The new deal
On 8 April 2013 the full details of HMRC’s new offshore disclosure facilities (ODFs) with the Isle of Man, Guernsey and Jersey were announced. These provide an opportunity for UK taxpayers with assets or investments held in British Crown Dependencies and other overseas jurisdictions to bring their UK tax affairs up to date.
The facilities can be used to make a full disclosure of outstanding UK tax liabilities and pay any amount due. There are individual facilities with each of the Crown Dependencies – the Isle of Man, Jersey and Guernsey – but the details are essentially the same for all three.
New automatic tax information exchange agreements between the UK and the Crown Dependencies form part of the agreements. These will allow financial information on UK taxpayers with accounts in these jurisdictions to be reported to HMRC automatically each year.
How do they work in practice?
The ODFs run from 6 April 2013 to 30 September 2016 and cover all UK taxes, including inheritance tax and national insurance contributions. Those who are eligible will be entitled to limit their disclosure to tax periods ending on or after 6 April 1999 and to pay limited penalties. Each government will require all financial intermediaries to contact clients who may be eligible to use the disclosure facility. However, the responsibility for submitting an application to participate within the time limits lies with the account holder or asset holder, rather than the intermediary.
Each facility is governed by a memorandum of understanding (MOU) and associated schedules. The facilities are open to:
- individuals who have been resident in the UK for UK tax purposes at any time between 6 April 1999 and 31 December 2013; and
- companies or any other legal person either incorporated in the UK or resident in the UK for UK tax purposes at any time between 6 April 1999 and 31 December 2013.
In each case, those wishing to use the facility must also have held a beneficial interest in ‘relevant property’ at any point in the period specified. ‘Relevant property’ covers a wide variety of assets or interests either held in or administered from the specific dependency, ranging from a single bank account to complex trust structures.
Anyone who fulfils any of the below criteria is not eligible to participate:
- Those under criminal investigation on 6 April 2013.
- Those under non-criminal in-depth investigation on 6 April 2013.
- Those who come under criminal investigation following the application to participate in the disclosure facility, but before HMRC has determined the liability to pay outstanding UK tax, interest and penalties.
- Those who are already linked to any alternative HMRC disclosure facility or were, on 19 February 2013, a ‘relevant person’ for the purposes of the Swiss/UK tax cooperation agreement.
Benefits and downsides of the ODFs
Taxes are only due from 6 April 1999, compared with the normal statutory limit of up to 20 years. Therefore this is a genuine (albeit partial) tax amnesty for those who qualify for its special terms.
Additionally, those who qualify for the special terms will be able to benefit from a fixed penalty of 10 per cent of the tax due for tax years up to 5 April 2008 and 20 per cent thereafter (up to 5 April 2011) compared to the maximum penalties of up to 100 per cent of the tax due. From April 2011, the special terms of the Jersey Disclosure Facility impose penalties of 20 to 40 per cent, depending on the transparency of the country involved, rather than a penalty of up to 200 per cent of the additional tax where there is an offshore element. The tax settlement may be limited to only four years with no penalty if it can be agreed with HMRC that the person made an ‘innocent error’. The whole process can be managed by a tax agent and is entirely confidential.
The main disadvantage of the ODFs is that they do not guarantee immunity from prosecution for the person making a disclosure. This may be a problem for some, especially those who are financially qualified or high profile. Another disadvantage is that HMRC expects the tax to be paid up front, with the application. This could be a problem where funds are locked in investments or realising funds will generate further tax liabilities. Significantly, unlike the Liechtenstein Disclosure Facility (LDF), the ODFs do not have a composite rate option. This is helpful to eliminate inheritance taxes due if a death estate is in question.
Why act now?
If a person wants to use one of the ODFs and does not have an asset in one of the respective dependencies already, they have only until 31 December 2013 to transfer money into an account there to qualify for the facility, assuming it is suitable and they meet the other criteria.
Even those who already have a beneficial interest in an account or entity will gain nothing by waiting until 2016 before using the ODF – indeed, those who do so are likely to pay more. The date from which unpaid taxes must be disclosed remains 6 April 1999 and the fixed 10 per cent penalty runs only until 5 April 2008, after which higher penalty rates will apply. Interest on late tax payments runs from the original due date, so delaying disclosure will only increase the interest charged.
It is only after making the disclosure to HMRC that the individual is protected from investigation. Before its submission there remains a risk of HMRC opening an investigation and, if this happens, the penalty charged can be considerably higher. The investigation process is also likely to be more time-consuming and intrusive.
The most financially efficient option is to make use of one of the facilities as soon as possible and to complete tax returns as normal thereafter, thus avoiding any further interest and penalty payments. Since 1 April 2010, HMRC has been able to publish the names and details of taxpayers who have been penalised for deliberately evading taxes of more than GBP25,000; participating in a disclosure facility prevents any publishing of names if the minimum penalty is obtained.
ODF or LDF?
The favourable terms of the LDF remain unchanged. No tax is due for periods before 6 April 1999 and fixed penalties are available if a taxpayer had an offshore asset at 1 September 2009. The LDF can be used by those under enquiry or investigation unless they are the subject of a criminal investigation or a Code of Practice 9 investigation. The LDF provides a guarantee of immunity from prosecution providing a full disclosure is made to HMRC and the monies are not criminal property. It also enables an election to be made for the use of a composite rate or single charge rate for certain tax years, which can limit the amount of tax due (the composite rate may eliminate inheritance tax or national insurance contributions, for example). In addition, the LDF process enables a taxpayer to register for the facility with a seven- or ten-month timeframe to then submit a full disclosure report. Protection from investigation may therefore be obtained earlier than under the new disclosure facilities.
However, the Liechtenstein financial institutions now require those without existing assets in Liechtenstein to transfer 20 per cent of their offshore assets requiring disclosure in order to obtain the certificate of relevance needed to apply for the facility. No such minimum investment in a Jersey, Guernsey or Isle of Man account is required for the ODFs.
Does this affect compliant taxpayers?
All individuals will be notified if they live in the UK and hold Jersey, Guernsey or Isle of Man assets, whether or not they are tax compliant. This is likely to require some people to seek tax advice to make sure their UK filing position is correct. Participants in tax-planning schemes may also need to be sure that the arrangement still works. Individuals can clearly still retain non-UK-domiciled status. However, it will be important to ensure their tax advice on domicile is up to date. Individuals must be aware of the major changes to claiming non-UK domicile from 6 April 2008, so that if they have lived in the UK for many years they now need to pay GBP50,000 per tax year from 6 April 2013 to be taxed on the remittance basis; if not, their worldwide income and gains must be declared to the UK authorities. Care is also required because of the new statutory residence rules in the UK, effective since 6 April 2013, meaning that some individuals who were previously non-resident for UK tax purposes may now be resident and need to file UK tax returns.
For those with funds offshore, the increasing number of agreements and information exchange agreements should be a reminder that they should disclose any irregularities before the net closes further. The Isle of Man, Guernsey and Jersey have agreed to automatic exchange of information. With Luxembourg signing a similar agreement in April 2013, Austria is now the only EU state yet to sign. HMRC is likely to use this information to investigate foreign account holders living in the UK. It is important that, where funds are held overseas, UK tax advice is sought to confirm that individuals are compliant; a proactive rather than a reactive approach tends to mean a smoother ride when it comes to dealing with tax authorities.
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