In the last year a number of new measures have come into force or been announced to tackle tax avoidance and evasion. Jason Collins, a member of the CIOT’s Management of Taxes Sub-Committee, updates us on the developments since the guide he produced last year. This should help tax agents, journalists and others with an interest in tax compliance to cope with the tide of new measures in this area.
The Common Reporting Standard (CRS) is likely to prove to be a game changer in the battle governments around the world face against offshore tax evasion. Hiding money offshore becomes increasingly difficult when 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.
Although 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 will come through in September 2018. This is significant because it will 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 is a crucial date for anyone with undeclared offshore income or gains, or for advisers with clients in this category. It is 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 disclosureby 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 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 (20 years 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 (eg 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.
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 (premium fee etc.). 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.
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.
More tax is lost to onshore – rather than offshore – non-compliance but it does not always attract the same level of public interest.
As with offshore non-compliance, HMRC's strategy involves a combination of 'encouraging' recalcitrant individuals to come forward and increasing HMRC's powers to obtain information from third parties who may provide the key to finding those who are non-compliant.
HMRC has invested heavily in its 'Connect' database, which collates data from numerous different sources such as the Land Registry, self assessment declarations, banks (both onshore and offshore) and the electoral roll.
It enables HMRC to direct their investigation resources at those most likely to have tax irregularities. For example, according to press reports, it has led recently to letters to people identified by HMRC as having sold a second home in 2015-16 who have not declared a profit in their tax return. The letters are intended to act as a prompt, giving taxpayers an opportunity to explain why they are not subject to tax or to pay the outstanding tax.
Widening information powers
HMRC is currently consulting on a proposal to make it easier for it to get information to investigate non-compliance by a taxpayer from third parties such as financial institutions, accountants, lawyers and estate agents. At present if HMRC wants to get this information it has to get the consent of the taxpayer or the prior approval of the tax tribunal. It is expecting to get more requests for information from overseas tax authorities following the introduction of CRS and it says the current process is too cumbersome and is out of step with the process in other countries.
The government is proposing either to remove the requirement for prior approval by the tribunal for all third party notices or just for notices calling for bank statements, transaction histories and other basic banking information reasonably required to check a taxpayers' tax position. Concerns have been expressed by advisers and others that removing the Tribunal from the equation removes any external scrutiny over whether the information is “reasonably required” by HMRC.
Making businesses take responsibility
Often an individual who wants to evade tax needs help from others, perhaps to change an invoice, make a payment in cash or direct a payment to another entity. The government's answer to this is to put companies and partnerships on the hook if their staff or agents criminally facilitate tax evasion by others.
Although the new corporate criminal offence of failing to prevent the facilitation of tax evasion has applied since 30 September 2017, many businesses have still not taken all the necessary steps to protect themselves from the risks of a criminal conviction.
Liability is again 'strict' so that a rogue employee who helps a tax evader causes his employer to commit a criminal offence as well, even if those running the business knew nothing about it. However, businesses will have a defence if they can show they had reasonable procedures in place to try to stop misconduct. This effectively forces businesses to tighten up their procedures, which should make it more difficult for tax evaders to engage with larger businesses.
By now all businesses should have conducted a risk assessment and should already have policies and procedures in place to ensure that they are not at risk of the offence. However, many businesses have still not completed this process. For businesses with significant numbers of off-payroll workers, employment status can be a particular risk area for the new offence.
The government has been looking at ways to tackle phoenixism whereby tax liabilities in a company are left unpaid when a company becomes insolvent and then the same individuals set up a new company and transfer the business but not the debts.
It is proposing wider powers to transfer liability for the tax debts beyond directors and company officers to a wider range of people responsible for the avoidance, evasion or repeated non-payment of taxes, including shareholders in some circumstances, and making them jointly and severally liable. It is particularly controversial that the government is considering extending HMRC's powers in relation to tax avoidance as well as tax evasion. The consultation closed in June and we are waiting to hear whether or not the proposals will get the go ahead.
At the moment HMRC can require businesses considered to be at high risk of not paying PAYE, NICs, VAT and certain other taxes to give a security deposit. From April 2019 the power to require a deposit is being extended to corporation tax and liabilities under the construction industry scheme of contractors and subcontractors. The government has said that it expects these powers to only be used in a small minority of cases, where people are choosing not to pay the tax, rather than those who are in financial difficulty and so cannot pay.
VAT and the construction sector
In another measure designed to tackle missing trader fraud which appears in sub-contractor chains in the construction sector, a VAT reverse charge is being introduced from October 2019. Missing trader fraud occurs when a supplier charges 'VAT' to its customers and then absconds without paying the VAT to HMRC. Where a sub-contractor is supplying mainly labour, it has little input tax to set off against the VAT it charges on its own supplies, thus building up a large VAT debt and there is a concern it may disappear without paying. The reverse charge will be a significant change for this sector and will shift responsibility for paying the VAT to HMRC to the customer, where the customer is a VAT registered business. It will only apply where the customer is itself supplying construction services so will not affect the end customer. The change is estimated to mean that 100,000 to 150,000 businesses in the construction and building sectors will have to change their accounting systems.
This is yet another example of larger businesses being used to police the tax compliance of individuals and small businesses.
People are increasingly moving away from using cash, with digital payments being used more and more. This is good news for HMRC as it makes it harder to evade tax and launder money if fewer payments are made in cash. The government has therefore consulted recently on how it can remove barriers to digital payments but it also wants to understand more about large cash transactions and why they are used, with a view to potentially legislating in the future to limit their use, as some other countries have done.
Online VAT evasion
The government is concerned that offshore sellers (particularly from China), individuals and small businesses using online marketplaces such as Amazon and eBay are not always accounting for VAT on their UK sales. Accordingly it has introduced a raft of measures over recent years designed to clampdown on this avoidance, including, in some circumstances, making the marketplace responsible for paying VAT unpaid the trader.
A number of marketplaces - including Amazon and eBay - have signed an agreement with HMRC giving the tax authority access to merchant data relating to sellers and committing to educate their sellers on their tax responsibilities.
The government has also consulted recently on a 'split payment' mechanism to clampdown on VAT non-payment by online sellers. An online payment typically involves the online market place, a merchant acquirer, a payment service provider, a card scheme, and the seller’s bank. HMRC is considering new rules which would make one of these parties (potentially the merchant acquirer) responsible for splitting the VAT element from the gross payment made by the buyer and paying it directly to HMRC.
For a number of years HMRC has been fighting variations of schemes whereby employees or contractors forgo direct remuneration and instead receive loans from a third party such as a remuneration trust and it is argued that there is no remuneration subject to PAYE or NICs, even though the loans are unlikely to be repaid.
The disguised remuneration rules largely stopped these schemes from December 2010, but large numbers of disputes remain in relation to older arrangements. HMRC finally won in the Supreme Court in 2017 in a well publicised case involving employees of Rangers Football Club.
HMRC has a settlement opportunity for those who have used these schemes. This is aimed at employees, contractors and employers. Time is fast running out as those who do not sign up for the scheme by 30 September 2018 will face a new 'disguised remuneration loan charge' from April 2019. This widely drafted provision will impose income tax and national insurance liabilities in relation to any third party employment loan made since 6 April 1999.
Although in most cases the liability for the tax should fall on the employer, employees could be liable for the tax in some circumstances.
Those advising employers, employees and trustees who have been involved in this type of arrangement need to be aware of the consequences for their clients if they fail to act.
Off payroll working
Employment status has been a major area of focus for HMRC investigations over recent years. The rise in the 'gig economy' has led to fewer individuals being formally employed and therefore having tax deducted under PAYE. As well as routine employer compliance reviews, there have been clampdowns on particular types of job, including a focus recently on dental associates.
In the public sector, new rules were introduced in 2017 to tackle individuals operating through personal service companies (PSCs).
Under the old rules – which still apply (for now) for the private sector (often referred to as 'IR35') – when an individual provides services to a client through a PSC, employment taxes have to be paid if the individual would have been regarded as an employee of the client, had the individual not contracted through the PSC. However, the income tax and national insurance contribution (NIC) liabilities fall on the PSC not the client.
Under the new public sector off-payroll working rules, public authorities are responsible for determining the employment status of those they engage through PSCs or other intermediaries. They are obliged to deduct income tax and employee NICs and account for employer NICs in respect of payments to PSCs where the individual would have been an employee if engaged directly by the authority rather than through a PSC. In other words, the risk of employment status being proven sits with the public sector engager, which takes away most of the attractiveness of PSC arrangements for them.
As HMRC considers that the IR35 legislation is not working effectively, and non-compliance is widespread, it is consulting on a proposal to extend the public sector off-payroll rules to the private sector.
Should this change be introduced, one significant added cost for private sector clients engaging individuals through PSCs will be the risk of having to pay employer's NICs (currently 13.8%). There will also be an increased administrative burden as businesses of all sizes will have to more closely consider the tax status of all their off-payroll workers. This could be a significant issue in the construction and financial services sectors, where such engagements are common
Tax advisers need to be aware of the impact these changes could have on their clients and of the increasing number of measures which could catch the unwitting tax adviser.
Blog by Jason Collins, a Partner at Pinsent Masons LLP and member of the Chartered Institute of Taxation’s Management of Taxes Sub-committee.