The Financial Secretary to the Treasury, Mel Stride, wrote in his forward to ‘No Safe Havens 2019’ that “It’s right and fair that everyone pays the correct tax, wherever in the world they or their assets are based. The majority do this voluntarily and the UK tax gap is at a near record low…. However, some do not. Since 2010, HMRC raised over £2.9 billion by tackling offshore tax non-compliance, enough to build 6 new hospitals.”
Any tax adviser with experience of offshore assets will agree, it’s not simple to determine when UK tax arises on an offshore asset. That is because the assets to which the ‘No Safe Havens’ is targeted include those held within structures such as:
- Offshore trusts and foundations
- Offshore companies
- Employer financed retirement benefit schemes
- Employee benefit trusts
According to HMRC “Where companies and trusts are located outside the UK there are significantly higher risks that they can be used for avoiding or evading tax or facilitating illicit finance”. Admittedly, there is a greater risk that offshore companies and trusts are used for avoiding or evading tax: Offshore jurisdictions had offered a level of anonymity as well as low or nil tax rates where the beneficiaries of structures administered in those jurisdictions were resident elsewhere. Having spent over twenty years defending tax investigations involving offshore structures, a tax irregularity would predominantly arise because of poor administration or not seeking tax advice. Those who sought to evade UK tax are likely to know what they have done. Instead, it is more likely that:
- Complicated tax legislation has been misinterpreted.
- Whilst initial tax advice was sought, regular advice was not subsequently sought.
- Reliance was placed on the ‘advice’ of the fiduciary provider promoting their services.
- The fiduciary service provider didn’t correctly implement advice or continued an old practice after the law had changed.
If HMRC’s starting point with offshore structures is they are used for avoidance and evasion of taxes, a person with offshore interests has a potential battle looming with them. The Courts have steered away from interpreting legislation based on the words it contains and their meaning to considering what Parliament intended. If tax advice were provided or structuring undertaken, based on the interpretation of words forming the legislation, they believed tax treatment may be at odds with the intention of Parliament.
Interpreting legislation on the basis of what Parliament intended may be perceived as strange because what Parliament intends should be written into the legislation. It is as if Parliament are exonerated if they make a mistake: you can’t sit an exam and get a mark by informing the examiner what you wrote was not what you meant.
HMRC are now in possession of an unprecedented amount of information. In 2018, HMRC received 5.67m records on UK taxpayers’ offshore financial accounts. The information is placed within Connect — HMRC’s analytical tool. Connect cross-references more than 22 billion lines of data, for example: information received from other tax jurisdictions is linked with a taxpayer and their tax return. That taxpayer is also linked with other sources of information which may include: The Land Registry, Companies House, Border Control, Electoral Role, Council Tax, third party information from financial institutions, auctions, insurers, and property management agents.
According to HMRC:
“Connect identifies more than 500,000 cases (onshore and offshore) for HMRC to enquire into every year”
“We have already integrated this data into Connect to help us verify compliance and detect possible non-compliance and have started contacting customers where we believe there is a risk of tax having been underpaid”.
HMRC states that “tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter — but not the spirit — of the law. Most tax avoidance schemes simply do not work…Those who engage in avoidance can find they pay more than the tax they attempted to save once HMRC has successfully challenged them. Many others choose to settle their dispute without resorting to litigation”.
HMRC has sent tens of thousands of letters prompting recipients to check they have paid the correct amount of tax and confirming an investigation may follow.
After the requirement to correct
The Finance Act (No. 2) 2017 introduced the Requirement to Correct (RTC) legislation in relation to offshore matters. The legislation has been broadly drafted and will therefore catch most people with offshore interests of any kind. It specifically requires the taxpayer to correct any tax irregularities relating to offshore interest, placing the responsibility to do so on them and imposes significant penalties if the correction is not made.
Only tax non-compliance committed before 6 April 2017 falls under the RTC rules. Non-compliance means any of the following:
- failure to comply with an obligation to notify chargeability;
- failure to comply with an obligation to deliver a return; and
- delivering a return which contained any inaccuracies.
RTC only applies if HMRC were able, by 6 April 2017, to raise an assessment to recover the unpaid tax. The time limits for HMRC doing so depends on the behaviour they deem to have lead to the underpayment:
- 20 years where the behaviour was deliberate;
- 6 years where the behaviour was careless; or
- 4 years where the behaviour was neither careless nor deliberate.
The objective of the legislation was to enable and incentivise persons with UK tax irregularities relating to offshore interests to regularise their tax affairs. The deadline for making the correction ended on 30 September 2018. Now tougher sanctions apply for a failure to correct (FTC).
The maximum penalty for FTC is 200% of the potential lost revenue (PLR). The penalty can be reduced if an appropriate disclosure is made. The amount of the reduction depends on whether the disclosure was prompted or unprompted and should reflect the quality of the disclosure (timing, nature and extent). The penalty cannot be reduced below 100% of the PLR.
Further sanctions for FTC include:
- A potential asset based penalty of up to 10% of the value of the relevant asset where the tax at stake is over £25,000 in any tax year;
- Potential “naming and shaming”; and
- A potential additional penalty of 50% of the amount of the standard penalty, if HMRC could show that assets or funds had been moved to attempt to avoid the RTC
Furthermore, the Offshore Criminal Offence (OCO) legislation introduced in FA 2016 applies where a person has failed to declare offshore income or gains. The offence applies to any subsequent loss of tax over a threshold amount, which will be defined in the regulations annually. Crucially the OCO does not prescribe the need to prove intent for failing to declare taxable offshore income and gains.
Reducing the FTC penalty
A reduction to the FTC penalty is to ‘come forward voluntarily’ and disclose the failure(s) to HMRC. If a person is prompted by HMRC to make a disclosure, then the penalty will not be reduced below 150%. The incentive mechanism encouraging a post RTC voluntary disclosure is still financially painful although in doing so, the penalty level can be reduced from 200% to 100%.
The penalty could be mitigated by providing sufficient details to HMRC about the person(s) who ‘enabled’ their offshore non-compliance. This could be anyone who promoted a scheme/arrangement, or who ‘encouraged, assisted or otherwise facilitated’ the offshore tax non-compliance. ‘Otherwise facilitated’ is deliberately wide and HMRC may attempt to include accountants and tax advisers who perhaps ‘turned a blind eye’.
The quality of the disclosure, in particular ‘telling, helping and giving’ will help secure reductions in the penalty level.
FTC penalties can be appealed. However, FTC penalties are statutory, and as such the tribunal has no jurisdiction to determine whether they are ‘fair’. The tribunal can only consider the facts set out before them to determine ‘on the balance of probabilities’ whether the quality of the disclosure corresponds to penalty reduction. The penalty level simply cannot be reduced below the statutory minimum of 100%.
The legislation specifically rules out ‘insufficient funds’ as a ‘reasonable excuse’ for not meeting reporting obligations unless the failure is attributable to an event outside of the person’s control. This concept of events being beyond a person’s control and them taking corrective steps without unreasonable delay is the only safeguard against the FTC penalty. If demonstrated successfully, there will be no penalty payable.
The concept of having taken ‘reasonable care’ does not apply. The ‘reasonable excuse’ safeguard itself has been heavily tightened so that it does not apply easily, specifically referring to ‘disqualified advice’.
Reliance on professional advice is not a reasonable excuse if that advice was provided by an ‘interested party’ – i.e. someone who participated in or stood to benefit from the person’s participation in a tax avoidance scheme. This would include promoters of tax avoidance schemes relying on generic advice.
HMRC may contend that advice was not specific to the person concerned and was instead provided to the promoters. Promoters have in turn passed advice on to numerous people and will likely be ‘interested parties’.
If advice was provided by someone with ‘insufficient expertise’ or did not consider a person’s specific circumstances, there is no reasonable excuse. If the adviser held themselves to have been suitably qualified, then a person is more likely to have a reasonable excuse. Each case will be considered on its own merits and so the outcomes will differ.
The facts are:
- HMRC are in possession of increased information.
- They have sent out nudge letters and therefore disclosures where such letters have been issued are arguably prompted.
- Penalties and other sanctions are considerably onerous.
- HMRC have to challenge non-compliance and collect revenue especially in light of the current Government spending and economic climate.
- Voluntary disclosures, careful analysis and presentation to HMRC are more important than ever if the exposure to tax and penalties is to be mitigated.
- Those that don’t disclose will inevitably be investigated.
- Improved relations with other tax authorities allows HMRC to collect and enforce even where a person has left the UK tax net.