Over the past 2 years HMRC has invested close to £100 million on tackling tax avoidance and evasion. It is now using various behind the scenes technology to track and analyse property purchases, tax returns, loans, bank accounts and employment data to create a risk profile database which will highlight transactions and help it identify those who are concealing from it (whether intentionally or negligently) any taxable income or wealth. Various inter-government agreements with offshore territories mean that its search has a global reach.
Likely we have high-profile tax “minimisers” like comedian Jimmy Carr and Starbucks to thank for this increased vigilance as HMRC is keen to show the media that “steps are being taken.” Whatever the origins, the upshot is higher-quality tax investigations and a significant deterrent for those who have not made full disclosures to HMRC. The key is to make sure that your tax affairs are up to date and squeaky-clean and to ensure that you put right any indiscretions before it pounces. Where regularisation is required, it is reasonably straightforward and relatively painless, at least compared to the alternative. Here are a few possible avenues:
Liechtenstein Disclosure Facility
The LDF represents a real tax “amnesty”. It came into being in 2009 and will continue to provide an opportunity to disclose until 31 March 2016. Under the LDF the taxpayer will be subject to a 10% penalty on all income and gains with a Liechtenstein connection in the 10 year period to April 2009 and can opt for a composite rate of tax on any outstanding liabilities as well as being guaranteed that he will not be subject to criminal prosecution. Even where a defaulting taxpayer has no funds in Liechtenstein it is possible to transfer funds to the territory in order to make use of the favourable terms of the LDF. Since its inception the LDF has raised a very decent £630 million for HMRC.
The Swiss Agreement came into force on 1 January 2013 with the first batch of one-off tax payments raising an almost equally handsome £342 million for HMRC. It applies to UK taxpayers with funds in Switzerland. They will have had communications from their banks and ought to be considering their past tax compliance record and deciding a way forward. The information- sharing powers under the Swiss Agreement mean that there is no possibility of concealing assets in Switzerland. Where disclosures need to be made in relation to Swiss-held monies it is sometimes more worthwhile to move funds to Liechtenstein to make use of the LDF.
Other Offshore Island Facilities
The Isle of Man, Jersey and Guernsey have all recently signed disclosure facilities similar to the LDF which provide lower penalty rates and a 1999 cut off, although do not guarantee immunity from criminal prosecution.
Contractual Disclosure Facility
If HMRC starts a tax investigation before the taxpayer gets round to making a disclosure as above, then it is too late; these favourable facilities will no longer be available, with the result that the interest and penalties on the tax due will be much higher. However, all may not be lost, as there may still be an opportunity to make a deal with HMRC if the matter is dealt with carefully.
The CDF was introduced in January 2012 but did not really gather pace until the back end of last year. It is a simple procedure whereby HMRC contacts the taxpayer, stating that it suspects that there is some serious tax fraud and offering him 60 days in which to consider his situation and respond to HMRC. Once both parties have agreed to cooperate, the taxpayer’s advisers will set out in more detail the full nature of the “oversight” and a civil settlement will be reached with no criminal sanctions for the taxpayer. The CDF still needs a few refinements (in particular that HMRC ought to stop discouraging taxpayers from using it by its assuming a “serious fraud”) but is generally working well.
Where a taxpayer (either an individual or a corporate) is concerned that there may be irregularities in their tax filing history, the penalty regime for “unprompted” disclosure before HMRC discovers the irregularity by itself is much more favourable. The voluntary disclosure will also bring the taxpayer outside of HMRC’s Managing Serious Defaulters special investigations unit and their Naming and Shaming lists on the HMRC website.
In our experience the use of the disclosure facilities made available by HMRC are extremely well administered and if used properly should produce a palatable outcome for the defaulting taxpayer.