The 'enhanced information exchange agreement', which will be closely based on a similar agreement between the UK and US, will come into force at the same time as the Isle of Man agrees measures to implement the US Foreign Accounts Tax Compliance Act (FATCA). It will allow the UK and the Isle of Man to automatically exchange a wide range of information on account holders due to pay tax in the other jurisdiction on a reciprocal basis.
The agreement is the latest of several automatic information exchange agreements entered into by the UK Government, intended to improve its ability to tackle cross-border tax evasion. Details of the necessary operational and implementation requirements of the scheme, which are still to be finalised, will be announced in due course.
"Automatic information exchange is an important tool in boosting HMRC's ability to clamp down on those who seek to hide their money overseas," said David Gauke, Exchequer Secretary to the Treasury. "Our ground breaking agreement with the US sets a new standard in international tax transparency and today's agreement between the UK and Isle of Man to move to much greater levels of automatic exchange is the next step in this process."
The Government was aiming to enter into similar agreements with other jurisdictions, he said. In a joint statement issued last month, tax authorities in Jersey and Guernsey confirmed that they were in discussions in relation to the creation of an enhanced information-sharing agreement with the UK.
FATCA is aimed at preventing tax evasion by US residents using foreign accounts. It introduces reporting requirement for foreign financial institutions (FFI) with respect to accounts help by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% 'withholding tax' on their own US source income and sales proceeds. However, the US and the UK entered into an inter-governmental agreement earlier this year which means that UK FFIs will disclose information about US residents to HMRC rather than the US Internal Revenue Service and will not be subject to the withholding tax.
The agreement between the US and UK also contains a commitment by the US Government to pursue "equivalent levels of information exchange" to those that the UK must provide under FATCA. Although tax authorities in the US are unable to collect certain information, most notably with regards to 'entities', the UK Treasury has claimed that it will be provided with "a wider scope of information on individual accounts" than it is providing the US authorities.
Holding an offshore bank account is not illegal and can be used for legitimate tax planning, especially by non-domiciled individuals. However, taxpayers are obliged to disclose funds held in offshore accounts that are subject to UK tax to HMRC.
"The automatic exchange of information, provided for under the agreement, will be a boost to HMRC's attack on offshore evasion, and a warning for those who have unresolved UK tax liabilities," tax expert Phil Berwick of Pinsent Masons, the law firm behind Out-Law.com, said. "Taxpayers with issues should consider using the Liechtenstein Disclosure Facility before they are approached by HMRC, as this will enable them to regularise their affairs on favourable terms, compared to the normal rules."
The Liechtenstein Disclosure Facility (LDF) enables taxpayers with UK tax irregularities connected to a bank account, investment or structure in Liechtenstein to settle their tax affairs on favourable terms. Those who do not currently have an account in Liechtenstein, but have an offshore account located elsewhere, can now bring themselves within the LDF by acquiring a bank account or similar connection in Liechtenstein.
Ahead of the Autumn Statement last week, the Government announced that it would make £77 million in additional funding available for HMRC to expand its anti-avoidance and evasion work. A new 'centre for excellence' will be set up within HMRC to head its work on offshore tax evasion, while the department will also develop a "comprehensive strategy" on offshore tax evasion to be published in spring 2013.