The real impact

Tuesday, 01 December 2009
Why the following initiatives have been launched at this time and what the real impact will be for STEP clients.

Members will recall the shock wave of concern some three years ago, created when HM Revenue & Customs (HMRC) were successful in obtaining the authorisation of a Special Commissioner to issue a Notice to a high street bank and another to its credit card business requiring documentation in respect of its customers with UK addresses and overseas accounts. There was real concern that HMRC’s statistical evidence as to ‘serious prejudice to the assessment or collection of tax’ through the anticipated failure by some members of this class of taxpayer had not been independently tested, (the hearing was ex parte) and was capable of widely different interpretation.

Nevertheless, as a result of that initiative, HMRC inevitably gained possession of a considerable amount of documentation and started the laborious process of cross-checking it to the taxpayers’ returns of self assessment. They swiftly recognised there was a similar likelihood that UK resident customers of the overseas operations of all the high street banks may have defaulted on their reporting responsibilities in respect of their overseas accounts. They began discussions with the other high street banks as to what documentation was available in the UK in respect of the relevant class of taxpayer. The process of fact finding and negotiation was complicated and time consuming, but meant that when HMRC returned to the Special Commissioner for approval to issue Notices to these banks, the Notices were drafted in terms such that the banks were confident of their ability to comply accurately and completely and within the timescale specified.

Offshore Disclosure Facility

The Offshore Disclosure Facility (ODF) was launched in the summer of 2007 to coincide with the submission of documentation by the banks to HMRC. HMRC recognised that it would have taken enormous resource and many years to analyse and risk-assess the data. It was more effective therefore to incentivise people to come forward on a voluntary basis to pay the tax, interest and penalties relating to their previously undeclared overseas accounts. HMRC anticipated that around GBP2 billion of tax was outstanding in respect of these accounts. The ODF received a fair amount of media attention and around 40,000 taxpayers completed the forms specified and paid GBP400 million, significantly less than HMRC had expected and had estimated in their submission to the Special Commissioner.

HMRC had clearly not realised there were so many non-domiciled UK resident individuals who could hold an overseas account and not report the interest arising quite legitimately. If, in fact, no income remittances had been made and HMRC had not issued that individual with a tax return, there was no obligation on the individual to request a return in order to claim their non UK domiciled status. HMRC had been considering a revision of the special tax status afforded to persons who were non UK domiciled for many years. It is possible that the non-domicile legislation of Finance Act 2008 was precipitated by HMRC’s realisation that they had no idea how many non-domiciled persons were UK resident, together with the fear that perhaps such persons were either earning income or gains undeclared in the UK or were actually remitting income or gains.

The full impact of this legislation will not be seen until the tax returns for 2008/09 have been submitted, although anecdotally significant numbers of people have been relocating to other jurisdictions.


HMRC were also surprised to discover how many of the people making voluntary disclosures under the ODF were not customers of the high street banks. Apparently, customers of well over 100 different financial institutions, some of whom had no associated company, branch or agency in the UK, made disclosures in respect of their overseas accounts. The jurisdictions where the accounts were held were not restricted to ‘tax havens’, but also included the US and Canada, countries in the EU and Australasia.

HMRC therefore commenced the process of negotiating with around 60 financial institutions, including building societies, private banks and UK branches or subsidiaries of overseas banks, where HMRC held what they considered to be sufficient evidence of the likelihood of default, as a result of disclosures under the ODF, that other customers of these institutions may have so defaulted. The discussions were protracted. Some banks sought to challenge the hypothesis that because some customers had disclosed previous liabilities, there would be other customers who still needed to disclose. It was also a difficult and time consuming process to ascertain if the UK institution could actually identify and obtain details in respect of the relevant class of taxpayer.

Notice served

It may be that recent fiscal imperatives demanded an accelerated approach. The Special Commissioner, who had been so understanding of their concerns, was now sitting on the First-Tier Tribunal, from whom they now needed authorisation to issue statutory compulsory information notices. HMRC therefore took the innovative, and controversial, step of approaching the Tribunal for permission to issue a generic notice to over 300 financial institutions at the same time. In many cases, HMRC had no understanding of the financial institution’s UK business or structure within the group. The legislative changes introduced by the Finance Act 2008 paragraph 5, Schedule 36 also meant there was no need to issue a ‘precursor’ notice or indeed advise the institution at all that they planned to seek authorisation to issue a notice. It follows that there is no entitlement provided by the legislation for the affected institution to make representations to the Tribunal as to the appropriateness of the notice.

This is a serious concern as the only ground of appeal against a notice is that it would be ‘unduly onerous’ to comply. There is an inbuilt presumption that the documentation or information relating to the relevant class of taxpayer is indeed held by the institution. HMRC have advised that institutions who can demonstrate they have neither possession nor power to obtain the data can submit a ‘nil return’, although in practice, withdrawal or cancellation of the notice is, in my view, more appropriate. However, a complicating factor is that HMRC have expressly reserved the right to argue that overseas branches or subsidiaries are in the ‘power’ of the parent or headquarters in the UK for the purposes of this legislation.

Not all institutions will necessarily be advising their customers that they have received a notice, or they will wait until it has been complied with before notification. It is also unlikely that many of the institutions will be able to comply within the 90 day deadline provided, i.e. 17 November 2009. Clients who might appreciate the NDO might therefore miss the deadline for notification if reliance is placed on awareness from the media or advice from their bank.

If STEP members think that their clients may have overseas accounts, it would be as well to ascertain, first if a UK address is associated with the client or account and second, whether there is any involvement with an UK institution, subsidiary, branch or agency in the provision of management or advisory services. Even if such accounts have been declared in the clients’ UK tax returns it would be useful for the client to know if they are likely to be reviewed by HMRC’s special team for the risk assessment of overseas accounts.

If the account holder was made aware of the ODF, and failed to take advantage of it, the penalty is doubled to 20 per cent

The terms of the NDO and LDF are on the HMRC website and have been discussed in previous articles. HMRC hopes that significant numbers will take advantage of the NDO, although they are more wary of proclaiming the anticipated tax take this time. The NDO still has the disadvantage of offering no immunity from prosecution (although the likelihood of prosecution is admittedly low). No period has been specified under the NDO before one knows whether the disclosure is accepted as made or whether HMRC wish to investigate further. Further, if the account holder was made aware of the ODF, and failed to take advantage of it, the penalty is doubled to 20 per cent.

Liechtenstein Disclosure Facility

The terms of the LDF are very much more attractive than the NDO, principally on account of the shortened period of liability of only ten years (as opposed to nearer 20 under the NDO), the fact that the LDF runs for just over five years (as opposed to six months), the flexibility of applying a composite rate of tax rather than calculating which taxes might be applicable to which streams of the funds, and the assurance against criminal prosecution.

If clients have undeclared funds and now want to freely repatriate or access these funds, they may regret they had not put their money into Liechtenstein historically. However, HMRC have anticipated this. Factored into the Memorandum of Understanding between the UK and Liechtenstein is the ability for someone to still take advantage of the LDF if they open an account there after 1 September 2009 and before the closing date for completion of the disclosure. This facility is not a ‘loophole’, as some tax advisors have described it, but a sensible measure to encourage all persons with a need to disclose undeclared overseas income or gains to do so, and especially sensible because HMRC would be unlikely to readily obtain their details at the current time to mount an investigation.

If the overseas account was opened through the services of a UK financial institution, the details of the account and the account holder may well be provided to HMRC in compliance with one of the 308 notices issued. Such account holders cannot use the LDF and need to use the NDO or make an individual, personalised disclosure if their circumstances warrant this. A personalised disclosure outside the NDO may be appropriate if circumstances are complex and the taxpayer fears an HMRC investigation anyway, or really needs the certainty of an early HMRC acceptance, upon submission.

Serious consideration

While HMRC currently have no ability to obtain details of overseas accounts belonging to UK customers, other than using the powers provided by Schedule 36 Finance Act 2008 to UK financial institutions, this position is not static. Who would have thought even two years ago that Liechtenstein would have stolen a march on other European jurisdictions by entering into the Memorandum of Understanding with the UK? Financial institutions in other jurisdictions may indeed be envious of the new business opportunities opening in Liechtenstein to provide further trust and financial services to persons who choose to relocate funds to Liechtenstein in order to take advantage of the LDF. The Isle of Man has already announced the withdrawal of tax deduction as the default status under the EU Savings Directive for EU resident clients. Other countries will follow the momentum for exchange of information between tax jurisdictions and the practical encouragement, or even enforcement, of reporting overseas accounts will grow. Now is not only a good time, but the right time, for anyone with undeclared overseas accounts to consider seriously the advantages of legitimising their funds.

Author block
Aileen Barry

Aileen Barry TEP is Director of Tax Investigations at DLA Piper and an Editor of the STEP Journal.

The content displayed here is subject to our disclaimer. Read more