UK HM Revenue and Customs (HMRC) have made it very clear that it is not acceptable for those with overseas assets to not pay UK taxes where they are liable to do so. This article explains the measures the UK Government has put in place and the effect these measures have on UK taxpayers.
In April 2014, UK HMRC issued its strategy for tackling offshore tax evasion. The main objectives for this strategy were to ensure:
- there are no jurisdictions where UK taxpayers feel safe to hide income and assets from HMRC
- would-be offshore tax evaders realise that the balance of risk is against them
- offshore tax evaders voluntarily pay the tax due and remain compliant
- those who do not come forward are detected and face vigorously enforced sanctions
- there will be no place for the facilitators of offshore tax evasion.
Since issuing their objectives, the intention of HMRC has become a lot clearer: if an individual has not taken the opportunities which are available to them to disclose unpaid tax liabilities and is later identified, the individual will face tough consequences and the threat of a criminal conviction.
International tax transparency has been high on the agenda in recent years for many governments, and the UK has been at the forefront of this drive to recover revenue and crack down on offshore tax evaders.
Inter-Government sharing agreements
Since the beginning of July 2014, financial institutions have been collecting information on individuals and will, from May 2015, start sharing this information with home state tax authorities or foreign tax authorities. This is a universal initiative introduced following the US imposed Foreign Account Tax-Compliance Act legislation. More than 90 territories* have agreed to share information with each other under the Common Reporting Standards regime, which is based on the rules and principles introduced by the Foreign Account Tax Compliance Act and the UK and Crown Dependencies Tax Information Sharing Agreements.
The Common Reporting Standards will supersede the UK and Crown Dependencies Tax Information Sharing Agreements, FATCA will remain in place. The intention behind these agreements is for Governments to obtain and share information on individuals who own financial accounts with financial institutions in the other territory, in order to aid the collection of unpaid taxes and to reduce tax evasion.
*Albania, Andorra, Anguilla, Antigua and Barbuda, Argentina, Aruba, Austria, Australia, Bahamas, Barbados, Belgium, Belize, Bermuda, Brazil, British Virgin Islands, Brunei Darussalam, Bulgaria, Canada, Cayman Islands, Chile, China, Colombia, Costa Rica, Croatia, Curacao, Cyprus, Czech Republic, Denmark, Dominica, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Grenada, Guernsey, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Macao, Malaysia, Malta, Marshall Islands, Mauritius, Mexico, Monaco, Montserrat, Netherlands, New Zealand, Niue, Norway, Poland, Portugal, Qatar, Romania, Russian Federation, Saint Kitts and Nevis, Saint Lucia, Saint Vincent and the Grenadines, Samoa, San Marino, Saudi Arabia, Seychelles, Singapore, Saint Maarten, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Trinidad and Tobago, Turkey, Turks and Caicos Islands, United Arab Emirates, Uruguay.
The UK opened a number of disclosure agreements between, but not limited to, the Isle of Man, Guernsey, Liechtenstein and Switzerland. These initiatives have assisted UK HMRC to recover £1.5 billion. These disclosure facilities are available to those who have not taken part in any other disclosure facilities and those who have not been subject to any other tax investigations.
It was announced in the UK Budget 2015, that a new disclosure facility will introduce tough new measures and penalties of at least 30%. These will be introduced by the end of 2015. Unlike the current disclosure agreements, there are no guarantees around criminal investigation. As a result of the introduction of a new disclosure facility, the previous disclosure facilities were shortened and closed early on 15 December 2015.
The amount of penalty under the disclosure facilities varies and depends on whether the asset is based in an automatic exchange of information country (100% of lost revenue), an exchange of information on request country (150% of lost revenue) and countries where there are no agreements (200% of lost revenue).
Moving assets offshore
Following the 2014 consultations, ‘Tackling offshore tax evasion: A new criminal offence’ and ‘Tackling offshore tax evasion: Strengthening civil deterrents’, the UK Government have introduced legislation which extends the scope of the existing penalty regimes.
This means that UK taxpayers who deliberately move assets to a specified territory and the main or one of the main purposes to of the move is to prevent or delay the discovery by UK HMRC of a potential loss of income tax, capital gains tax or inheritance tax for which that person is liable, will be penalised in-line with these new measures.
For example, the Liechtenstein Disclosure Facility provided HMRC with evidence that funds were intentionally being moved out of jurisdictions with which the UK had announced agreements to jurisdictions in which individuals mistakenly thought would still protect their evasion by the local banking secrecy rules. Anyone taking such action, and moving money to a non-disclosure jurisdiction, will be prioritised for criminal investigation by HMRC where they have deliberately or mistakenly provided inaccurate returns.
One noticeable distinction between this and older penalty regimes is the inclusion of UK Inheritance Tax (IHT). This is the first time UK IHT has been considered and included as part of the UK’s disclosure and penalty regimes. The reason for this being that some taxpayers invest offshore in order to place the assets out of HMRC’s reach, sometimes in the hope of transferring their wealth to the next generation without paying UK Inheritance Tax, either throughout the lifetime of the settlor, or on their death.
The Finance Act 2015 introduced the following penalty rates.
(i) For careless action, the penalty is 37.5% of the lost revenue.
(ii) For deliberate but not concealed action, the penalty is 87.5% of the potential lost revenue; and
(iii) For deliberate and concealed action, the penalty is 125% of the potential lost revenue.
Should my clients be concerned?
Over the last few years the Governments have taken the issue of tax evasion more seriously than they ever have done. The coming together of a universal system which allowed information to be shared cross-border was widely thought to have been impossible to implement and unmanageable to maintain. Its success is yet to be seen, however with the regime which has been in place since July 2014 many see this as a success in itself.
The introduction of legislation in the UK shows a clear intention that any resistance by an individual to pay taxes that they are liable to pay will not be tolerated. These rules are not aimed at the offshore market or offshore products; they are aimed at UK taxpayers who have previously evaded tax, mistakenly or deliberately, and at those who continue to do so.
For those UK taxpayers who hold offshore assets and declare their assets and self-assess tax returns, the offshore life and redemption market still offers legitimate tax planning opportunities in a tax efficient environment.
For those who don’t declare their assets, they face a real risk of being identified and liable to tougher sanctions and penalties in the future.