Back to Insights

Offshore Money: Legitimately Hiding It.

By admin
05 Oct 2023
Tax Investigation

HMRC are on the rampage sending out letters about offshore income and gains

It is normal to feel anxious after receiving a HMRC letter regarding offshore income or gains. Letters are now being sent by HMRC we believe monthly. We have been contacted by concerned individuals with letters dated each month since May this year (and probably before) with the notable exception of August. The absence of an August dated letter may be an anomaly or may be because a lot of HMRC officers would have been on holiday.

 “We have information that shows you may have received overseas income or gain 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.”

The letter is simply a prompt by HMRC to check your tax affairs. Half of those contacting us had little to worry about although some may have needed to include income on their tax return along with a claim for double taxation relief.  Quite a lot of people, especially those that originate from overseas, assumed there was no requirement to report in the UK or that the income was too low to be reported. The tax, interest and penalties on a small amount of income over a long period can however be costly.

Where offshore income or gains have been omitted from a return, there is a legislative provision resulting in criminal prosecution in the absence of a reasonable excuse. The provision carries a potential sentence of up to fifty three weeks and the tax, interest and penalties will remain due. The representations to HMRC therefore need to be handled with care.

Representations may also be more complicated from a tax perspective depending on the individuals domicile status, time resident in the UK and the provisions of the double taxation agreement. HMRC’s letter doesn’t bring any of these points to the recipients attention, which could result in a person managing their own disclosure and settling more tax than needed.

There have also been letters issued relating to the Pandora Papers. We had a number of new clients contact us prior to summer but a larger surge in the past few weeks. It appears HMRC officers returning from the summer holidays have released generic letters from those named in the Pandora Papers:

“We’re writing to you because you’ve been named in the Pandora Papers, the largest release of offshore data by the International Consortium of Investigative Journalists.”

If HMRC sends you a generic letter because you’ve been identified in the Pandora Papers, you need to seek some specialist tax advice. That is unless you have political immunity. The likelihood is you are not immune and the types of structures identified by the leaked information are generally a little more complicated than simply having an overseas source of income or having realised a gain.

The information leaked (more than 11.9m confidential files) came from fourteen offshore services firms. The offshore fiduciary services world offers (and has offered) numerous structures to legitimately hold assets. Structures include family trusts, non-settlor interested trusts (those set up by an arranged settlor), purchased interest in excluded property settlements, remuneration arrangements – employee benefit trust, remuneration trusts, commercial purpose trust/foundations, international pension plans, QNUPS, QROPS, asset protection trusts, captive insurance arrangements, protected cell companies, incorporated cell companies, personal portfolio bonds and many more. Whether the arrangements work from a tax perspective is based on an interpretation of complicated anti-avoidance legislation, case law and the individual circumstances of the case.

HMRC considering whether such arrangements technically work, are likely to issue code of practice 8 (COP8). COP 8 is for cases other than suspected serious fraud, which sounds both positive and negative at the same time. Where COP8 is issued, it may progress to COP9 – cases of suspected serious fraud. Where offshore structures are involved, it is not unusual for COP8 to be replaced by COP9 normally as a result of identifying poor implementation of planning or complacency on behalf of the ‘beneficiary’.

Having the unusual experience of both defending clients against suspected serious fraud on offshore structures for over two decades as well as having sat in senior roles at large fiduciary service providers early in my career, I am aware of how things are done wrong and maybe without the client’s knowledge or similarly without the fiduciary provider’s knowledge.

If you receive a Pandora Papers letter and choose not to respond, HMRC will likely make enquiries either by issuing COP8 or COP9. First they may take a slower route by undertaking an employer compliance audit on your business, a VAT audit or a general enquiry into a tax return. HMRC have always fished for information – making smaller more forgettable enquiries before more significant ones – or issuing an information request to a business requiring information on the director/shareholder.

Walking into this situation blindly results in HMRC obtaining information to prepare their case as well as testing how good your support is. For example, a recent COP8 required information not relating to the person it was issued to. The agent provided the information, which he shouldn’t have. The information notice required an senior officer to sign off on an issuing officer’s request for the notice, which demonstrates HMRC don’t play by their own rules. In fact on that occasion a senior officer approved not playing by their own rules.

It is important for anyone receiving a letter to be aware of the implications for doing something or not doing something. If approaching HMRC to regularise your affairs, you/your adviser need to know the how the law applies to your circumstances and that needs to be largely ascertained before speaking with an officer. Be prepared and make sure you have a knowledgeable adviser suited to your circumstances.

Maybe one harsh reality of society is that there could be different rules for different people. I am guessing the more high profile persons named in the Pandora Papers are not receiving a generic letter from HMRC. It would be nice for the identified UK politicians to receive a letter although one suspects that whatever they have structured is legal. Tony and Cherie Blair were named and the daily mail commented:

They have built a £35m property empire of 39 homes, flats and offices since he left Downing Street.

The structure could be completely legal and the correct amount of tax paid. Tony was also completely correct to go to war against weapons of mass destruction despite the evidence starting that war originating from a dossier a decade before.

The ICIJ website states:

In February, a commentary from the Tony Blair Institute for Global Change urged policymakers to seek, among other measures, higher taxes on land and homes. Blair, the institute’s founder and executive chairman, talked about how the rich and well-connected shirk paying their share of taxes as far back as 1994, when he campaigned to become the leader of the U.K.’s Labour Party.

“For those who can employ the right accountants, the tax system is a haven of scams, perks … and profits,” he said during a speech in England’s West Midlands. “We should not make our tax rules a playground for ….  tax abusers who pay little or nothing while others pay more than their share.”

Engaging with the right tax adviser is paramount to your success whether implementing planning or defending against planning that which went wrong. Smiling to myself and thinking, we can help with either the planning or the defending.

If you would like to speak to member of the team about regularising your offshore tax affairs then please get in touch

Don’t forget to keep and eye on our socials Facebook Instagram and LinkedIn

HMRCs information on offshore income and gains can be found here

This article about offshore money is written by:

Back to Insights

Get our latest tax articles direct to your inbox

Edge Newsletter

What best describes you?