There were a number of initiatives announced in 2016 to target avoidance and evasion. HMRC believes that it is at the forefront of the fight against harmful tax practises whether legal or illegal, which in recent years have become a global issues.
Since the economic crash of 2008, wealthy individuals and entities with tax planning arrangements in place to maintain their wealth have come under fire as countries and governments struggle to finance their debt. A number of initiatives have been implemented since then, including accelerated payment notices, follower notices and increasing penalties.
A major development in 2016 was the publication of the information obtained under the banner of the ‘Panama Papers’ in April 2016, which exposed issues ranging from legitimate offshore planning to money laundering. Both the Treasury and HMRC have utilised the public reaction to enhance HMRC’s powers for apprehending tax evaders and users of tax avoidance schemes as well as targeting professionals that assist/enable taxpayers to evade taxes.
With the Common Reporting Standard (CRS) due to be implemented from 1 January 2017 onwards, HMRC no longer believe it is necessary to provide incentives for taxpayers to make voluntary disclosures. In response to public outcry over tax avoidance and evasion, the government has introduced a raft of new measures, which we explain in further detail below.
Common Reporting Standard
The first information will be exchanged by September 2017 by the early adopters of the initiative. This means that HMRC will receive an unprecedented amount of information from tax authorities worldwide in relation to UK resident individuals who hold financial assets overseas. For many the implementation of the CRS signifies an end to the privacy they previously enjoyed, regardless of whether or not the relevant taxes were paid.
From January 2018, the remainder of the 100+ jurisdictions will implement the CRS and from HMRC’s viewpoint, there will be “nowhere to hide”. The deadline for the transfer of information between tax authorities is 30 September each year for information relating to the previous calendar year.
It is important to note that jurisdictions are now either viewed as transparent or opaque and anyone with assets in a jurisdiction that is not deemed to be cooperative can expect to face closer scrutiny from the relevant tax authorities. The mentality being adopted by cooperating states is that you are either with us or against us.
HMRC were ahead of the game by introducing an offshore penalty regime in April 2011 that reflected the transparency of the jurisdiction in which assets were held. The legislation will be further amended from April 2017 to incorporate CRS jurisdictions. Anyone with assets in non-cooperative jurisdictions will potentially face significantly higher penalties if their tax affairs are not in order.
Requirement to Correct
In Budget 2016, the Government announced that it would consult on a new legal requirement for individuals to correct a past failure to pay UK tax on offshore interests by 30 September 2018, with new sanctions for those who fail to do so. The draft legislation has been published and stakeholders are requested to respond to the consultation by 1 February 2017.
HMRC have confirmed that the RTC will come into force from April 2017 and run until 30 September 2018, when the Common Reporting Standard will have been implemented in full.
Anyone who is aware that they have historical undeclared tax liabilities linked to offshore assets will have a legal requirement to correct their affairs before 30 September 2018. Failure to do so will result in higher tax-geared penalties, dependent on the jurisdiction in which the assets were held
Criminal offence of offshore tax evasion
The criminal offence was introduced in Finance Act 2016. Any tax payer who fails to declare, fails to file a return or submits an incorrect return in relation to offshore assets is liable not only to higher penalties (based on the jurisdiction where the asset is held), but also a custodial sentence of up to 6 months.
As this is a strict liability offence, HMRC will not need to prove that there was intent to evade tax, only that the under-declaration has occurred with respect to overseas assets. The only defences are that reasonable care was taken in the preparation of the return or that there was a reasonable excuse for not filing the return. Trustees of a settlement and executors of a deceased person’s estate are not subject to the charge.
Although the strict liability criminal offence legislation has been published, at present there is no indication of when it will be enacted.
Corporate criminal offence of failure to prevent tax evasion
Earlier in 2016, HMRC issued draft legislation on a criminal offence aimed at corporate entities that fail to prevent their employees or “relevant associated individuals” from enabling tax evasion. By implementing this, HMRC are forcing companies to take responsibility for the actions of their employees and any “associated person” in the course of their work for the entity.
New penalty for enabling offshore tax evasion
Professionals that have either encouraged, enabled or facilitated a client to evade tax using offshore structures will be subject to penalties, based on the tax lost to HMRC. This civil offence is meant to act as deterrent to advisers. An additional sanction for those that have been caught by the penalty regime is the publishing of their details.
In the light of HMRC’s recent successes before the tax tribunal challenging tax avoidance, a new sanction was announced for professionals that either assist or enable clients to avoid taxes. The Government will shortly publish draft legislation regarding the new penalty for enablers of tax avoidance arrangements that are later defeated by HMRC.
HMRC intend to remove the ‘reasonable care’ argument for users of tax avoidance schemes where the advice taken was not independently provided. This means that unless separate and independent advice is taken, the taxpayer may face tax-geared penalties.
Following the criminal offence consultations and implementation of penalties for tax enablers, the seven main regulatory bodies for the taxation profession amended their guidance on professional conduct in relation to taxation, highlighting that tax professionals should not “create, encourage or promote tax planning arrangements…that set out to achieve results…contrary to the clear intention of Parliament”.
Requirement to notify offshore structures
Going forward, HMRC wishes to consult on the new legal requirement for intermediaries (tax advisers, banks and fiduciaries) that arrange overseas structures for clients to notify HMRC of the structures and provide details of the related clients.
The legislation will require professionals to notify HMRC of new overseas trusts, companies and legal entities, with the aim of making it easier to police the UK tax position. This will presumably underpin the information provided by jurisdictions that have signed up to the Common Reporting Standard and provide HMRC with information on alternative low tax jurisdictions that are used for new structures.
While the proposal will hopefully prevent money laundering, it will also make it very difficult for wealthy individuals to retain their privacy.
Until now HMRC have only been able to react to information received on overseas structures. The proposed new legislation will enable them to identify risk areas. Any future legislation in respect of offshore structures is therefore likely to be based on the type of structure that HMRC believe shields the most UK tax. Responses to the consultation must be submitted by 27 February 2017.
It is clear to see from the above initiatives that the landscape for both taxpayers and their advisers has shifted dramatically in the past 12 months in favour of HMRC. Despite serious concerns being raised by the professional bodies and stakeholders, HMRC have steamed ahead with the new legislation.
Professionals should take extra from 2017 to ensure that neither they nor their clients inadvertently fall foul of the more stringent penalties and sanctions coming into force. It is definitely a matter of measure twice and cut once!