Offshore Tax Investigations

Offshore Tax Investigations – by Anton Lane

In February, Tolley’s published a tax digest written by our Anton Lane. The digest fell forty four words short of thirty three thousand. The digest covered an update of HMRC’s activity.  

The start of a new tax year always starts with an increase of enquiries. This tax year started with an increase of offshore entities and UK persons with overseas income or gains receiving letters. It was interesting to see that campaigns run in parallel. In HMRC’s ‘No safe havens 2019’ they stated: 

“In 2018, HMRC received information about the offshore financial interests of around 3 million UK resident individuals, or entities they control. We have begun using this data to detect possible non-compliance.” 

It is evident that HMRC are in possession of considerable information and are in full swing of working their way through taxpayers. It will take a considerable amount of time to work through all that information so unlikely that every one of the three million (likely more now) will be enquired into this year. In fact, given HMRC’s resources, it will take many years for them to enquire. Hence, it is better to send nudge letters to encourage a taxpayer to come forward. Nudge letters can be sent to a larger number of taxpayers. 

‘Dear Mr Taxpayer, 

Your overseas assets, income or gains 

We have information that shows you may have received overseas income or gains that you may have to pay UK tax on. We have received this information through the UK’s tax information exchange agreements with other countries. 

We want to help make sure you are paying the right UK tax on your overseas income and gains. 

We have compared the information we have received with your tax record and tax return(s). We believe that you may not have paid the right amount of UK tax. There may be a reasonable explanation for this. 

We are giving you the opportunity to review your tax affairs and to tell us about anything that you may need to put right. Some people with assets overseas have found that earlier tax advice is out of date after changes to their personal circumstances or to tax law.’ 

As mentioned, HMRC is also targeting offshore entities. It is difficult for HMRC to make enquiries of the trustees or directors unless there is UK income. Where enquiries are made, the questions and information requests we have seen ignore the boundaries that HMRC should operate in. For example, during an enquiry into UK source income of an offshore company, HMRC concerned themselves with wanting to know the settlor of the trust that held the shares in the company. The line of enquiry was not relevant to the tax liability of the company. It is accepted that the enquiry might be relevant to the tax liability of UK resident settlor, although the correct direction for these enquiries would be to the UK resident person.   

The third of April this year marked the anniversary of ‘Offshore Leaks’ (2013) and the ‘Panama Papers’ (2016). The International Consortium of Investigative Journalists’ (‘ICIJ’) have been exposing the ownership of offshore structures for a decade. ICIJ have also been the Pandora Papers and the Paradise Papers. The ICIJ database contains some eight hundred thousand companies. Obviously, journalists want to identify the more well-known owners of offshore companies (and settlements) because it makes better reading.

The leaked information forming the ICIJ database was received by astonishment. HMRC’s three million UK residents with overseas income or gains against and the ICIJ’s eight hundred thousand offshore companies indicates just how big a task HMRC has. The ICIJ’s database is from leaked information from a limited number of fiduciary service providers. All fiduciary service providers report beneficial owners amongst other information to the tax authorities they operate in, which in turn provide that information to HMRC. Overseas entities owning land and property in the UK have also had to register with Companies House. The Government has therefore achieved some transparency with identifying ownership. The task now is to identify those who historically got the tax treatment wrong. 

Where the tax position was previously incorrect, the taxpayer had the opportunity to correct. The world-wide disclosure facility opened on 5 September 2016. Finance (No 2) Act 2017 introduced the requirement to correct sanctions. The enabler legislation therefore encouraged professionals to in turn encourage their clients to consider the Requirement to Correct (‘RTC’). The RTC ended on 30 September 2018 and now we are post-RTC. 

Under post-RTC, all irregularities are caught. There is no behavioural differentiation at all in the penalty regime: a simple mistake will be treated the same as a deliberate act. A specific definition of ‘avoidance arrangements’ was included in the draft legislation and referred only to circumstances where the main purpose, or one of the main purposes, was the obtaining of a tax advantage.  

The penalties for not correcting are 200% of the potential lost revenue (‘PLR’). The penalty can be reduced if the person makes an appropriate disclosure. The amount of the reduction should reflect the quality of the disclosure (timing, nature and extent). The penalty cannot be reduced below 100% of the PLR.  

HMRC being armed with a higher penalty regime have certainly begun this tax year targeting offshore. Enquiries have ranged from owners of overseas properties to beneficiaries of offshore trusts. Some letters issued simply are clearly automated and intend to encourage the taxpayer to consider whether they have liabilities. Other letters are more specific indicating that HMRC has already considered risk areas.  

Our tips when receiving a letter from HMRC regarding overseas income or gains that you may have to pay UK tax on are: 

1. Don’t assume there is no risk that HMRC may challenge there is a tax liability, because they argue, for example: 
   • Beneficiaries of an offshore structure may also be a part settlor under settlements legislation or a transferor under the anti-avoidance legislation applying to direct or indirect transfers of assets abroad.  
   •  A UK resident interacting with an offshore company may amount to managing and controlling or being a permanent establishment of that business.  
   •  The amounts paid by friends to use your overseas property, weren’t gifts or just to cover running costs. 
   •  The investments you made are taxed on an arising basis
   •  Whether you have retained your domicile status. 
2. Don’t assume there is no tax risk if you had tax advice. Tax legislation and HMRC’s approach to offshore has changed dramatically over the past two decades. Advice on an avoidance structure set up many years ago, might not cover the current investments made within that structure.  
3. Don’t ignore HMRC’s letter. Whilst we don’t recommend dealing with it yourself, if you ignore the letter and HMRC identify a tax liability, you may be regarded as non-cooperative when it comes to negotiating penalties. 
4. Engage a tax specialist who deals with tax investigations and is knowledgeable on offshore tax issues. Most accountants and tax advisers do not have the correct experience to deal with this area.  
5. Embrace the process of regularising your tax affairs. You might not have intentionally done something wrong but the consequences of not addressing an issue are not pleasant (see below). 
6. Don’t be naïve and think HMRC won’t know something. HMRC will often know more about your affairs than you realise. In some cases, they will have obtained records from third parties such as banks. They may have also enquired into related parties obtaining information through the back door
7. Be prepared to consider any other irregularities you may have. For example, if you own offshore investments and you think that is what HMRC are interested in, not telling them about the source of undeclared income that allowed you to acquire those assets will likely be discovered. 
8. Know HMRC’s powers to enquire, obtain information and assess – often they will overstep their ability but by the time they have a response, damage may have been created.  
9. We would usually advise you don’t contact or meet HMRC directly. HMRC know the responsibility is on the taxpayer to get it right. They won’t necessarily help you to do so but instead you may inadvertently create higher liabilities by simply saying something wrongly! 
10. Act quickly. Talk to us for an initial view

The reason we suggest a cautious approach follows the introduction of a strict liability criminal offence for offshore tax evasion. There are also several sanctions against tax avoidance and evasion.  

If you would like to discuss the contents of this article in further detail, or are worried about unpaid tax on your overseas assets then please contact our Tax Investigations team

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Other relevant articles relating to Tax Investigations

Nudge Letters and Worldwide Disclosure Facility FAQ

Ten tips if under tax investigations