Isle of Man and UK sign agreement for automatic exchange of tax information

FATCA is a US law designed to prevent tax evasion by US citizens using offshore banking facilities. FATCA introduces a reporting requirement for foreign financial institutions with respect to accounts held by US residents. 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 (IGA) last 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 UK and the Isle of Man is based on this IGA. For this reason, the UK's tax exchange arrangements with the Crown Dependencies and Overseas Territories are sometimes referred to as 'UK FATCA'.

As a result of the agreement between the UK and the Isle of Man, a wide range of financial information on UK taxpayers with accounts in the Isle of Man will now be reported to HMRC automatically each year. This is the first time that an agreement based on FATCA has been signed between two parties neither of which is the US.

"This is the first of many such agreements with other jurisdictions" said Reg Day, a tax expert at Pinsent Masons, the law firm behind Out-law.com.

The Government is currently in discussions about similar agreements with the rest of the Crown Dependencies and the Overseas Territories.

Chancellor George Osborne described the agreement as "a momentous step forward in tax transparency". He said that the Isle of Man "should be recognised as the first jurisdiction to sign an agreement of this kind with the UK".

The Chancellor warned "For anyone attempting to hide their money offshore our message is clear: our resolve is stronger than ever, the net is closing in and the world is becoming a smaller place to evade paying the taxes which are owed."

A disclosure facility for those with tax irregularities relating to the Isle of Man was announced earlier this year. It will enable irregularities to be disclosed before automatic exchange of information begins in September 2016. The disclosure facility will offer guaranteed penalty rates to taxpayers who voluntarily disclose liabilities arising from April 1999 to HMRC. Taxpayers who do not use the facility will be subject to "significantly higher penalties" once the automatic information exchange begins, the Government said.

"Taxpayers with tax irregularities connected to the Isle of Man have a limited opportunity to regularise their tax affairs. Specialist advice should be taken now so that a taxpayer can make an informed decision about his options." said Reg Day.

Day said that the Isle of Man disclosure facility is not as generous as similar arrangements made between the UK and other territories. In particular, he pointed out that those who used the new facility to disclose past tax evasion would not necessarily be immune from prosecution. He said that "in many cases, the Liechtenstein Disclosure Facility (LDF) will provide a better outcome."

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.

In a separate development it was announced that South Africa will join the pilot scheme for the automatic exchange of tax information launched by the UK, France, Germany, Italy and Spain (the 'G5') in April 2013.