Offshore Assets - The Taxman Cometh

“The game is fundamentally up”

Those were the words of Dave Hartnett, HMRC’s charismatic Permanent Secretary, in a recent BBC interview promoting the New Disclosure Opportunity (NDO) for undeclared UK tax liabilities arising from offshore assets.

The Revenue’s two main messages in all of the extensive publicity surrounding the launch of the NDO are that:

•    this will be the final opportunity for taxpayers to come clean about offshore assets with only limited sanctions (the terms and scope of the NDO are covered in detail elsewhere in this edition); and
•    HMRC already have a large amount of information about UK residents with offshore assets and the means to obtain more, so the chances of getting caught are increasing by the day.

Errant taxpayers should not underestimate the Revenue’s determination to root them out, nor the mechanisms at their disposal.

Knowledge is power

In the case of offshore accounts which are held with a financial institution based in another EU member state, the EU Savings Directive already requires the institution to provide information about UK resident account holders to HMRC.

However, the Revenue has also been very active in seeking information about accounts held outside the EU.

For example, on 12 August this year HMRC made a successful application to the First Tier Tax Tribunal under the provisions of schedule 36 of the Finance Act 2008 for compulsory disclosure orders against 308 financial institutions with a presence in the UK. Those institutions must now hand over information held in their UK branches about any offshore account holders with UK addresses.

In most cases it is likely that the institutions involved will hold only limited details about offshore accounts within their UK operations. However, even if the exercise does no more than produce a list of names and addresses, HMRC may later be able to obtain detailed information about an individual taxpayer on a case by case basis under the provisions of a tax information exchange agreement with the jurisdiction where the relevant offshore account is based.  

The UK has already signed several such agreements - jurisdictions covered include the Channel Islands, the Isle of Man, Gilbraltar, and Switzerland, to name but a few – and more will almost certainly follow. Not all of these agreements are yet in force and some provide for a transitional period where withholding taxes will be applied instead of information being exchanged. However, it is only a matter of time until exchange of information with jurisdictions outside the EU becomes commonplace.

HMRC are also willing to use less conventional methods to acquire relevant information, such as their purchase last year of confidential details about UK customers of LGT Bank in Liechtenstein.

Hobson’s choice

Voluntary disclosure is the only option where there are undeclared UK tax liabilities. HMRC are increasingly likely to catch up with errant taxpayers and have warned that the penalties imposed in those cases are unlikely to be less than 30% and could be as high as 100%. Criminal proceedings cannot be ruled out in extreme cases.

Errant taxpayers who choose to spurn the generous terms of the NDO (or the Liechtenstein Disclosure Facility, which is also covered in detail elsewhere in this edition) will therefore do so at their peril. They have been warned...