No safe havens

Monday, 01 July 2013
Ronnie Pannu and Iain Sanderson review HMRC’s current activity and open disclosure facilities in light of its offshore evasion strategy

"The message to offshore evaders is clear: HMRC has the ability to detect hidden income, assets and gains, and the consequences of detection are penalties up to 200 per cent of evaded tax or possible criminal prosecution. Time is running out for offshore tax evaders: there are no safe havens”1

As part of Budget 2013, the UK government announced further agreements and disclosure facilities with the Crown Dependencies of Jersey and Guernsey, following hot on the heels of the recently announced Isle of Man Disclosure Facility.

This builds on HMRC’s strategy of offering disclosure facilities in relation to offshore evasion. These include the Offshore Disclosure Facility (ODF) in 2007, which yielded GBP400 million; the New Disclosure Opportunity (NDO) in 2009, which gained GBP85 million from 5,500 disclosures; and, most recently, the Liechtenstein Disclosure Facility (LDF). The LDF has run since 1 September 2009 and will last until 5 April 2016.

The Treasury estimates that the three recently announced disclosure facilities will yield GBP1 billion in previously uncollected taxes.

UK/Swiss tax agreement

This agreement was signed on 6 October 2011 and entered force on 1 January 2013. If individuals were UK-resident and held bankable assets in Switzerland, whether UK tax-compliant or not, they were affected. This deal has several results:

  • A one-off levy (of between 21 per cent and 41 per cent) was applied on 31 May 2013 to the value of Swiss bankable assets held at 31 December 2010.
  • Withholding tax (of 48 per cent on interest, 40 per cent on dividends and 27 per cent on capital gains) will be applied from 1 January 2013.
  • A separate withholding tax of 40 per cent of the assets will be deducted on death in lieu of inheritance tax unless full disclosure of the assets is made to HMRC.

To avoid the levy and future withholding tax, UK-resident individuals needed to agree that their Swiss financial intermediary could provide certain details to HMRC. These included:

  • The identity (name, first name and date of birth) and address of the relevant person.
  • Their UK tax reference number, if known.
  • The name and address of the Swiss paying agent.
  • The customer number of the account or deposit holder (customer, account or deposit number, IBAN code).
  • The annual account balance and statement of assets as at 31 December of each relevant year.

Many individuals have agreed that their Swiss financial intermediary can provide this information while simultaneously making a disclosure to HMRC.

In addition to the levy and withholding tax, the UK and Swiss tax authorities agreed to greater exchange of information between the two countries, with the UK tax authorities allowed to request Swiss bank account details of up to 500 UK residents each year. Individuals who don’t legitimise their assets through voluntary disclosure could face a lengthy investigation, high penalties (up to 200 per cent under the offshore penalty regime) and potentially prosecution if they’re one of the 500 whose details HMRC will receive (or if they’re investigated for any other reason).

This exchange of information agreement means there’s no guarantee of anonymity for those who choose to have the levy and withholding tax applied. To add to this, the levy may not cover all past liabilities – for example, if there have been any withdrawals or bank charges applied to the account then further liabilities are likely to be due if this person is investigated at a later date.

For people who choose to disclose through the LDF, its advantageous terms mean it’s likely to be the appropriate route.

Liechtenstein Disclosure Facility

The LDF has proved to be a real success since the groundbreaking agreement between HMRC and the Liechtenstein government was reached in August 2009. With 3,910 registrations and 2,630 submitted disclosures at 31 January 2013, when figures were last published, HMRC has already exceeded the total it expected when the agreement was signed.

In 2012, HMRC revised the LDF’s estimated yield upwards from GBP1 billion to GBP3 billion (on top of the GBP5 billion expected from the UK/ Swiss tax agreement). The average settlement to date under the LDF has been GBP184,000 (although this is artificially increased by six settlements over GBP5 million, including one settlement of GBP11 million). Individuals with previously undisclosed offshore assets are continuing to use the LDF as a disclosure route. There are distinct advantages to the LDF.

  • There’s a guarantee of immunity from prosecution for tax-related offences.
  • Tax is paid only from 6 April 1999, not the normal 20 years.
  • The penalty is normally fixed at 10 per cent of the unpaid tax (increased to 20 per cent and above from 2009/10).
  • There’s no need to meet HMRC.
  • It’s a quick and efficient process.
  • All worldwide assets can be legitimised.
  • No detailed and intrusive forensic review of financial affairs by HMRC is required.
  • There’s an opportunity to have an initial ‘no names' discussion with HMRC before making a disclosure.
  • The composite-rate and single-rate options can give significant savings, particularly  of inheritance tax.
  • There’s no naming and shaming or increased future scrutiny by HMRC.

These advantages of making a disclosure are encouraging many tax evaders to come clean.

Jersey, Guernsey and Isle of Man Disclosure Facilities

As with the LDF, these three recently announced facilities run until 30 September 2016. The terms are similar to the LDF, but with some exceptions.

  • There’s no guarantee of immunity from prosecution for tax-related offences (although in the recently published FAQs HMRC stated that it ‘will not start a criminal investigation for a tax-related offence if you make a full and accurate disclosure to us and the source of the funds is not from “criminal activity”)’.
  • There’s no composite-rate or single-rate option.
  • A payment on account, based on an estimate of the liabilities, is required at the time of registration.
  • The disclosure must be submitted within six months of registration.

It’s clear that these facilities aren’t as attractive as the LDF where there are past inheritance tax liabilities. In this instance, it may make more sense for people with undisclosed assets in Jersey, Guernsey or the Isle of Man to make any disclosure under the LDF.

There’s also a small window of opportunity, which lasts only until 31 December 2013. Up to this date, individuals can create a connection with Jersey, Guernsey or the Isle of Man, allowing them to use the disclosure facilities for purely UK-based disclosures – something that could be of benefit for anyone in that position.

HMRC strategy

It’s clear that HMRC will continue its fight against offshore tax evasion. In HMRC’s offshore strategy document issued on Budget day (20 March 2013), David Gauke wrote:

‘Central to this offshore evasion strategy is greater sharing of information between governments. Last year, we signed an enhanced automatic exchange agreement with the USA, the first of its kind anywhere in the world. In February we reached an agreement with the Isle of Man and I welcome the lead they have taken. We now have similar agreements with both Guernsey and Jersey, demonstrating the commitment of all the Crown Dependencies to transparency and to tackling tax evasion. We, of course, expect them to honour that commitment and will be looking to conclude similar agreements with other jurisdictions.

‘With this dramatic increase in information flows comes an increase in the likelihood of evaders getting caught. Those who are determined to continue breaking the law by evading tax will find that the strongest penalties are imposed on them. The time has come for those with hidden offshore interests to come forward: there are no safe havens for tax evaders.’

But with increasing pressure to reduce headcount, how is HMRC going to police this? Disclosure facilities provide a quick, low-cost solution for processing thousands of disclosures, which HMRC would not be able to achieve through investigation alone. Following the end of the disclosure facilities in September 2016 we’re likely to see a significant increase in investigations based on the information HMRC has received from bank and other financial institutions since 2007. The opportunity for settlement on favourable terms will be over.

Where next?

The ODF, NDO and LDF have proved that HMRC can achieve high yields from relatively low resources. HMRC is likely to try to negotiate similar disclosure facilities with other jurisdictions in the future. The question is, where next?

Under the UK/Swiss tax agreement, the Swiss authorities will report the top ten destinations people are transferring their money to in an attempt to avoid the levy and having to make a disclosure to HMRC. This list is not expected until later in the year. In the meantime, here are our predictions for which jurisdictions may be next on HMRC’s hit list:

  • Gibraltar
  • Cayman Islands
  • Singapore
  • BVI, and
  • Monaco.

Any agreements with overseas tax authorities are likely to be linked to disclosure facilities ending in September 2016.

Conclusion

As HMRC continues to tackle offshore tax evasion, most notably with the recent tax agreement with Switzerland, more people are realising that it’s time to review their historical tax issues. The disclosure facilities offer a simple and relatively beneficial way of achieving this. With the clock ticking closer to 2016, making the most of these disclosure facilities now could be a sensible move.            

  • 1. HMRC Offshore Evasion Strategy, 21 March 2013"
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Ronnie Pannu and Iain Sanderson

Ronnie Pannu and Iain Sanderson are part of the Tax Disclosure team at PWC.

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