Tax authorities around the world will by now have been endowed with an unprecedented level of data regarding their ‘home’ taxpayers, with both early and late adopters of the Common Reporting Standard (CRS) having supplied the requisite financial information.
So what happens next? The UK has a powerful IT capability with its ‘CONNECT’ computer system which already held 20 billion pieces of information, even before the tidal wave of data from CRS made shore.
Logic would suggest that taxpayers with the largest account balances or highest portfolio values should be approached first, but HMRC sometimes moves in mysterious ways. Certainly, when the first batch of ‘experimental’ letters were issued in October 2017 (following the receipt of data from the 49 early adopter countries) there appeared to be more focus at thebottom end of the value spectrum. In these cases, individuals were invited to review their affairs and either make a disclosure or sign a loosely worded certificate confirming that the person was fully compliant. Individuals would have been ill-advised to sign such certificates given that the initial statements had no time parameters. Later certificates did at least contain the words ‘to the best of my knowledge and belief’ in the declaration area.
HMRC has made no secret that it is ‘beefing’ up its investment in compliance and, in particular, the numbers of officers being recruited or re-deployed to tackle tax evasion and criminal prosecutions. There will undoubtedly be a desire to make up the shortfall of approximately £1.5 billion from the £3 billion of funds originally targeted to be raised from the Liechtenstein Disclosure Facility (LDF).
In reality, there will be tens of thousands of low-level accounts maintained by overseas nationals who find themselves living temporarily or otherwise in the UK for reasons of education, employment or residence. It is natural that such individuals will continue to maintain accounts in their ‘home’ countries. The danger here for HMRC is that the whole system employed for pursuing overseas non-compliance becomes completely clogged pursuing mundane, meaningless and ultimately valueless accounts that are held for reasonable purposes.
HMRC is politely invited to adopt a layered approach to investigate the information which it is receiving. For example, any account balances and/or portfolios with a value of £100,000 or less should receive the sort of letters issued following receipt of the first tranche of CRS data; effectively asking individuals to self-assess their compliant status. The certificates should, however, not request anyone to confirm their compliant position for a period of more than ten years (i.e. before 6 April 2008), due to this being the maximum period that most overseas financial institutions will hold information for. Any declaration must be to the best of an individual’s knowledge and belief as individuals cannot be held to account for something they do not know. Failure to sign a reasonably presented certificate would result in an inquiry being opened. Since there would be no statutory authority requiring an individual to complete such a certificate, the incentive of not having a formal enquiry opened might be made clear. Suffice to say a small percentage of the returned certificates would need to be sample checked to avoid any ‘chancers’ wishing to gamble on signing the form without appropriate due diligence.
Anybody with an account balance of, say, £100,000 to £1 million should be automatically risk assessed and investigated where the source of capital is not clear and/or the amounts of bank interest, dividends or other income received in earlier years is not commensurate.
Account holders with balances in excess of £1 million might be considered for investigation under HMRC’s Codes of Practice 8 or 9; the latter being where fraud is suspected and the former being for all other cases where fraud is not suspected.
The success, or otherwise, of HMRC getting to grips with the vast amount of overseas financial information which will be available to it, and working in a cost-effective, productive manner, will ultimately decide whether there is a pot of gold at the end of this information rainbow. The potential for being wholly inadequately resourced to tackle the data or the ‘project’ being conducted in an ineffective, non-productive manner is immense and will require clear and focused leadership from HMRC officials.
HMRC will probably already have done a ‘work and motions’ type exercise to work out how many working hours are needed to tackle the information already received and set to arrive on a yearly basis going forward. It is suggested that even with the increased resources being deployed by HMRC, there are many years’ worth of data to be ploughed through. Again, if not dealt with quickly and efficiently, there is a huge danger that much of this information will never see the light of day and ‘opportunities’ will be lost.
One suspects that the most ardent transgressors will have re-organised their affairs before 1 January 2016 to hide their ill-gotten gains and/or illicit, undeclared income. What is to say that those individuals who ‘missed the boat’ have not been desperately trying to do the same, particularly in those late adopting countries where they would have had an extra year to cover their tracks?
Furthermore, with the passing of the (hugely under-publicised) requirement to correct deadline, we have now entered the world of failure to correct penalties with potential minimum penalties of 100% of underpaid tax and maximum penalties of 300% of underpaid tax. So where does this leave the individual, Trustee or corporate service provider in the event that a tax underpayment is discovered (innocent, careless or deliberate)?
The first question that will be addressed by any tax disclosure specialist is why has the underpayment arisen, so that it can be compartmentalised in one of the behaviour silos. Next, it will be necessary to establish whether a reasonable excuse exists that might be used to avoid or mitigate penalties to the greatest possible degree. The potential in this regard is more limited than ever with reliance on certain professional advisers being specifically excluded by the legislation.
Still, voluntary, unprompted disclosure of tax liabilities remains morally, professionally and indeed financially the best option. The positive gains from taking such aproactive approach will include:
Coming forward voluntarily with the assistance of a suitably qualified professional will enable the client and the adviser to seize and maintain control of the nature and direction of any inquiry.
Adopting the ostrich ‘head in the sand’ approach and doing nothing is certainly not an approach that should be taken. If you make the wrong decision here then an individual, company or trust will immediately increase its minimum penalty exposure from 100% to 150%.
Furthermore, the requirement to correct legislation (FA (No2) 2017 Sch 18) froze the time limits as at 5 April 2017. This, for instance, extends the time limit for assessing underpaid tax due to careless behaviour from six years to ten years, and have to deliberate behavior from 20 years to 24 years (allowing HMRC to keep 1996/97 in charge).
A further proposal to extend time limits for all cases involving non-deliberate overseas non-compliance to a flat 12 years have been put on hold following political objections (by the House of Lords Economic Affairs Finance Bill Sub-Committee) that such an extension was a step too far in the balance between taxpayer rights and the powers of the state.
If approaches are received from HMRC, then the response needs to be proportionate to the methods employed by HMRC. Any approach should be taken seriously as undoubtedly HMRC will have information regarding an offshore account, investment or structure.
One suspects that the persons who will be written to in the first instance will be the account holder, beneficiary or settlor of a trust, or a significant controlling person for an offshore company. It would be good practice for any adviser to meet immediately with his/her client to have a wide-ranging conversation to try and establish if any taxes have been underpaid. An adviser will only be as good as the information they have been provided.
Where uncertainties exist regarding the bona fides of a trust – particularly those settled many years ago – it may be appropriate to engage a specialist to check that the structure is still fit for purpose given the many changes to trust legislation in recent years. Such an exercise should be carried out by a specialist adviser who was not responsible for giving the original advice that led to the trust being created, if a case for arguing reasonable excuse is to stand any chance.
For more serious cases, particularly where HMRC enacts Code of Practice 9, great care should be taken if a criminal investigation is to be avoided. Such cases should only be dealt with by a suitably qualified specialist (or firm) with bespoke experience to craft the appropriate response to the invitation to participate in the Contractual Disclosure Facility where there are many potential pitfalls from the start to the end of the enquiry process.
The next twelve months should therefore be very interesting in terms of how HMRC decides to use its wealth of information, and against whom its measures are directed. The Public Accounts Committee (PAC) will doubtless take an interest in an attempt to hold HMRC to account.
This article first appeared in Trusts and Estates Law & Tax Journal in February 2019.