By Simon Read HM Revenue and Customs (HMRC) sent out a stark warning to offshore bank account hol...
By Simon Read
HM Revenue and Customs (HMRC) sent out a stark warning to offshore bank account holders in February.
The department's ongoing campaign to bring to book people who shelter cash overseas to avoid paying UK tax moved up a mark when it raided four banks with orders to divulge details of its customers.
The Revenue has steadfastedly refused to reveal the names of the four banks concerned, but they are believed to be HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB. Following the Revenue's landmark court decision against Barclays last year, it means all five major UK high street banks have now been forced to hand over customer details.
The campaign isn't going to stop there. A Revenue official said: "Collecting tax is our job. If we didn't go after these people who are using offshore accounts to avoid paying UK tax, we would be failing in our duty." In other words, there is going to be a relentless chase to the end, presumably until the very last tax avoider is tracked down. Even now, bloodhound-like investigators are on the trail, sniffing out unpaid tax.
It almost sounds exciting, but it's not. It's a serious business and anyone caught sheltering cash overseas could be hit with heavy fines. The Revenue's latest clampdown yielded details of around 100,000 people with offshore accounts. It's expected they will collect £281m in unpaid tax from the round-up. It's thought that up to £180bn is lodged offshore by Brits, which could mean a sizeable tax claw-back for HMRC.
It's not just the cash, of course. It's the principle, too. The Revenue can't let anyone get away with it. That's why it's now getting tough. The focus on overseas accounts will draw tens of thousands of innocent people into the investigation. However, HMRC is quick to point out that it is not cracking down on offshore accounts - only on people evading tax.
A spokesman said: "Those who have been declaring the interest on offshore accounts as the law requires, have absolutely nothing to worry about. But anyone who is worried that they may not have been paying the right amount of tax should contact HMRC. The level of co-operation shown will influence the level of penalties we seek."
In other words, play ball with the Revenue, and offenders could reduce their fine. It's this last approach that has led some quarters to believe that an amnesty for offshore offenders is in the offing. Rumours keep resurfacing that HMRC could offer a 10% discount to encourage people to own up. There have been precedents across the world. There have been amnesties in Germany, Italy, Spain and South Africa before. And even closer to home in Ireland, where an amnesty was followed by the publishing of a quarterly name-and-shame list of offenders.
But HMRC said this will not happen in the UK. "It's not an amnesty - we won't be offering one," a Revenue spokesman said. "But if people co-operate with us, they may be able to get a better deal." He added: "If they don't co-operate with us, we will track people down."
It is legal to keep savings offshore, and has been so since the relaxation of exchange controls in 1979. But it is illegal to conceal the interest earned from the government. All interest should be declared on tax returns and ignorance of the law is no defence. Anyone caught not declaring the tax on their overseas savings is likely to be prosecuted and fined, under the Revenue's new hard-line approach.
And the charges can go back two decades. If the Revenue believes someone has been negligent or knowingly committed fraud, it can claim back up to 20 years of unpaid tax and interest. And the amount could be doubled as HMRC can impose penalties of up to 100% of the amount owed. It's the penalties that could be cut if account-holders with untaxed interest own up.
In the past, banks have not had to disclose customers' details. But the EU savings directive - introduced in July 2005 - changed all that. Under the directive, most EU states now share information about people who earn income from savings in a country but live elsewhere. So if a UK resident has an account in France, the French authorities will share information with the Revenue. There are exceptions. Austria, Belgium and Luxembourg don't share customers' information and, crucially, neither do the offshore centres of Jersey, Guern- sey, the Isle of Man and the British Virgin Islands.
The Barclays case last year established the precedent that offshore banks that have their onshore parent companies registered in mainland Britain, must hand over customer records. Barclays Bank Offshore is based in Jersey but its parent company is Britain. It was HMRC's success in the case which gave it the authority to go after HSBC, HBOS, Lloyds TSB, and Royal Bank of Scotland. The banks were given 90 days - from 1 February - to comply. There is no right of appeal, said the Revenue, but any of the banks has the right to request a Judicial Review of the decision. None are expected to do so.
Who will be next? Smaller banks and those building societies offering offshore accounts are likely to be targeted. But with the Revenue already downgrading the amount of cash it expects to claw back from unpaid tax on savings, most institutions feel that if the Revenue comes calling, the cupboard will be virtually bare in terms of finding customers avoiding tax.
"My general feeling is that we haven't any systematic tax avoidance among our customers," said Simon Hull, managing director of Alliance & Leicester International, based in the Isle of Man. "We certainly expect something to happen in terms of a Revenue approach. But a lot may depend on what they discover at the banks they've already approached." The Revenue originally said it expected to rake in £1.5bn in unpaid tax from Barclays customers. But its recent raid on four of Barclays' rivals prompted a Revenue estimate of just £281m. The much lower figure suggests that HMRC has been disappointed with the amount of undeclared interest it had discovered and has therefore revised its estimates downwards.
Hull thinks that the figure could fall even further once the Revenue examines closely the details of the accounts it has gathered. "From our experience, most of our customers come through intermediaries so we believe that they have ensured that clients are in transparent tax arrangements." Alliance & Leicester International has around 22,500 customers with offshore savings accounts.
"We're happy to be reasonably open with the Revenue," said Hull. "We're not surprised at their hard-line approach and we've had discussion here on the island through the Bankers' Association but no-one is running scared. Mostly we're just very keen to understand what the tax authorities' actions mean for our customers."
At rival Isle of Man savings institution Nationwide International, a subsidiary of the UK building society, there's a similar expectation that a Revenue official will come knocking. "We haven't been directly contacted by HM Revenue & Customs as yet, although we expect we will be in due course, together with other institutions who provide offshore savings facilities," Jeremy Wood, divisional director of Nationwide International said.
"Nationwide will, of course, co-operate fully with any investigation." Wood pointed out that anyone who has declared interest of offshore savings has nothing to worry about. "Customers who have declared income received offshore to the appropriate authorities need not be concerned about this situation and we understand that those who might be uncertain about their situation will be offered the opport- unity to register with HMRC."
The investigation is likely to rumble on for months. The landmark decision against Barclays - which prompted the original scare among accountants and banks was last June and it took until February this year for the Revenue to move onto other banks.
It will undoubtedly tackle other UK savings institutions with offshore subsidiaries, but it is likely to be a long, drawn-out process. Far from running scared, therefore, it's business as usual for offshore centres. Most feel they have nothing to hide and therefore there's nothing to fear. Has the crackdown affected business in offshore centres? No, says Peter Niven, chief executive of GuernseyFinance.
"It's not having a depreciable effect and it's not putting people off Guernsey's private banking sector. Feedback from the industry is that it hasn't affected business and we are seeing increases in deposits quarter on quarter."
Niven stressed there were legitimate reasons for holding an offshore bank account. He added: "A lot of expats and others who are not liable to UK tax have offshore accounts and from them have credit/debit cards.
"They give UK or c/o UK addresses as they don't want their bank statements to be subject to the vagaries of foreign postal systems. They are therefore legitimate offshore clients.
"We believe there is little 'bad' money in Guernsey in particular, which in some part has been exemplified through the EU Savings Tax Directive that really came up with little of any substance despite the majority of clients (by amount) opting for exchange of information to their home tax offices."
So, looking forward, the crackdown is likely to have little effect on business. HMRC will certainly continue to make as much noise as possible about its plans but when it comes to tackling banks outside its jurisdiction, its hands seem to be tied.
However, it's clearly wise to nudge clients and customers about the crackdown and encourage anyone who may have, perhaps inadvertently, failed to reveal offshore interest, to volunteer the information to the Revenue. Cutting the amount of any potential fine for avoidance will clearly be in their best interest.
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