The UK government has been steadily cracking down on offshore tax evasion for years, arming HM Revenue & Customs with more and more tools to uncover undeclared assets and income.
The UK government has been steadily cracking down on offshore tax evasion for years, arming HM Revenue & Customs with more and more tools to uncover undeclared assets and income. It has also been encouraging people to come forward and voluntarily regularise their affairs.
The UK was one of the countries calling for exchange of tax information across the world, something which will shortly come into effect. In preparation for this, the government has now published its final regulations for automatic exchange of information.
The International Tax Compliance Regulations 2015 which came into effect on 15th April 2015 cover three international agreements –
- The Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Account Information, which implements the OECD's Common Reporting Standard (CRS).
- The revised European Directive on Administrative Cooperation (which implements the CRS in Europe).
- The UK's agreement with the US on its Foreign Account Tax Compliance Act (FATCA).
Under the regulations, financial institutions have to have procedures to identify the tax residency of clients, and where they live abroad disclose information about their accounts to the parties of these agreements.
These are reciprocal agreements, and so HMRC will receive on UK taxpayers who have assets abroad.
Financial institutions will start to compile information from 1st January 2016. This will cover bank accounts in existence at 31st December 2015 and new ones opened from 1st January 2016. This will be reported to HMRC, for onward transmission, from 2017.
At present the tax authorities use double taxation agreements to request information specific taxpayers. According to international law firm Pinsent Masons, HMRC made 640 requests in 2011/12 to foreign tax authorities to find out the value of the taxpayers’ assets held in those countries, and 490 requests in 2012/13. In the same way other countries send HMRC requests on assets held in the UK by their taxpayers – in 2012/13 it received 2,466 requests.
James Bullock, Partner at Pinsent Masons, explained: “HMRC’s efforts to identify those who may be under-declaring overseas income and gains are now running at a very high pace… Many UK high net worth individuals are now living, making investments and conducting business abroad. A sizeable number will have highly complex tax affairs across multiple jurisdictions and as the amount of information available to HMRC increases, they are likely to come under more intense scrutiny.”
The pace will increase even further under automatic exchange of information. Under this system, tax authorities will not need to make requests. They will receive the information automatically, about every taxpayer with overseas assets.
The government is investing £4m in data analytics resource to maximise the yield from the information received.
On 19th March, the Chief Secretary to the Treasury, Danny Alexander, announced plans for new sanctions and criminal offences for tax evasion.
The government plans to introduce a strict liability offence for offshore tax evasion. This means that it will no longer be possible to plead ignorance to avoid criminal prosecution
Financial penalties will also increase, and for the first time the penalty will be linked to the value of the asset kept in an offshore bank account.
New civil penalties will be imposed on those who enable tax evasion, and both the evader and the adviser could be publicly named and shamed.
The Liechtenstein Disclosure Facility and Crown Dependencies Disclosure Facilities will close at the end of this year, several months early. The vast amounts of information the Treasury will receive through the Common Reporting Standard makes them obsolete. However there will be one last opportunity for tax evaders to come clean before information starts being shared. A ‘last chance’ disclosure regime will run from mid-2016 to mid-2017. It is less generous than its predecessors. The penalties will be stricter (at least 30%, on top of the tax owed and interest), and no guarantee of immunity from prosecution.
Since 2011 tougher penalties apply where the offshore territory used for hiding assets does not have the highest level of information sharing. This applies to income and capital gains tax, but new legislation will extend this to cover inheritance tax and offshore transfers from April 2016).
A new aggravated penalty – “Offshore Assets Moves Penalty” – for moving hidden funds to circumvent exchange of information came into force on 27th March 2015. With more territories agreeing to automatic exchange of information, some people may move assets to country which has not signed up, in an attempt to continue to hide them. This new regulation imposes a further penalty if this happens.
Besides sharing information on taxpayers, governments also share ideas. What is effective in increasing revenue for HM Treasury could be used by other countries in future. This UK news is timely reminder to only use tax planning arrangements which you know are compliant in your country of residence. There are effective structures available here, but seek personalised advice.
13 April 2015