a one off historic withholding tax on the capital value of their accounts on 31 May 2013 and future withholding taxes on any future income received. The latter option was expensive but appeared to preserve anonymity.

The agreement goes much further than that however, and allows HMRC to obtain details of UK resident Swiss account holders. Under the terms of the agreement HMRC can ask for details of Swiss accounts operated by 500 UK residents per year, with this number increasing in later years should this process success identify taxpayers with undisclosed liabilities. This will be an ongoing process, as where HMRC has plausible grounds for suspecting a person has an offshore account it can require the Swiss authorities to confirm whether they hold accounts with Swiss financial institutions.

It is also worth noting that one glance at HMRC’s foreign pages tax return guidance for 2013/14 appears to confirm that anonymity will not be preserved in any event for those who chose to suffer the Swiss withholding tax. The guidance notes that “your return should include a claim to have the withholding tax treated [as a payment on account] and you should also supply the certificates provided by your Swiss paying agent to confirm the amounts of withholding tax taken off”. HMRC are likely to take a keen interest in taxpayers now disclosing the existence of Swiss accounts for the first time, perhaps taking the opportunity to ask what other offshore interests these clients may have.

Disclosure Facilities
HMRC has attempted to make non-compliant taxpayers come forward voluntarily, with the introduction of a series of offshore disclosure facilities. Those currently in force are the Liechtenstein Disclosure Facility (LDF) and similar facilities with the three Crown Dependencies. Advantages these facilities offer include mitigated penalty levels, a requirement to disclose from 6 April 1999 onwards (rather than a 20 year period) and, in the case of the LDF only, guaranteed immunity from prosecution. To date, 56,000 people have come forward through these facilities. HMRC have reported that £966m up to March 2014 was raised through the LDF alone.

Whistleblowing
HMRC is now actively encouraging whistleblowing, the April 2014 press release noting that they will pay financial rewards for information about offshore tax evaders where appropriate. How effective a tool this is remains to be seen, but we have seen in the past examples of ex business partners or former spouses contacting HMRC to inform them of tax evasion, even if implicates them at the same time.

More punitive measures to tackle overseas evasion
HMRC has already increased the penalty for offshore tax evasion with effect from 6 April 2011, with the maximum penalty standing at 200% of the tax due in cases where they take civil sanctions only. Whilst tax evasion generally has always been a criminal offence, relatively few criminal prosecutions have historically been made, limited mainly to extremely serious cases or high profile cases.

HMRC has announced it will now consult on a new strict liability criminal offence of failing to declare taxable offshore income. Failure to declare offshore income could result in an unlimited penalty or a prison sentence. Not only will sentences be tougher, but more tax evaders will be subject to these tougher sentences – HMRC aims to bring criminal proceedings against almost 1,200 people in 2014/15, compared to only 165 in 2010/11.

SO IS THERE ANY PLACE TO HIDE?

Probably not. The UK Government (and undoubtedly other Governments) is putting significant pressure on financial centres that have not to date signed up to the new FATCA equivalent protocol. For example, Singapore has signed a FATCA deal with the United States, and it seems likely that a similar agreement with the UK will follow. In addition, the UK : Swiss agreement stipulated that on 31 May 2014 the Swiss authorities must have given HMRC a list of the top jurisdictions to which UK account holders moved their money to avoid the one off withholding tax. HMRC will use this information to form new initiatives with those jurisdictions wherever possible, to the extent they have not already signed up to international tax transparency.

What should you do?
Offshore trustees and corporate service providers should ensure they and their clients understand their UK tax position well in advance of information being automatically transmitted to the UK under the FATCA agreements.

HMRC will use FATCA information as a means of opening investigations and if action is not taken in advance this could prove costly to clients and put them at risk of serious investigations or even criminal prosecution in certain circumstances.

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