Unravelling the Offshore Tax Gap: HMRC’s Pursuit of Hidden Wealth and Tax Evasion

Closing the Tax Gap and offshore tax investigations

HMRC know which UK persons have offshore interests: around £570bn is held by UK residents in financial accounts in tax havens.

The ‘Tax Gap’ is a reference to the deliberate underpayment of tax. Responding to a freedom of information request, in May last year HMRC admitted it had no current estimate of the scale of taxes unpaid by UK residents relating to their offshore interests. HMRC subsequently published (23 June 2022) the estimate of the overall tax gap at 5.1% of the total potential tax yield. The perceived accuracy of the tax gap that followed the admittance of not knowing the ‘offshore tax gap’ caused HMRC considerable embarrassment and in response, the Financial Secretary to the Treasury announced that HMRC would publish new estimates in 2023.

At the same time as this ‘embarrassment’ (July 2022), HMRC announced that an international investigation had led to the deregulation of the Euro Pacific Bank in Puerto Rico (‘EPB’).  EPB has been accused of facilitating tax evasion and money laundering on a global scale.  The international investigation was undertaken by the J5 – the Joint Chiefs of Global Tax Enforcement set up in 2018 and comprising of tax fraud enforcement organisations from Australia, Canada, the Netherlands, UK and USA.

There is a political drive for HMRC to ascertain the ‘offshore tax gap’, which has involved the better processing and analysis of information received from the Common Reporting Standard (‘CRS’), leaks such as the Pandora Papers and the work of the J5. The CRS is where a tax authority of one jurisdiction agrees to collect information from financial intermediaries on assets owned by a tax resident of another jurisdiction and pass that information over.

HMRC is now aware from the CRS that around £570bn is held by UK residents in financial accounts in tax havens. A further £280bn is held by UK residents in overseas ‘onshore’ jurisdictions. Given the CRS commenced in 2016, UK residents aware they have tax irregularities may have already taken measures to regularise their affairs. HMRC also commenced an attack of schematic planning, which often utilised offshore structures. Increased penalties for ‘offshore’ irregularities also encouraged many taxpayers to settle taxes ahead of their introduction. The now much higher penalties may also actually deter disclosures to HMRC with instead a UK tax resident hoping not to be found.

The likelihood is that what is left for HMRC to examine will be complex overseas structures many of which would have been established on the back of professional advice. HMRC examine data ahead of opening an investigation. The CRS or leaked information may have prompted a ‘nudge letter’:

Dear Sir or Madam

Please check that your tax affairs are up to date
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.

We’ve been reviewing the data in the Pandora Papers and writing to taxpayers to give them an early opportunity to update their tax affairs.

HMRC uses its computer systems and sophisticated algorithms to organise and assess mountains of data obtained from the CRS and other sources. That information is cross compared to tax returns for omissions. Nudge letters are evidently sent following an assessment although the approach is likely made before an actual HMRC officer has reviewed a case in any significant detail. Nudge letters are more an approach to appeal for taxpayers to save HMRC incurring time investigating and to come forward and disclose. Where a complex offshore structure becomes the subject of scrutiny, a UK tax resident may not be incentivised to disclose because they rely on their advisers (nothing is wrong).

Information from the CRS is also unlikely to identify that there is a problem with an offshore structure. Firstly, the information provided under the CRS is for a calendar year, meaning that several years need to be considered against tax returns to identify if there are issues. Secondly, the information received is too limited on its own to determine whether a complex structure technically works: analysing anti avoidance legislation against a structure is beyond the capabilities of HMRC’s computers (and many of HMRC’s officers).

Information obtained from the J5 is however likely to provide taxpayers with inaccuracies. HMRC explicitly stated it believed there are hundreds of UK taxpayers that used the services of EPB to evade paying UK taxes. Last September, HMRC wrote to around 600 UK resident customers of EPB urging them to check their tax position. Arrests have been made for suspicion of tax evasion and money laundering, and criminal investigations are in progress.

The J5’s current focus is the targeting of tax and financial crimes involving professional enablers, cybercrime including illicit use of crypto currency. It also ‘builds capacity and expertise of tax enforcement officials’.  The J5 publishes its success stories many of which are guilty tax fraud pleads or prosecutions.

Identifying one person who has tax irregularities is often the start of uncovering many others:

• Whilst acting for the trustees of an offshore structure not set up quite right (unbeknown to the main beneficiary), it transpired that the trust had been inherited from the purchase of a fiduciary business (one trust provider acquired another) and there were a number of similar trusts. Furthermore, the main beneficiary had introduced a handful of wealthy associates also looking to save tax.
• A promoter suggested a particular structure to a crypto investor who in turn introduced a few friends also investing in crypto to the same structure.
• An accountant (tax adviser or solicitor) advising on offshore structures, will use a preferred fiduciary services business where they hold a good relationship. By introducing multiple clients, the service provider is likely to prioritise work for them. The service provider may have offered a financial incentive for clients. By identifying the accountant, HMRC would be able to identify other clients that may have offshore interests.

HMRC is under growing pressure to identify and resolve the ‘offshore tax gap’. The information received under the CRS and that received more recently (EPB – 2022, Pandora Papers – 2021) would by now have been analysed and checked against tax returns/tax payers. A long list of names is slowly being worked through and taxpayers across the country are being  subjected to enquiries and information requests. HMRC’s national approach appears to be targeting taxpayers residing in wealthy areas within or around the main cities (not just London).

HMRC investigations into taxpayers with offshore assets and/or income carry the risk of criminal prosecution. Not only because legislation exists providing for a criminal offence where income or gains have been omitted from a SATR but because the legislation and case law that can apply is amongst the most complex. It is great to seek the advice of a tax investigation specialist although not all such specialists will be familiar or competent to advise on the tax treatment.

That could result in you not being best represented or even the potential tax liability not being reduced through technical negotiations. My career started within the big four handling tax investigations for clients with offshore structures. Having continued to work in tax investigations for over two decades and specialising in offshore structures, we are well placed to manage a disclosure or HMRC investigation involving complex offshore issues.

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About Offshore Tax Investigation Specialist Anton Lane

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Offshore tax

Offshore tax