A new initiative is offering offshore account holders the chance to find the taxman before he finds them, says Brendan Harper, technical services manager at Friends Provident International. But what happens if they don't?
The UK taxman's assault on offshore bank accounts has been widely publicised, and has resulted in the opportunity for individuals to disclose assets on which tax has not been paid. After the deadline to make a report, what will happen next?
As a result of the landmark decisions in six cases, all entitled Financial Institution, the UK HMRC has more information about offshore accounts held by UK residents than it can cope with. As a result of this, HMRC launched the "Offshore Disclosure Facility" on 17 April. This initiative is intended to encourage people to come forward voluntarily rather than waiting for HMRC to catch up with them. In return, the penalty for the unpaid tax will be limited to 10%.
This initiative has been described in some quarters as an "amnesty". However, for an amnesty to exist there needs to be two elements: a one-off payment in return for the waiving of the past tax liabilities, and immunity from prosecution. In the case of the UK facility, neither of these features are present.
All tax liabilities that have been evaded by the individual concerned over the last 20 years must be paid, plus interest. Furthermore, if the money in the illicit bank account has been generated from tax evasion - for example from undeclared earnings, the tax that was due must also be paid plus interest.
Individuals must register their intention to disclose by 22 June 2007, and a full return plus the payment must be submitted by 26 November 2007. HMRC then has until 30 April 2008 in which to reply to the individual, advising whether it accepts their offer to settle. There are no guarantees that the offer will be accepted, so many people will need to sweat it out to see if they will be able to wipe the slate clean without being prosecuted.
Although there is a risk of prosecution in every case, the reality is that most people will be able to settle their affairs without prosecution. However, there are certain categories of case where HMRC is more likely to consider prosecution, including the following:
• Where large amounts of tax have been evaded.
• Where significant resources are needed by HMRC to investigate.
• Heinous categories, for example, previous false disclosure/certificate of assets, benefit fraud or corruption.
• Where it is in the public interest - for example a well-known personality or where the defendant is a professional, for example an accountant or lawyer.
After 22 June, HMRC will begin to investigate those who have not made voluntary disclosures, presumably with a view to imposing tougher penalties when it catches up with the individuals concerned.
HMRC will throw substantial resource at this exercise, such are the potential rewards in terms of tax raised. To give an idea of the potential scale of this, figures pub-lished for a 24-month period prior to April 2002 revealed that £8.3bn in tax was raised from HMRC investigative work - almost the equivalent of an extra penny on income tax. And that was without the information on offshore bank accounts. In this case HMRC is hoping to raise £1.5bn from one bank alone.
It is unlikely that the financial institution cases will be the last of their type in the UK, and other banks will be in the firing line in the future.
The common factor in the cases so far has been that the information was available in the UK. This was because the information was held on a server in the UK, or because UK-based bank staff had access to the data. But just because account information is not available in the UK, this does not mean that other information isn't. For example, could HMRC ask for records from private banks where opening an offshore account formed part of the service to customers?
Another way that client information can become available is through the analysis of credit and debit card data. If someone uses a credit or debit card in the UK, they leave a financial footprint behind, which can be traced. Gaining access to and analysing credit card information is now an important part of HMRC's weaponry against tax evasion. This tactic has been employed very successfully in other jurisdictions, particularly in the USA and Australia.
So, even if someone could hide their money overseas, they would be unable to spend it, which leads me to wonder what is the point? Relying on bank secrecy for tax planning is fast becoming a thing of the past. The only advice anyone should be given is to use legitimate tax planning structures. Structures that can be held up for Revenue scrutiny and do not force individuals to constantly look over their shoulders.
Joined as head of strategy, multi asset, in June
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