The past 13 years has seen an enormous amount of activity in relation to offshore tax matters, with the beneficial terms offered via HMRC’s various disclosure facilities acting as the catalyst for most people to take the decision to correct the past. The voluntary disclosures have kept tax investigation specialists busy and brought in significant sums for the Treasury. The availability of these facilities was arguably in danger of making the target audience complacent – why disclose now, when another facility is sure to come along? The introduction of the Requirement To Correct draws a line in the sand in this regard.
The true secret of HMRC’s success has been its ongoing attempts to access data concerning taxpayers’ offshore interests.
In the 2000s, considerable efforts were made by the treasury in negotiating Tax Information Exchange Agreements and there had been some success with agreements made with many traditional ‘Tax Havens’ in 2005, including Gibraltar and Isle of Man, but these agreements really only allowed for targeted requests about individual taxpayers. The treasury continued to seek agreements with further countries.
HMRC’s real assault on those suspected of offshore tax evasion began in late 2005 when it successfully persuaded a Special Commissioner (now the Upper Tribunal) to approve a production order on a financial institution whose customers used credit cards to access offshore funds. In early 2006 a further order was approved for offshore banks holding client information in the UK and another in early 2007 on the same basis.
With a huge amount of data at their disposal, on 1 April 2007, HMRC launched the Offshore Disclosure Facility (ODF), for taxpayers to declare unpaid tax, boasting a low 10% penalty. HMRC began to send warning letters to those taxpayers whose details they held encouraging them to make use of the scheme.
This round of activity mainly targeted the traditional tax havens of Jersey, Guernsey and the Isle of Man, as this is where the banks targeted by the production orders had their offshore connections. Around 60,000 registrations were made by the time it closed on 26 November 2007, but many believed that tax evaders had hidden significantly more in Switzerland, where their funds were protected by banking secrecy laws.
In the meantime, the introduction of the European Savings Directive on 1 July 2005, forced EU banks to either provide details of interest earned on accounts held by foreign individuals to their EU country of residence, or deduct withholding tax.
In September 2009 with a further tranche of production orders for UK banks with offshore connections in the pipeline, HMRC launched the New Disclosure Opportunity, this time offering a 20% penalty. However, in a surprise turn of events, this facility was quickly overshadowed by the signing of an historic agreement with the Principality of Lichtenstein, which formed the basis of the most generous disclosure facility yet. The Liechtenstein Disclosure Facility (LDF), also launched on 1 September 2009, offered a 10% penalty and also a restricted the tax years that had to be considered to no earlier than 1999/00. Despite its name, it was not necessary to already have a Liechtenstein bank account, Foundation, Anstalt, or Stiftung, or indeed any other Liechtenstein asset; the facility was open to those with UK tax liabilities in respect of assets held anywhere in the world, providing they had undisclosed offshore assets elsewhere at the time of launch and subsequently obtained a financial footprint in Liechtenstein.
On 1 January 2013, the UK-Swiss Tax Cooperation Agreement came into force, this agreement provided for the sharing of data in relation to UK resident holders of Swiss bank accounts but allowed those account holders to maintain their anonymity in exchange for a One Off Charge – a sizeable chunk of their offshore holdings and thereafter comparatively high Final Withholding Tax, payable to the UK treasury via the Swiss authorities. The first data for those who decided not to accept the deductions was shared on 30 June 2013 and soon afterwards HMRC began to write to taxpayers.
On 6 April 2013 the Jersey Disclosure Facility, Guernsey Disclosure Facility and the Isle of Man Disclosure Facility were launched for taxpayers with historical tax liabilities in those jurisdictions.
The LDF, JDF, GDF and MDF came to a close on 31 December 2015, apparently closing the door to those who had yet to regularise their affairs.
In the background the Treasury had been working on Inter-Governmental Agreements with the Crown Dependencies and British Overseas Territories, these were implemented on 1 July 2014. These new agreements were far more powerful than the TIEAs and provided for an automatic exchange of information. The first data was exchanged on 30 September 2016.
However, simultaneously, a far-bigger and wide-ranging project had been underway, the OECD had been working on the Common Reporting Standard, a global mutual information exchange agreement.
The project has by all accounts been a great success and a group of 49 countries including the UK, the ‘early adopters’, made their first exchange of information on 30 September 2017 in relation to the 2016 calendar year, with the remaining countries due to disclose a year later.
In anticipation of the huge amount of valuable data, HMRC drew up plans for another disclosure facility, the Worldwide Disclosure Facility, as a final chance to disclose. The facility was launched on 5 September 2016 with a closing date of 30 September 2018.
The WDF offers no real beneficial terms; instead HMRC has introduced, hard-hitting legislation – the Requirement To Correct (RTC), designed to severely punish those who have not come forward before the facility closes, with much higher penalties than have applied previously.
The numerous leaks of offshore data over the years have also undoubtedly added weight to HMRC’s efforts to strengthen domestic legislation and provided ministers with clout in international negotiations around tax transparency. Notably there was the Legarde list of stolen HSBC data and the LGT data theft in 2008 which shone a light on offshore tax evasion. Most recently the publication of the Panama Papers and Paradise Papers clearly helped to drive through the new legislation, which has serious and far reaching consequences for taxpayers who fail to check that their offshore affairs are in order and act if they are not.
Who is at risk?
There is a general feeling among advisers that, as with previous disclosure facilities, HMRC have failed to target the right audience and make those at risk of falling foul of the legislation aware of the changes and the existence of the disclosure facility. Instead, they are relying on advisers to raise awareness and market the disclosure facility on their behalf. The people with the greatest risks are those with any sort of offshore tax irregularity, regardless of how it may have arisen, unless they can show that any errors have arisen as a result of following advice from an appropriate adviser.
In particular, people affected by the following should pay particular attention to their offshore interests:
- Historical tax liabilities in relation to undisclosed offshore bank accounts or managed portfolios; individuals with undisclosed offshore assets are at greatest risk. Not only could they be subject to 200% penalties, they are also at risk of criminal investigation or an investigation under Code of Practice 9 where there is suspected serious fraud.
- Anyone who opted to be taxed under the Rubik principle in Switzerland and suffer withholding taxes under the UK-Swiss agreement; HMRC make it clear that accepting the One-off Charge and Final Withholding Tax does not necessarily mean that there are no further tax charges.
- Many individuals agreed to allow their Swiss bank to disclose details of their account, but did not follow up by returning their foreign income, or making a disclosure for earlier years.
- Foreign investments can be complex and many individuals and even advisers, may not be aware of certain issues such as offshore income gains.
- Non-domiciled individuals; The rules governing the benefits available to non-domiciled individuals, including the remittance basis are complex.
- Individuals who have settled or are beneficiaries of an offshore trust or a nominee arrangement
- Individuals who have set up offshore companies (corporate wrappers) hold investments
- Individuals unsure of their residency position; residency is a complex area and changes in HMRC guidance may leave individuals exposed.
What happens if I fail to correct in time?
Those found to have failed to correct could be at risk of a range of tax penalties:
- Failure To Correct (FTC) penalties –after 30 September 2018, where HMRC establish tax has been paid late, in relation to years up to and including 2016/17, a new 200% penalty will apply, with the usual abatements, the minimum penalty possible will be 100%, this is regardless of the jurisdiction involved. Unlike normal penalties for incorrect returns, it will not matter if the errors have arisen through innocent error or deliberate actions – the only basis for appeal will be reasonable excuse where a taxpayer has relied on advice from an appropriate adviser, which has transpired to be incorrect.
- Asset-based penalty – introduced 1 April 2017 in relation to tax years 2016/17 onwards (or 1 April for IHT). Where the amount to which penalty could apply exceeds £25K and one or more of the other offshore penalties applies, a penalty of the lower of 10% of the value of the asset or 10 x the amount to which a penalty could apply, can be charged.
- Aggravated offence penalty – introduced on 23 March 2015; where funds have been moved to avoid reporting under any of the information exchange measures mentioned above, any of the penalties mentioned above which are applied, could be increased by 50%.
Failure to correct applies to years up to and including 2016/17, from 30 September 2018 onwards, but for those disclosing before 30 September 2018 and for the 2017/18 tax year onwards, the regime has also been toughened. The asset-based and aggravated offence penalties will apply, as will a new offshore penalty regime – introduced 1 April 2017; as before, penalties worked out using the existing onshore rules can be uplifted by up to 200%, but now only CRS adopter countries will remain in the 100% category with a new 125% category introduced for those previously in category 1 who have not signed up to CRS.
In addition to the suite of penalties available to them, legislation has also been introduced to provide HMRC’s investigators with further time to investigate cases of FTC. The ordinary assessing time limits will be extended by 2½ years, which put errors that would normally only be assessable if HMRC could show carelessness or deliberate behaviour, within HMRC’s grasp without the need to.
The indications are that HMRC will consider many FTC cases as tax fraud, passing them to their Fraud Investigation Service (FIS) and will investigate them using Code of Practice 9. The new rules ensure that HMRC will be unlikely to give taxpayers the benefit of the doubt when deciding the level of penalties.
The recommendation for anyone with concerns about the tax position of their offshore assets, is to contact a tax disclosure specialist as soon as possible as the 30 September 2018 requirement to correct deadline is not far away.