The ‘Panama Papers’

Earlier this week, the International Consortium of Investigative Journalists (ICIJ) confirmed that the organisation had obtained confidential documents (the ‘Panama papers’) from Panamanian law firm Mossack Fonseca (MF) and had been shared with a network of international journalists, including The Guardian and the BBC. A staggering 2.6TB in size, the Panama Papers include 11.5 million files detailing the offshore financial structures of a number of high profile, high net worth individuals with links to world leaders.

MF is the world’s fourth largest offshore law firm, specialising in company incorporation and administration of offshore companies. As a large proportion of the incorporations are in tax havens, the automatic assumption is that the law firm assisted individuals and corporations in avoidance and possibly evasion of tax in their home jurisdictions. There has been a great deal of recent media coverage on the leak and HMRC will be under close scrutiny for their actions in respect of the data.

Many assume that companies incorporated by MF are vehicles for tax evasion and most of the news articles appear to support this view. It should be borne in mind that although this may be the case in some instances, there are reasons other than tax evasion that a person may wish to use an offshore vehicle to hold their money.

For instance, there are certain parts of the globe where bribery and corruption are rife and wealthy individuals may wish to protect their assets in a stable, low tax jurisdiction using a corporate or trust structure to protect their privacy. There are also certain cases where UK resident individuals can hold assets offshore without being subject to UK tax. For example, if the offshore vehicle was a trust managed offshore and without any UK assets then, subject to some anti-avoidance provisions, the assets, income and gains of that trust may not be subject to UK tax. UK resident beneficiaries of the trust may not be subject to UK tax until they receive a distribution. Non-UK domiciled individuals in particular have a lot more flexibility in how their affairs are structured and it should not be assumed that every person connected to MF was evading tax.

Despite the bona fide reasons for using an offshore entity, HMRC have been heavily criticised in recent periods in relation to their use of previously leaked data (HSBC) and for not ‘converting’ most of the data or subsequent investigations into criminal convictions. There is an enhanced risk that individuals with previously undisclosed offshore assets could be exposed to a criminal investigation. Anyone with a connection to the law firm MF can expect at the very least, to be investigated by HMRC.

In addition, now that the Liechtenstein Disclosure facility has closed, the routes for making a disclosure have been restricted and immunity from prosecution can no longer be secured. HMRC have a general policy of not criminally investigating a person who makes a voluntary disclosure and discloses all previously undeclared income/gains/other transactions that should have been subject to UK tax. The key to avoiding criminal prosecution is for the client to approach HMRC before HMRC approach them.

HMRC have advised the UK media of their interest in obtaining the data for assistance with their enquiries. As the data was stolen, it is not clear whether this would be admissible in court but HMRC have indicated that they would use it to support their open investigations. They may also use it to open enquiries into other UK resident entities and individuals, where enquiries are not yet open.

As a consequence of the recent publicity on offshore assets, David Cameron announced on 11 April that the government “will legislate this year to hold companies who fail to stop their employees facilitating tax evasion criminally liable”. The measure was originally intended to be brought in from April 2016 but is now being rushed through as a result of the furore surrounding the Panama Papers.

Other worldwide tax agencies, including the Australian, Indian and New Zealand Tax Offices have already set up work forces to deal specifically with data in the Panama Papers. Although HMRC may wish to obtain the data and review it for the purpose of opening enquiries, the question arises as to whether they have the available manpower to do so, given the number of offices closed and redundancies made in late 2015.

The UK government has promised funding of £10m to support a new taskforce set up specifically to deal with the information contained within the Panama Papers. The taskforce will be led by the National Crime Agency and HMRC Investigations specialists and will be supported by the the Serious Fraud Office and the Financial Conduct Authority.

Anyone with undeclared offshore assets should seek tax advice as soon as possible to ascertain whether their tax affairs are in order and if necessary make a voluntary disclosure of any income/gains to HMRC to minimise their exposure.

By Isobel Clift and Mala Kapacee.

For further information on overseas assets and the implications from a UK tax perspective, as well as how to make a voluntary disclosure to HMRC, please call TaxDesk on 0845 4900509 and ask for Isobel Clift.