The Developing Story On Offshore Tax Evasion
Gary Ashford provides an update on the various developments taking place on offshore tax evasion and non-compliance.
The new client notification requirements
In September 2016, the UK government published the International Tax Compliance (Client Notification) Regulations, which amended the original regulations issued in 2015.
The regulations apply to specified financial institutions and to specified relevant persons (including bodies such as companies or partnerships) and require them to write to clients, in a format prescribed by HMRC, highlighting the developments in international transparency; and where tax matters in relation to offshore assets are not in order, the client should disclose these irregularities to HMRC.
The deadline for writing to clients is 31 August 2017, and there will be a penalty for any person required to comply and who does not. The penalty will be £3,000.
Specified financial institutions
The regulations set out that a financial institution for the purposes of the legislation is essentially the same as identified as for the EU Directive on Administrative Cooperation (DAC) or the Common Reporting Standard (CRS). The definition of a financial institution will, therefore, include entities such as trusts, hedge funds, and family offices.
Specified financial institutions are required to write to those clients reasonably believed by the financial institution to be resident in the UK for income tax purposes for the tax years 2015/16 or 2016/17 and holding an account with the institution on 30 September 2016 where either that account is a high-value account (exceeding $1 million) or where, in the relevant period, the individual held certain offshore accounts with the institution.
Specified relevant persons
A relevant person under the regulations is a person who, in the relevant period, provided offshore advice or services in the course of business, or referred an individual to a connected person outside the UK for advice or services in relation to the individual’s tax affairs.
The relevant period is between 1 October 2015 and 30 September 2016.
Advisers are required to use either a ’general approach’ or a ’specific approach’ to identify individuals to whom the prescribed notifications described must be sent. Where the only service that has been provided is of preparing and filing a tax return, those clients can be excluded.
As with financial institutions, the regulations focus on UK resident clients.
Information to be included in the notification to clients
The wording to be sent to clients, prescribed by HMRC, highlights three main points:
- that the world is becoming more transparent (and that from 2016 HMRC will start to receive data from over 100 jurisdictions);
- that clients should consider whether their affairs are in order; and
- that clients should report irregularities to HMRC before HMRC investigate.
The HMRC wording specifically refers to the existence of the worldwide disclosure facility, which was launched by HMRC in September 2016.
Penalties and audits?
As stated above, there will be a penalty for any financial institution or adviser who fails to comply with the new regulations. This leads one to speculate how HMRC will enforce matters. Will HMRC seek to audit financial institutions and advisers? If so, will this enable HMRC to identify the specific clients written to?
The new requirement to correct offence
In a timely manner, at just the point where financial institutions and advisers will be writing to clients, under the client notification regulations mentioned above, the government is introducing the ‘requirement to correct’ offence (RTC).
This requires any person with offshore tax non-compliance prior to 6 April 2017, to correct this by 30 September 2018, or face a significant penalty, and possibly have their personal details published.
Whilst the RTC is not specifically mentioned in the prescribed wording for the client notification rules, the RTC adds a very important part of the jigsaw.
The RTC is a civil offence rather than a criminal offence. It is timed to coincide with automatic exchange of information through the CRS (30 September 2018).
Offshore tax non-compliance means any tax non-compliance that relates to an offshore matter. It will be relevant offshore tax non-compliance if, at 5 April 2017, it has not been corrected, the original non-compliance involved a potential loss of tax, and at the relevant date it is lawful for HMRC to assess the tax. For income tax and capital gains tax the relevant date is 6 April 2017, but for inheritance tax the relevant date has passed.
On the point of the lawfulness for HMRC to assess the offshore tax non-compliance, the draft legislation enables HMRC to assess the offshore tax non-compliance for the in date periods up to 5 April 2021. This essentially extends the general assessing time limits, and in practical terms will allow HMRC two and a half years to review the CRS data received as at 30 September 2018.
The draft legislation sets out that tax non-compliance includes a failure to notify, failure to file a return, filing an incorrect return linked to an understatement of tax, false or inflated loss of tax, or false or inflated repayment of tax.
The draft legislation states that the penalty payable is 200% of the offshore potential lost revenue (PLR) attributable to the uncorrected offshore tax non-compliance, or so much of the relevant offshore tax non-compliance as has not been corrected within the RTC period.
The penalty can be reduced, where a disclosure has been made, but even in such cases, the penalty cannot be reduced below 100% of their PLR. Any reduction will take account the quality of the disclosure, particularly the timing, nature and extent of any disclosure.
As well as telling HMRC about the matter, quantifying it and giving access to records, the legislation states that a disclosure should contain details of any person who enabled the offshore tax non-compliance.
The triggering of an RTC offence and consequent penalty also opens up the risk of an offshore penalty or an asset based penalty.
Correcting the offence and disclosure
The draft legislation sets out how a correction can be made, and beyond correcting the failure or inaccuracy (e.g. by notifying chargeability, filing a return, or correcting an inaccurate document) it also states that a disclosure can be made to HMRC or the tax issues communicated to an HMRC officer as part of an ongoing compliance check.
Appeals and reasonable excuse
It is possible to appeal against any RTC penalty decision.
It is also possible to challenge any penalty by demonstrating to HMRC or a tribunal that the person had a reasonable excuse. The legislation states that a reasonable excuse does not include an insufficiency of funds. Reasonable excuses are only a possibility where reasonable care has been taken. However, there are also restrictions where advice has been taken, such that unless any reasonable excuse has ceased, it is remedied without unreasonable delay.
The draft legislation also states that ’disqualified advice’ cannot be relied upon to argue reasonable excuse. This point follows the approach introduced in terms of the new ’errors in taxpayers’ documents’ rules in Finance (No. 2) Bill 2017 in relation to avoidance.
Similar to the proposed changes for avoidance, amongst other things, advice is treated as disqualified if it was given by an interested person, or the advice was given as a result of ’arrangements’.
An ‘interested person’ means a person who participated in relevant avoidance arrangements. Avoidance arrangements mean arrangements at respects which, in all the circumstances, it would be reasonable to conclude that their main purpose, or one of their main purposes, is the obtaining of a tax advantage.
The draft legislation makes clear that offshore tax non-compliance is within the scope of the RTC.
Criminal Finances Bill 2017
Another significant change being proposed in relation to offshore tax evasion is the introduction of the new corporate criminal offences of failing to prevent the facilitation of UK or foreign tax evasion.
These new offences were introduced by way of additions to the Criminal Finances Bill, which itself makes changes to the Proceeds of Crime Act 2002. The Bill introduces the new corporate offences of failure to prevent facilitation of tax evasion.
How do the new offences work?
There are essentially three steps that must be passed for the offence to be in point:
- The first step is that a person must have been found liable for a criminal tax offence, or subjected to an offshore penalty.
- The second step is that an individual acting as an associate of a body must have knowingly acted in a way to assist the person who has been found guilty of the offence (or civil penalty).
- The third step then turns to the body associated with the person supporting the client. If that body does not have reasonable procedures to prevent their associate helping the client to commit tax evasion, the body itself will be liable for this offence.
The foreign taxes offence requires further hurdles to be passed. It can only be in point in relation to a body incorporated (or a partnership) in the UK, or that carries on business in the UK, and that any conduct constituting the foreign tax evasion facilitation offence takes place in the UK.
The foreign tax evasion offence means that conduct which would amount to a tax offence in that foreign country, and would also be considered an offence in the UK, will be regarded as amounting to the fraudulent evasion of that tax.
The main defence to the new offences is the existence of reasonable procedures, or to be able to demonstrate that procedures are not required in the circumstances.
HMRC has published draft guidance, which set out the principles to be considered when introducing reasonable procedures.
There are six main principles, which any procedures should take into account:
- risk assessment;
- proportionality of risk-based prevention procedures;
- top level commitment;
- Due diligence;
- communication (including training); and
- monitoring and review.
Where the relevant body is guilty of an offence under this legislation, it will be liable on conviction to a fine. A deferred prosecution agreement might be considered by the CPS.
The client notification requirement will ensure many relevant clients are fully aware that CRS is on its way, and that there is still time to make a disclosure. The terms of a disclosure are not as good as they were a few years back, but it is clear that the drawbridge is closing and a disclosure will result in a significantly better position than would be the case if HMRC were to conduct an investigation, particularly given announcements in the last couple of years that HMRC will significantly increase the number of criminal of investigations, and as we approach the RTC offence.
Gary Ashford CTA Fellow, TEP, ATT is a Partner (Non-Lawyer) at Harbottle and Lewis LLP.