New UK offshore tax evasion and avoidance measures

Over the last year a number of new measures have come into force or been announced in the UK to tackle tax avoidance and evasion, including that taking place offshore. Some involve assets and income within the UK, which we have dealt with separately.

The Common Reporting Standard

The Common Reporting Standard (CRS) is likely to prove to be a game changer in governments' battles against offshore tax evasion. Banks, other financial institutions and trust and company service providers have to provide information each year about financial accounts and investments held by non-residents, which are then provided automatically to the tax authorities where those account holders are resident. This makes hiding money offshore increasingly difficult.

Although UK authority HM Revenue & Customs (HMRC) has already had bank account information from the Crown Dependencies and Overseas Territories (CDOTs) and early adopters of the CRS, the first information from late adopter countries is scheduled to come through this September. This is significant because it should include information for the first time about accounts in existence on 1 January 2017 in the major financial centres of Switzerland, Hong Kong, Dubai and Singapore.

The challenge now for HMRC will be to trawl through all this information and to begin investigations into UK residents with overseas interests. However, as we will see, HMRC has a number of new powers linked to CRS as well as its powerful Connect computer system, which means it is more important than ever for the non-compliant to regularise their tax affairs before HMRC tracks them down.

Requirement to correct and tougher civil penalties

30 September 2018 was a crucial date for anyone with undeclared offshore income or gains, or for advisers with clients in this category. It was the deadline to disclose past non-compliance in respect of income tax, capital gains tax or inheritance tax involving offshore matters under a new legal requirement, the requirement to correct. For these purposes, past non-compliance means non-compliance in respect of liabilities to tax arising before 6 April 2017. It will apply to tax returns that were filed, or should have been filed, in the 2015–16 tax year, as well as earlier tax years.

The issue is treated as corrected if the taxpayer registers with HMRC under the Worldwide Disclosure Facility (WDF) before the 30 September 2018 deadline and completes a satisfactory disclosure by 29 December 2018.

A failure to register and disclose by the deadlines means HMRC will be given a further four years beyond the usual timeframes in which to assess the under-declared tax and a new super penalty of between 100 per cent and 200 per cent of the potential lost revenue will be applied. Of particular note is that the super-penalty is not set by reference to the underlying conduct; in other words innocent mistakes are treated in the same way as fraud. The amount of the penalty depends partly on the level of cooperation shown in putting things right.

This super penalty can be imposed in addition to a new asset–based penalty introduced with effect from April 2017. The asset-based penalty is intended for the most serious cases of offshore evasion and starts at the lower of 10 per cent of the value of the asset and 10 times the potential lost revenue related to the asset.

The super penalty is also subject to an increase of up to 50 per cent if HMRC can show that assets or funds have been moved in a deliberate attempt to avoid the exchange of information under CRS, such as moving the assets to a jurisdiction which has not signed up to CRS.

Strict liability offence

Since June 2012 only 26 individuals have been successfully prosecuted for offshore tax evasion, according to figures in HMRC's latest annual report and accounts, and HMRC is under pressure to prosecute more people.

A new 'strict liability' offence has now been added to the UK statute book. This should make prosecutions easier as prosecutors will just need to prove that the liability was not declared and there will no longer be any need to prove that the individual's actions were dishonest.

It applies if a UK taxpayer fails to notify HMRC of his or her chargeability to tax, fails to file a return or files an incorrect return in relation to income, gains or assets in a non-CRS country and the underpaid tax is more than £25,000 per tax year.

The offence has been talked about for some time, but it is finally about to bite as it applies in relation to tax liabilities for the 2017-18 tax year onwards. This means it will apply in relation to liabilities that should be disclosed in tax returns being prepared now and is a powerful incentive to clients to disclose everything to their advisers, or potentially face a prison sentence. The offence can first be committed on 6 October 2018 if a notice of being chargeable to tax is not given, 6 April 2020 if a return is not delivered or 31 January 2020 if an inaccurate return is made.

Whilst the number of jurisdictions which have not yet signed up to the CRS is relatively small, there are still a number of jurisdictions which are holding out – the US being the most notable.  

New assessment limit for offshore matters

Over recent years we have seen a blurring of the line between tax avoidance and tax evasion. In the eyes of HMRC and the media, aggressive avoidance is no more acceptable than evasion. As with evasion this year we have seen further measures aimed at tax avoiders themselves and also at the professionals who make the avoidance possible.

Despite widespread opposition, the government confirmed in July 2018 that it is going ahead with a new 12 year time limit for "discovery" assessments (HMRC's assessment powers where there is no open enquiry into a tax return). This new time limit will apply to non-compliance with income tax, inheritance tax and capital gains tax relating to an offshore matter, irrespective of the behaviour involved. At present, the discovery time limits are 4 years for innocent errors, 6 years for a failure to take reasonable care and 20 years for deliberately incorrect returns. The 20 year period also applies to a failure to notify chargeability and failure to disclose the use of a tax avoidance scheme notifiable to HMRC under the disclosure of tax avoidance schemes (DOTAS) regime.

This new time limit will therefore catch any errors, even if innocently made, such as through transposing figures. There will be a defence if the taxpayer has a reasonable excuse, but HMRC takes an increasingly narrow view of what amounts to a reasonable excuse.

The new time limit will not apply where, before the standard time limits, HMRC receives CRS information on the basis of which the HMRC officer could reasonably have been expected to be aware of the lost tax and it is reasonable to expect the assessment to have been made before the time limit.

The 12 year time limit will apply to years of assessment from 2013/14 onwards, where there has been careless behaviour and from 2015/16 onwards in all other cases. These transitional years are there so that HMRC is not using the legislation to open up periods which, under current rules, are already closed. Those with offshore income or gains would be wise to keep records for more than six years in case HMRC assesses them going back more than six years.

Increased transparency

Tied in with international measures and the fight against tax evasion and avoidance we have also seen a number of measures to increase transparency. UK companies and LLPs have to provide annual information about 'persons with significant control' over them and trustees of UK trusts and of non-UK trusts with certain UK tax liabilities have to register and report beneficial ownership information annually to HMRC.

There are now plans to introduce a register of people with significant control over non-UK companies owning UK real estate. It is intended that the register will be operational in 2021. The register is likely to be of great interest to HMRC in selecting cases for investigation in the coming years. In a wider crackdown, HMRC is also expected to work closely with other law enforcement agencies to challenge the owners of high value residential real estate to prove where the money came from to buy the asset. Those who cannot do so are liable to having the properties confiscated under new "explained wealth order" powers.

Mandatory disclosure of cross-border arrangements

The UK already has a regime (DOTAS) under which details of certain types of tax avoidance scheme are required to be disclosed to HMRC, both to give HMRC an accurate picture of usage but also to allow it to take quicker steps to block schemes if it thinks they could work. The obligation falls on the "promoter" of the scheme but will shift to the user of the scheme in certain circumstances. An international version of this regime has been legislated for by the EU.

On 25 June 2018 an EU Directive (known as DAC 6) entered into force. It requires the disclosure of information about certain cross-border arrangements, based on a 'hallmark' system as features in DOTAS. Member states are required to transpose the directive into national law by 31 December 2019 with first reporting to take place by August 2020 – but are also required to apply the regime to reportable arrangements where the first step has taken place on or after 25 June 2018. The UK government says it will implement the rules, notwithstanding Brexit.

Advisers and companies need to be aware of what may be covered by DAC 6 because it is much wider than the DOTAS regime. It catches arrangements with hallmarks similar to the DOTAS hallmarks such as premium fee. Worryingly there are some wide categories of arrangements that need to be disclosed even if they do not have to have a main purpose of avoiding tax, which could catch some relatively common intra group arrangements. 

In many cases companies themselves (rather than their advisers) may be required to make the disclosure and the rules potentially catch arrangements being entered into now. Depending upon how the rules are implemented in the UK, advisers may need to keep records of arrangements being entered into now as these may need to be disclosed once the rules come into force.

The DAC 6 regime also cover arrangements designed to circumvent automatic exchange of information obligations (including those under CRS), whilst the OECD has also published 'model' rules for countries to introduce a reporting system for arrangements designed to circumvent CRS reporting. Whilst DAC6 and the OECD model have many similarities, there are also some differences which need to be studied carefully.

Profit fragmentation

New rules are being introduced from April 2019 designed to tackle tax avoidance where some or part of the profits of a UK business are 'diverted' to an offshore entity where no or very little tax is paid. Such entities are often owned by an offshore trust where the UK individual is neither the settlor nor beneficiary, but some benefit from such profits can accrue to a linked person.

HMRC believes that current anti-avoidance legislation is ineffective against these schemes. The new rules identify tests which, if met, will require that the profits are taxed on the UK resident individual.

A proposal that would enable HMRC to issue a notice requiring the tax to be paid up front – before the taxpayer had the chance to put forward detailed arguments contesting the liability - has been dropped for now. However, HMRC is going to monitor the position, so this proposal could come back onto the table in the future.

Jason Collins is a tax expert at Pinsent Masons, the law firm behind Out-law.com. This update is based on one first published on the Chartered Institute of Taxation (CIOT) blog .