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By admin
01 Oct 2015
Tax Investigation

This week’s article considers reporting requirements of the offshore financial services industry to HMRC. The US based Foreign Account Tax Compliance Act (FATCA) is one such policy. Along with that bad boy is the IGA: Intergovernmental agreements. That’s right! The governments intend to speak and share on information relating to tax.

In September 2012, the UK and the US entered into an IGA, which means that UK financial institutions will be able to meet their FATCA obligations without having to enter into an agreement with the IRS. This will be done by reporting information to HMRC who will supply it to the US.

The UK has sought similar exchanges with the Crown Dependencies and British overseas territories. Guidance for the UK IGAs involving Jersey, Guernsey and the Isle of Man was published in 2014. The UK agreements require financial intermediaries to provide information on UK residents to HMRC. A financial intermediary includes those:

  • Accepting deposits in the ordinary course of a banking or similar business
  • Holding financial assets for the account of others as a substantial portion of its business
  • Engaging primarily in the business of trading in financial instruments, managing portfolios or otherwise managing funds or money
  • Conducting certain business as an insurance company

The UK launched its UK FATCA in the Budget 2013 and included:

  • The provision of automatic exchange of information of UK residents with accounts in the Crown Dependencies
  • An alternative reporting arrangement for UK resident non domiciled individuals
  • A tax disclosure facility (no shock there!)

However, maybe now UK FATCA should be considered in line with subsequent legislation introduced (or being introduced) by HMRC. In particular, HMRC published four consultations this year:

  • A new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents
  • Tougher financial penalties for offshore evaders, including the possibility of a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders
  • A new penalty regime for those who enable tax evasion, based on the tax they have helped taxpayers to evade, and naming of enablers
  • A new simpler criminal offence to make prosecution of offshore evaders easier

It is likely that a number of people with offshore structures are relying on the safeguard that, should HMRC challenge their tax position, they can rely on having sought appropriate advice and will have a defence of reasonable care. HMRC state:

“A prudent taxpayer is expected to seek advice if there is any doubt about the tax treatment of any activity. Similarly, any taxpayer who had a reasonable belief that he did not need to do something (or had already done it) might be considered to have a reasonable excuse for a failure. Therefore, the government believes defences of reasonable excuse and reasonable care provide sufficient safeguards in themselves. HMRC will continue to challenge what it sees as inappropriate claims to reasonable care or excuse, when the facts as it sees them do not support those claims, as it does elsewhere in the tax system.”

The information from the Crown Dependencies flows from 2016 i.e. after the closure of the offshore disclosure facility on 31 December 2015 but not the last chance disclosure facility, which is less favourable. Some may feel that HMRC won’t be able to handle the information received although one has to remember the unprecedented expense of the award winning software, Connect, at HMRC’s disposal. Connect is looked after by HMRC’s Risk and Intelligence Service (RIS).

RIS is responsible for:

  • Collating information
  • Identifying those operating in the hidden economy
  • Receiving and exchanging information with other government departments
  • Researching and identifying campaign and taskforce targets

It appears that RIS will be responsible for looking after this new information and will be able to analyse it against arguably the largest database on UK individuals and businesses. The potential ability to detect tax avoidance or evasion once in possession of this information is phenomenal, for example:

  • There is the ability to compare profiles
  • Match information from intra government sources
  • Match information from third parties (the scale of the potential ability becomes clearer when considering the information powers contained in Schedule 23 Finance Act 2011)

If I were a HMRC officer in RIS, this is what I would do:

  1. Match the identity of a named person from the Crown Dependencies to their tax profile
  2. Sort that group of persons by:
    1. High net worth persons
    2. Business owners
  3. Identify within those groups:
    1. Those who have historically declared and not declared overseas income and gains
    2. Connections between trusts/foundations (provided by financial intermediaries) and insurance policies (provided by insurance companies)
    3. Connected persons or companies that have disposed of assets
    4. Connected recently deceased persons
    5. Pension transfer information related to connected persons
  4. Compare information available at my fingertips including:
    1. Import and exports
    2. Land registry
    3. Council tax and electoral role
    4. Border agency
  5. Use schedule 23 Finance Act 2011 to obtain information from banks, financial institutions, insurance companies, brokers, auctioneers and estate agents to name a few.
  6. Compare the profiles of connected persons and entities to ascertain whether similar persons maintain a similar lifestyle or are equally profitable (or not so) or had similar expenditure.
  7. Collate information available on connected business which could include accounts and other Companies’ House records (charges, shareholders, directors); tax returns, VAT submissions, import/export declarations, employee information (PAYE), property ownership or rental arrangements, insurance details (whether indemnity or insured guarantees provided on products sold) etc.
  8. Open a “routine” employer compliance or VAT inspection to assist to gather information or get to know the business. Obviously, I would arrange this meeting with some suitable colleagues from other departments.
  9. Make an enquiry into tax returns that are within the open year for enquiry and ask some subtle questions to provide information, for example director loan accounts are always interesting.

How much fun could you have with this amount of information at your fingertips? Registering for the offshore disclosure facility comes to a close on 31 December 2015.

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