The UK's fight against tax evasion

01 May 2013 Dawn Register

The UK's fight against tax evasion

Dawn Register reviews the latest UK Budget and examines the effects of its tax policies.

The UK Chancellor, George Osborne, has been resolute in his fight against tax evasion over the past six months, outlining a comprehensive strategy for 2013 and onwards in the recent Budget (20 March 2013) and the earlier Autumn Statement (5 December 2012). Both outlined a plethora of measures, aimed at both onshore and offshore tax evaders, that will allow HMRC to continue to flex its muscles in the fight against UK tax evasion. So what are the key points that trust and estate practitioners should be aware of?

Switzerland-UK tax agreement

The Switzerland-UK tax agreement came into effect on 1 January 2013. As many readers will already know, this agreement means UK residents with undisclosed funds in Swiss banks now have a choice of either authorising full disclosure of their affairs to HMRC or facing a one-off levy for past liabilities. The levy will be between 21 per cent and 41 per cent and will be applied on 31 May 2013 to the account balance as at 31 December 2010. The percentage applied will depend on how long the account has been held and the level of funds deposited or withdrawn since 2002. The agreement also introduces a new withholding tax, at the highest rates for interest, dividends and capital gains, along similar lines to the EU Savings Directive.

Swiss banks have already written to all UK-based account holders informing them of their options and, in the run-up to 31 May, many people will be making the choice between opting for the Switzerland-UK agreement or disclosing to HMRC. Many account holders may already be UK tax-compliant, but they still need to reply and be able to prove their UK tax status. Other account holders will have an element of doubt and may need professional advice, particularly on questions of residence and domicile, to avoid the punitive levy in May.

Key points to note include:

  • Legislation has been introduced in the Finance Bill 2013 whereby amounts received by HMRC under the agreement will not be treated as taxable remittances themselves where they are made by, or on behalf of, non-UK-domiciled individuals.
  • The Switzerland-UK agreement introduces a new inheritance tax (IHT) levy on the death of the relevant person who is the beneficial owner of the Swiss assets. On the death of a beneficial owner, the Swiss bank will freeze the assets and only release them on provision of a certificate confirming that the deceased person was not UK domiciled or deemed domiciled for IHT purposes in UK law. In that case, no tax will be withheld and there will be no disclosure to the UK authorities. For UK-domiciled individuals, the personal representatives must authorise disclosure to HMRC. If, within a year of the date of death, the personal representatives have not authorised disclosure, then the Swiss bank will withhold 40 per cent of the relevant assets booked at the date of the UK person’s death.
  • The new IHT levy withheld will be deemed to cover all liability to UK IHT on the relevant assets at the date of death of the person, including interest and penalties. Any other tax liabilities of the deceased person in the UK, including liabilities to tax in respect of income and gains during their lifetime, must be reported in the normal way.
  • Trustees or executors dealing with assets held in Switzerland must have a clear understanding of these new provisions and ensure compliance. Even where disclosure to the UK authorities does not trigger a tax problem, it may lead to unnecessary questioning if matters are complex or have not been disclosed previously.

IHT exemption for gifts

This coincides with the Chancellor’s announcement that the IHT-exempt amount that a UK-domiciled individual can transfer to their non-UK-domiciled spouse or civil partner will be increased; non-UK-domiciled individuals who have a UK-domiciled spouse or civil partner will be able to elect to be treated as UK-domiciled for IHT purposes.

The current exempt amount that a UK-domiciled individual may transfer to their non-UK-domiciled spouse is GBP55,000; this applies to all transfers, whether during lifetime or on death. This will be increased to GBP325,000 initially, in line with the current nil rate band, and in future the level will be linked to changes to the nil rate band. Electing to become UK-domiciled will enable a couple to benefit from uncapped IHT-exempt transfers between them, although as a result their non-UK assets will come within the IHT net. Non-UK-domiciled individuals will also be able to make a formal election to be subject to the IHT regime to allow all transfer between spouses to qualify for 100 per cent IHT relief.

General anti-abuse rule (GAAR)

The Chancellor has confirmed that the GAAR will be coming into effect in the Finance Bill 2013, giving HMRC additional means to tackle tax-avoidance schemes. No repeals or changes are proposed for existing anti-avoidance legislation, so all forms of tax avoidance will continue to be challenged and counteracted using existing means as well as the new GAAR. The GAAR will apply to income tax, corporation tax, capital gains tax, IHT and stamp duty land tax (national insurance contributions will be included later). It will also apply to the annual residential property tax due to be enacted with effect from 1 April 2013. The GAAR will apply only to abusive tax arrangements that are entered into from the date theFinance Bill 2013 receives royal assent. However, if an arrangement were subject to an earlier ‘pre-commencement step’ (i.e. one that took place before royal assent), it may be caught by the GAAR.

The main objective of the GAAR is to deter taxpayers from entering into ‘aggressive’ schemes that might otherwise succeed under current legislation. The Chancellor used the Budget to reaffirm his commitment to clamping down on tax avoiders by pledging to ‘name and shame’ advisors who actively promote tax-avoidance schemes.

It seems probable that HMRC will seek to use this new weapon wherever it believes that a scheme or arrangement is artificial or abusive. The GAAR is not aimed at legitimate tax planning, where arrangements accord with established practice that HMRC accepts and where there are commercial or non-tax reasons for what has happened. However, it will not always be easy to determine where such tax planning becomes ‘aggressive’, so I expect more detailed guidance on this will be required, and some test cases may need to be heard by the courts.

Information sharing

Before the Autumn Statement it was leaked that the UK government was looking at introducing its own version of the US Foreign Account Tax Compliance Act (FATCA). The original Act is aimed at combating tax evasion by US persons by requiring financial institutions around the world to report details of US accounts. In January 2013 the Cayman Islands’ monetary authority announced a public database of funds domiciled on the island alongside a list of the funds’ directors. Osborne also confirmed the formation of what are referred to as the ‘sons of FATCA’, as all three Crown Dependencies – the Isle of Man, Guernsey and Jersey – have now struck deals with the UK.

All three disclosure facilities will operate from 6 April 2013 and run until September 2016, but HMRC will begin investigating accounts immediately if it has information that it believes warrants an investigation. Liabilities arising from April 1999 must be fully disclosed and there is a guaranteed penalty rate of 10 per cent for additional taxes due before April 2009 and 20 per cent thereafter. Account balances will automatically be declared to the UK authorities, so the onus will be on all UK residents to ensure their UK tax returns properly report all foreign income and gains. It may also lead to questions from HMRC as to how sums held offshore were amassed. The agreements look set to have some advantageous terms for non-domiciled residents, under which only interest or other gains, not balances, would be disclosed. At the time of going to press, detailed guidance from HMRC is yet to be announced – and the devil is usually in the detail.

Boosting HMRC’s firepower

In the Budget statement, the Chancellor announced measures aimed at enhancing HMRC’s investigative capabilities, committing an additional GBP994 million to fight tax evasion and avoidance through to 2014–15. Improving HMRC’s Connect computer system, to enable HMRC to analyse and investigate data more swiftly, is a major facet of this strategy. This includes, for example, 14,381 items of ‘communications data’ that were collected on taxpayers in 2011.

Another interesting development was the announcement of the expansion of HMRC’s Affluent Unit, which targets the tax affairs of high-net-worth individuals, by extending its remit to taxpayers with GBP1 million in assets. The unit previously focused on those with a wealth of GBP5 million to GBP20 million. This will increase the number of people who fall under the remit of the Affluent Unit, and there will be greater scrutiny by HMRC of those taxpayers, and consequently an increased likelihood of investigation.

HMRC is also targeting specific sectors, with the most recent focus being on London lawyers and undeclared property sales. Government sources have indicated that this will lead to more prosecutions for tax evasion in the coming year, which they hope will act as a deterrent and raise awareness.

The Offshore Coordination Unit, established in November 2011, is another string to HMRC’s bow, and continues to use stolen bank data and information received from treaty countries to work out which British citizens are evading tax. The unit is to be expanded and intensified in 2013, and this may mean many estate cases will be pursued, sometimes where the executors or trustees were simply not aware of offshore accounts.

With all of these changes it is important that advice is sought to show tax liabilities are correctly reported, and that any mistakes are dealt with through voluntary disclosure. For any professional who comes across someone still on the run, it is safe to say that the net is tightening.

Authors

Dawn Register

CPD Reflective Learning