The UK Government announced in the Autumn Budget 2018 that HM Revenue & Customs (HMRC) will publish an updated offshore tax compliance strategy which will build on the progress made under the current strategy.
Not surprisingly the Government also reaffirmed its commitment to tackling tax avoidance, evasion, aggressive tax planning and non-compliance generally, claiming its initiatives since 2010 have secured and protected over £185bn ($237bn) of tax that might otherwise have gone unpaid.
“No safe havens”
HMRC’s current tax strategy was published in 2014, entitled “No Safe Havens,” with the aim of ensuring that there are no jurisdictions where taxpayers feel safe to hide their income and assets from HMRC.
Over the last four years this has seen both new legislation and disclosure facilities designed to encourage those with unreported UK tax liabilities from offshore wealth to come forward voluntarily and bring their UK tax affairs up to date.
Over this period HMRC have taken a ‘carrot and stick’ approach. The Liechtenstein Disclosure Facility’s (LDF) key terms, including immunity from criminal prosecution and penalties of only 10% of the tax involved (for the core years), were widely criticised as overly generous, considering many of those who used the facility were disclosing tax fraud involving substantial amounts.
More recently the approach has hardened with the introduction of more severe measures, including:
- penalties based on the value of offshore assets;
- penalties on the movement of offshore assets to avoid detection and disclosure under tax transparency initiatives; and
- the Requirement to Correct (RTC) and Failure to Correct (FTC) regime with the risk of stinging penalties for those who failed to correct offshore tax non-compliance of up to 200% of the tax involved and the prospect of their details being published.
Voluntary disclosures must now generally be made through the Worldwide Disclosure Facility (WDF), except for cases involving serious fraud where the voluntary disclosures would be through the Contractual Disclosure Facility (CDF). The WDF’s terms are less generous than the LDF in that there is no immunity from criminal prosecution or a generously restricted penalty.
The backdrop to all this has been a continuing push for global tax transparency driven by fiscal austerity measures and fuelled by increasing media and public intolerance to those who seek to evade or aggressively avoid their civil obligations to pay tax, with wealthy individuals and large global enterprises particularly attracting widespread opprobrium.
The Organisation for Economic Co-operation and Development’s international automatic exchange of information, better known as the Common Reporting Standard (CRS), has seen over 100 countries share financial account and tax sensitive information on an annual basis since September 2017. This flagship initiative has provided HMRC and other signatories to the CRS unprecedented access to financial data about UK residents’ overseas bank accounts and investments. In response, HMRC have invested heavily in data analytics technology, such as their “Connect” computer system which analyzes and cross-references this data to existing records to identify cases of suspected tax fraud and non-compliance for investigation.
Fiscal austerity policies have dominated the EU political landscape for over a decade which has resulted in year-on-year reductions in government departments’ overall operating budgets and resource. Ironically this has severely constrained tax authorities’ ability to curb evasion and non-compliance and provide valuable additional yield from investigations to their cash-strapped governments.
There is therefore a valid question whether HMRC, despite claims about improved intelligence, technology and data analysis, has sufficient investigative resource, in terms of both numbers and experience to make any real use of the abundance of data and intelligence it now has to make any significant impact on tacking offshore tax evasion and avoidance.
Earlier this year the UK’s Parliamentary spending watchdog, the Public Accounts Committee (PAC), reported that the Panama papers leak resulted in 66 criminal or civil investigations with an expected additional tax yield of £100m. Despite this the committee warned that it is “far from confident” that HMRC has sufficient resource to scrutinise the leaked data.
This concern is highlighted by the fact there is little evidence to date that the information obtained from the more recent data leaks, i.e., the Paradise Papers, has yet been used effectively, notwithstanding legal arguments that such information was illegally obtained and therefore inadmissible as evidence in a criminal court.
HMRC has also been criticised year-on-year by both Parliamentary and Treasury select committees for doing too little too late both in terms of criminally and civilly investigating offshore tax fraud. It would be far from unreasonable to conclude that HMRC will be unable to make any real in-roads into reducing the “tax gap” relating to offshore evasion and avoidance before it is properly funded and resourced to do so, a decision that only government, not HMRC, can make.
HMRC have announced it will be updating its offshore tax compliance strategy but many of the numerous initiatives introduced, as part of its current strategy are yet to bite. HMRC’s biggest stick –the RTC and FTC regime – is in its infancy, as the deadline for correcting offshore non-compliance only ended at the end of September. The RTC and FTC regime was really designed to flush out those with unreported offshore income who despite the previous disclosure facilities had still not come forward to bring their affairs up to date. HMRC will be under immense scrutiny to ensure it uses the RTC and FTC regime to the maximum effect, including the imposition of penalties, as much as 200% of the unreported tax involved.
Another development in the pipeline both highlights and acknowledges HMRC’s resource constraints by introducing legislation that extends from April 2019 the assessment time limits for offshore tax non-compliance for Income Tax, Capital Gains Tax (CGT) and inheritance tax (IHT) to 12 years instead of the current four years for innocent errors and six years for careless errors.
The RTC and FTC rules have of course already addressed HMRC’s need for more time to identify and investigate non-compliance by effectively freezing the time limits for HMRC to raise an assessment, as at April 6, 2017, which means any offshore non-compliance remains assessable for another four years to April 5, 2021. This means that under the RTC and FTC regime non-reporting because of careless behaviour can be assessed for up to ten years rather than six and for mistakes made despite taking reasonable care up to eight years rather than the existing four and for deliberate non-compliance up to 24 years rather than 20.
These developments, not unsurprisingly, have attracted criticism from the tax profession claiming they extend the period of uncertainty before finality can be achieved and create further record keeping burdens on tax payers who have not deliberately under-reported.
Given the previous disclosure facilities, the publicity surrounding them together with a measure that saw tax advisors compelled to write to relevant clients to explain about CRS, WDF and RTC the Government might perhaps be forgiven for suggesting that “the lady doth protest too much.”
Possibly overlooked by many advisors and undoubtedly so by most taxpayers with unreported offshore tax liabilities was the introduction in Finance Act 2016 of a strict liability criminal offense for offshore tax evasion. Such cases will be heard in a Magistrates Court, with no jury and the prosecution will not have to prove “mens rea,” or a guilty mind, necessary when HMRC pursue a conviction for tax fraud for the usual offense of cheating the “public purse” which is heard in the Crown Courts before a jury.
These new strict liability offenses provide a “fast track” to criminal prosecution and those convicted face the prospect of up to six months imprisonment or a maximum £5,000 fine , even where the failure to notify, provide a tax return or make an inaccurate tax return was not a deliberate act.
The new strict liability criminal offenses apply from 2017/18 and the earliest an offense for these purposes could be committed was October 6, 2018. This is because the deadline for notifying HMRC that you are chargeable to tax for the 2017/18 tax year was 5 October, 2018. It is no coincidence that this coincided with both the RTC deadline of 30 September and the first full exchange of information by over 100 countries who have adopted the CRS, which was also in September 2018.
HMRC will undoubtedly be under immense scrutiny to ensure it uses these powers to the maximum effect.
An updated offshore tax compliance strategy
With a significant armory of measures aimed at both the taxpayer and advisors, e.g., the strict liability corporate criminal offense for failing to prevent the facilitation of tax fraud and other initiatives aimed at penalising advisors who enable clients to evade tax, and others in the pipeline (see above) it is difficult to speculate what further initiatives the government might introduce to bolster HMRC’s current strategy.
As some of these measures are still in their infancy, e.g., the RTC and FTC regime, the strict liability criminal offense for offshore tax evasion and the abundance of financial account information now being provided to HMRC automatically and annually under CRS, it is understandably the right time for HMRC to take stock and reflect on the direction of travel.
To address criticism and make an impact it must increase the number of investigations it undertakes both civilly and criminally. If its data analytics are as good as claimed HMRC’s offshore fraud investigators should have plenty of intelligence and evidence to significantly improve the detection of non-compliance and increase its program of offshore investigations, rather than relying on taxpayers and their advisors making voluntary disclosures, which has characterised the last decade.
HMRC’s consultation document, ‘Amending HMRC’s Civil Information Powers‘, published on 10 July 2018 and closed for comments on 2 October 2018 does provide some insight into where HMRC might go from here with its offshore non-compliance strategy.
One of the main options HMRC proposed in the consultation is to dispense with the current need to obtain the agreement of the taxpayer under inquiry or the approval of the Tribunal to issue a third-party information notice (Schedule 36 FA 2008) and therefore align them with taxpayer (first party) notices. HMRC claim that the length of time it takes to obtain Tribunal approval is making it difficult for the UK to meet international and EU standards for administrative co-operation and exchange of information between tax authorities.
HMRC acknowledge that CRS and the automatic bulk exchange of financial account information is a highly valuable tool for tackling tax avoidance and evasion, but they also expect an increase in the requests for additional and more specific information from other jurisdictions once the CRS data has been used to open domestic tax inquiries and more detailed information is required and requested through mutual co-operation conventions.
The increase in requests for additional information to complement the automatic exchange is expected to place additional burden on both HMRC and the Tribunal resource and therefore HMRC argue that reform is required to meet the international standards it has committed to for the timely response to requests from other jurisdictions who have adopted CRS.
According to the consultation some jurisdictions have found the UK requirement for Tribunal approval for third party notices to be so onerous that they are discouraged from making such requests. This of course undermines the global drive for tax transparency and international co-operation between tax authorities to tackle offshore tax evasion and avoidance.
This desire to reform its civil information powers may not be unreasonable but it is important that “safe guards” such as a requirement for Tribunal approval are not merely dispensed with for the sake of convenience. To do so without introducing further balances and checks could severely undermine confidence in the integrity and fairness of the tax code and HMRC’s responsibility to care and manage taxes. HMRC considers that as with other aspects of its civil information powers the approval of an HMRC authorising officer is sufficient. The problem with that approach is that it lacks transparency and independent oversight and could result in unreasonable requests with no protection other than costly appeals or judicial review, which are of course beyond the means of many taxpayers.
HMRC need to carefully consider how it can ensure confidence in its internal governance processes including perhaps ensuring that the underlying decisions made by authorising officers are properly documented and subjected to independent audit.
In conclusion, it is likely that the amended offshore compliance strategy will unsurprisingly look like the current one, particularly given that many measures remain untested or do not come into effect until 2019. If there is a noticeable change it will be an emphasis on greater international cooperation, as HMRC seek to exploit the CRS and the mutual assistance and cooperation directives the UK has adopted.
For those who have still have unreported offshore income and investments the prospect of a voluntary disclosure is daunting and needs to be carefully managed. Nonetheless it is the author’s view that a managed voluntary disclosure is preferable to the risk of HMRC detecting the offenses and deciding whether a criminal or a civil investigation should ensue. The chance of detection has never been greater.
For more information, please contact Gary Gardner on firstname.lastname@example.org.