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Offshore Disclosure Facility

Key Facts

  • Offshore Disclosure Facility deadline brought forward
  • HMRC are restructuring now to manage cases or investigate
  • The tax law in this area is the most complicated
  • The circumstances a disclosure may be required are greater than most will assume
  • The risk of criminal investigation is significantly higher
  • We set out some circumstances where considering the ODF may be relevant
By admin
01 Apr 2015
Tax Investigation

It was a very sunny day and most unfortunate that the majority of it was spent in HMRC’s offices with a team who are being reallocated to tackle offshore tax avoidance/evasion. Whilst widely reported in the media that HMRC are tackling tax “abuse” through the use of offshore structures: Do those using them really know whether they are potentially within the Offshore Disclosure Facility (ODF)? The legislation that applies to offshore structures established to mitigate taxes is accepted as the most complex we have. Often a client would have been encouraged if not obliged to seek Queen’s Counsel’s opinion, which under the law at the time would have demonstrated that they did not have intent to evade tax. However, the proposed new legislation doesn’t require the need to prove intent to be an evader it merely requires tax to have been evaded (knowingly or not). Does this mean that if the interpretation of the law was wrong, someone has evaded? Well it appears so.

Whilst in the meeting, a senior inspector commented within a general conversation their surprise that they had up to now seen few new cases. However, HMRC are deploying resources through considerable internal restructures to tackle offshore abuse so inevitably they believe that there are high numbers who will come forward or HMRC intend to identify lots of taxpayers who should have come forward.

The conversation proceeded to identify that this team, based in an outskirt office in the West Midlands, was going to be forty strong comprising offshore specialist, investigators and criminal investigators.

HMRC state “There’s nothing wrong with having investments overseas as long as you declare all taxable income and gains on your UK tax return”. That must be a huge relief so long as you do declare or you have certainty you don’t need to declare. Rewind, this is the most complex area of tax law, are you sure you don’t have to declare anything especially when under scrutiny?

The Offshore Disclosure Facility gives the opportunity to bring tax affairs up to date. If you need help to decide whether you’ve paid the right amount of tax, ask your adviser or you can ask HMRC.

The ODF for the Crown Dependencies began on 6 April 2013 and the deadline to notify under the facility was brought forward to 31 December 2015 (from 30 September 2016).

So there is a bit of time. It transpires that information is being collated already and some of it is apparently making its way to HMRC. Financial institutions are obliged to collate information on offshore accounts and provide them to HMRC. The definition of financial institution is wide and means “a Custodial Institution, a Depository Institution, an Investment Entity, or a Specified Insurance Company”.

We find the definition of “Custodial Institution” interesting because it covers any entity that holds, as a substantial portion of its business, financial assets for the account of others. This basically applies to most administrators of structures designed to mitigate taxes. In addition, the definition of insurance company covers those that can issue or have a responsibility to pay under an annuity contract.

Information on the following will be provided to HMRC:

  • Overseas accounts

  • Insurance products (i.e. personal portfolio bonds and similar structures)

  • Investments held through overseas structures (i.e. companies, protected cell companies, foundations and trusts)

The information includes details of either:

  • Account or asset holder

  • The “owner” of the entity holding the asset including their:

    • Name

    • Address

    • Date of birth

    • The balance of the account

    • Payments made into it

Confidence running high, the structure is legitimate. Is that going to stop a name appearing on a list for enquiry? Probably not! If there is an enquiry, what are the chances of the “grey” areas of the most complex tax legislation being scrutinised?

These are some of the less straight forward circumstances where we imagine HMRC will want to challenge:

Companies: management and control

Is a board usurped? Defined in law there are two forms of user patients:

  1. Where the board merely purport to be a board and act under the influence of another

  2. Where a person outside of the board makes decisions without due regard for the board

Insurance wrappers: loans or premiums

Many insurance wrappers such as Personal Portfolio Bonds (PPBs) have a low premium and receive loans to underlying entities. The intention is that the growth within the wrapper is rolled up tax free. However, if the loan is regarded as a premium, the annual tax on the premiums to PPBs would be higher. There is also a potential dispute to whether the transfer of asset legislation would apply to the entities owned by PPBs making their income attributable to the transferor. A similar provision applies for Capital Gains Tax (CGT).

Annuity Contracts:

Annuity contracts have been utilised in a number of ways to mitigate taxes. The methods include entering into arrangements to displace liabilities under loan agreements for example, director’s loan accounts or those with trusts. Also, annuities have been utilised to arguably extract funds from pensions as well as mitigate Inheritance Tax (IHT).

Foundations: corporate entity or trust

The tax liability of foundations will depend on whether the structure is a settlement or a trust within tax legislation. The definition may be different for IHT, CGT and income tax. The tax treatment is highly complicated and untested, which will make for interesting discussions with HMRC.

Trusts: settlor interested or not

A number of older trusts were established with “dummy settlors” for the purpose of anonymity. However, some may have operated as non-settlor interested when looking through the circumstances as to who was the transferor, they are in fact settlor interested. The tax treatment can be considerably different.

Commercial purpose

Much of the anti-avoidance legislation does not apply where there are genuine commercial reasons for the structure. It is anticipated that once a structure is identified, any exemption for these reasons will need to be evidenced, which may give rise to numerous problems is records have not been properly maintained and there has been a change in administration.

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