Offshore structures

Key Points

  1. Exchange of information is anticipated to result in offshore structures being investigated regardless of their tax efficiency
  2. Most offshore structures will have a risk of technical challenge
  3. Intermediaries and advisers aware of offshore structures have an obligation to inform their clients of the risks of not entering the ODF or the reasons why they should not
  4. An independent risk review is advisable
  5. Time to take action is reducing fast

The exchange of information between the Crown Dependencies and HMRC will result in HMRC becoming more aware of offshore structures and inevitably becoming more able to enquire into their legitimacy. It would appear that there is a significant risk that whether or not a structure is tax effective, those structures will potentially be the subject of scrutiny.

Clients in receipt of professional advice should be aware that there is always a risk HMRC may challenge the effectiveness of offshore structures. Why?

Whilst good intentions were to ensure that the structures are robust, often due to the complexities of the legislation applying to those structures a number of risk areas exist that could result in a successful challenge by HMRC. Other risks often arise where the structure was poorly implemented, records are inadequate, beneficiaries or owners influence or are “involved” too much and where tax advice has not been sought appropriately.

When considering the strict new criminal offence for offshore evasion, it becomes immediately apparent that those administering offshore structures have an obligation to check tax efficiency. An administrator or connected person may consider it inappropriate to have a primary document review to check tax risks ahead of the closure of the Offshore Disclosure Facilities (ODF). A number of immediate concerns arise where post ODF, HMRC identify an area they can challenge:

  1. Will the new criminal offence be in point?
  2. Will higher penalties arise when compared against a pre ODF disclosure?
  3. Have the administrators of the structures fulfilled their obligations to the beneficiary of the structure?
  4. Is there a risk that a professional adviser has not satisfied a duty of care?

The new strict liability offence basically means that proving “intent” won’t be necessary: Currently tax evasion is where someone intends to defraud the Revenue, whereas the new offence will remove the need to prove an intention (or demonstrate no intention). The subtle difference opens up significantly more persons utilising offshore structures to criminal investigation. Furthermore, HMRC investigation teams are now structured to include criminal investigators and solicitors.

Given the proposed prosecutions for 2014/15 is 46% higher than the actuals for the previous year and predicted to grow, post ODF we anticipate a number of cases involving offshore structures.

Other measures include:

  • Financial penalties are proposed to link to the value of assets kept in an offshore bank and not the tax due
  • A £4m investment in data analytics to make best use of the information which will be collected under the Common Reporting Standard
  • Intention to legislate and require financial intermediaries and tax advisers to explain to their clients the Common Reporting Standard, the opportunities for disclosure and penalties for failing to disclose (duty of care alarm bells)

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). In light of the budget announcements and reduced ODF deadline, accountants, solicitors, administrators and other financial intermediaries need to communicate the risks accurately to their clients without delay.

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