Sometimes it can be hard to keep up with the avalanche of government announcements on tax avoidance and evasion. This guide, produced by Jason Collins, a member of the CIOT’s Management of Taxes Sub-Committee, should bring tax agents, journalists and others with an interest in tax compliance up to speed with the rapidly changing landscape in this area.
The 1st of January 2017 was a seminal date in the war against offshore tax evasion because it is the date on which financial accounts in existence in jurisdictions in the 'late' adopters of the Common Reporting Standard (CRS), will have to be reported, even if they are closed after this date.
Although the trigger dates were earlier for the Crown Dependencies and Overseas Territories (CDOTs) (1 July 2014) and early adopters of the CRS (1 January 2016), the late adopter countries are perhaps the most significant because they include the major financial centres of Switzerland, Hong Kong, Dubai and Singapore.
HMRC received the data from the CDOTs in September 2016 and has begun the process of matching that data to information it already holds in order to decide who to investigate. The data pot will be enhanced by the receipt of the CRS early adopter data in September this year and late adopter data in September 2018.
The date of 1 January 2017 also brought the start of Finance Act 2016 penalties for enablers of someone else's offshore tax evasion or careless non-compliance. Penalties can be up to 100 per cent of that other person's tax liability.
It is worth noting here that the taxpayer will be entitled to mitigation of his or her own penalty if he or she provides information about any enabler.
Strict liability offence
HMRC is under pressure to prosecute more people for offshore tax evasion, and FA 2016 introduced a new 'strict liability' offence which may achieve this end. The offence will apply 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. There will be no need for the prosecution to prove that the individual's actions were dishonest but the taxpayer can put forward a 'reasonable excuse' defence. The maximum sanction is six months of imprisonment. We do not yet have a definite date, but it is expected this will apply from April 2017.
As with the above, HMRC is also under pressure from the public to see more companies and partnerships prosecuted – in particular those who fail to prevent their staff and agents from criminally facilitating third party tax evasion. A new offence is being introduced in the Criminal Finances Bill and will be effective by September 2017 at the latest. Liability is again 'strict', but it will be possible to advance a defence that reasonable procedures were in place to try to stop the misconduct (or that it was not reasonable in all the circumstances to expect there to be a procedure in place). The offence is being introduced because under the current law a corporate will only be criminally liable if very senior management (usually board level) were involved or knew about the facilitation, meaning that it can be all too easy for senior management to let unscrupulous practices go on, provided they know nothing about them.
Tougher civil penalties
Despite bringing more prosecutions, most cases will continue to be dealt with by HMRC levying financial penalties rather than seeking a criminal conviction. The current maximum penalties for offshore evasion depend upon the extent that the UK has exchange of information arrangements with the jurisdiction connected to the non-compliance, with a maximum penalty of 200 per cent of the tax for the most opaque regimes. The standard penalty payable can be increased by up to 50 per cent where there has been a deliberate attempt to move assets in order to avoid exchange of information regimes (Sch 21, FA 2015).
In addition, a new 'asset-based' penalty is being introduced (Sch 22 FA 2016) for the most serious cases of evasion with an offshore connection. It is levied in addition to the standard penalties for deliberate behaviour. The asset-based penalty 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 and is subject to mitigation. It is not yet known when this penalty will come into force, but it is likely to be sometime in 2017.
Disclosure facilities and 'Requirement to Correct'
The Liechtenstein Disclosure Facility (LDF), which despite its name could be used for irregularities in other jurisdictions, has been withdrawn and replaced with the much less generous Worldwide Disclosure Facility (WDF). The WDF offers no tax amnesty, penalty reduction or guarantee of non-prosecution and therefore provides little incentive for the hard core who have resisted the numerous previous settlement initiatives to regularise their position. The WDF requires the taxpayer to pay the tax, interest and a self-assessed reckoning of the penalties which apply.
Linked to this, Finance Bill 2017 will include new measures applying to a person with any undeclared tax relating to offshore matters as at 5 April 2017. The law will impose a special 'new' statutory requirement to correct the issue between 6 April 2017 and 30 September 2018. The issue is treated as corrected if the taxpayer takes certain steps, including formally bringing it to the attention of HMRC under the WDF, before the deadline.
A failure to correct by the deadline will lead to two things. First, the time limit applying to HMRC's powers to assess will be extended so that HMRC is given a further four years beyond the usual timeframes in which to discover and collect the under-declared tax.
Second, the old penalty regime will fall away and a new super penalty will be applied. The penalty is between 100 per cent and 200 per cent of the potential lost revenue (depending on the levels of cooperation). The underlying conduct giving rise to the non-compliance is irrelevant. However, there is a 'reasonable excuse' defence and provision for reduction of the penalty in special circumstances.
This super penalty can be imposed in addition to the asset–based penalty mentioned above. It is also subject to an increase of up to 50 per cent under Sch 21 FA 1015 if HMRC can show that assets or funds have been moved in a deliberate attempt to avoid exchange of information (see above).
Obligation to write to clients
Advisers who have provided tax advice to UK residents in relation to offshore accounts, assets and sources of income and financial institutions who have provided offshore accounts are required to send a letter to their clients enclosing a HMRC leaflet and reminding them of their obligation to disclose offshore income and gains. It will apply in respect of advice provided in the year to 30 September 2016 and there are exclusions. A useful exclusion for advisers covers the situation where all the adviser has done is prepare tax returns disclosing offshore income. Letters need to be sent by 31 August 2017 but advisers need to start working out which clients they need to contact, if they have not already done so.
Requirement to notify offshore structures
HMRC is consulting until 27 February 2017 on a proposed new legal requirement for intermediaries (both within and outside the UK) creating or promoting certain complex offshore financial arrangements to notify HMRC of the details and provide a list of clients using them. The measure aims to target arrangements which could easily be used for tax evasion purposes. It is proposed that the requirement should apply to arrangements in existence at 31 December 2016, rather than just new arrangements entered into after the new measure comes into force, in order to tie in with the start of CRS.
More tax is lost to onshore evasion or non-compliance than to offshore evasion and avoidance but it does not always attract the same level of public interest - for example a former minister for tax was vilified for making the very valid point about the scale of the tax loss from paying tradespeople in cash. Indeed, the largest single type of loss to the exchequer is from the 'hidden' economy - for instance those who fail to register for tax at all (known as 'ghosts') or fail to declare an entire source of income (known as 'moonlighters'). In 2014/15 (the latest figures available), 17 per cent of the tax gap (some £6.2bn) was estimated to be down to this type of non-compliance.
As with offshore evasion, HMRC has adopted a two pronged strategy to counteract domestic tax evasion. This 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.
Recent 'encouragement' initiatives involve HMRC targeting areas where they believe there may be non-compliance. In the past HMRC has focused on specific industries, eg plumbers, solicitors and doctors, but over the last year it has launched campaigns targeting specific types of income that may be relevant to the population more generally, such as buy-to-let rental income and income from second occupations. These initiatives enable a voluntary disclosure to be made of previously undeclared income and generally offer reduced penalties, compared to the position if it is HMRC that discovers the non-declared income.
A more controversial aspect of the strategy to encourage non-compliant people to come forward voluntarily has been the use of 'nudge' letters. These letters to taxpayers reminding them of their obligations are sometimes not copied to agents, such as one that was sent out just before Christmas to those who had declared interest income on their 2014-5 tax return asking them to check the figures returned. It was not clear from the contents of this standard letter whether it had been sent randomly or to specific individuals as a result of HMRC receiving different information from banks and building societies about the interest paid. Anecdotal evidence from tax advisers suggests that the letter worried some individuals who had, in fact, complied with their obligations.
Increased HMRC powers
In relation to the second prong of the strategy, there were three consultations last year on additional powers to clamp down on the hidden economy. One consultation proposed extending HMRC's data gathering powers to enable it to collect data from money services businesses (for instance businesses that provide money transmission, cheque cashing or currency exchange services). As part of the 'Fintech' revolution, more and more people are buying bank services outside the traditional bank supply lines and HMRC has had to respond to try to ensure that the 'shadow banking' sector cannot easily be used to hide sources of income or wealth.
Another consultation proposed making access to public sector licenses such as licences for private hire vehicles, environmental health, planning and property letting conditional on registering for tax. As an alternative the government is considering measures which will effectively give financial services companies an indirect role in policing the hidden economy, by making access to business services such as insurance and bank accounts conditional on proving that you are registered for tax.
The third consultation document proposed tougher sanctions for those involved in the hidden economy, including higher penalties for those who repeatedly fail to notify chargeability, additional tracking and enhanced monitoring of taxpayers with a history of non-compliance, and strengthening the penalty regime where an immigration offence is also committed.
In this high-technology age, HMRC has invested heavily to keep up. It has spent a very large sum of money on a database, called 'Connect'. All information is fed into this data trove and reviewed in order to inform HMRC's deployment of resource to meet onshore and offshore risks, as well as identifying specific instances of non-compliance. The flip side is that as the country moves away from using cash, the traditional channels for the hidden economy are closing. Tax evasion is as old as the hills, but one wonders whether it has met its match.
A crackdown on tax evasion is probably only just ahead of a crackdown on avoidance in the political popularity stakes. In the eyes of HMRC, aggressive avoidance is no more acceptable than evasion and shares the feature that (because of their overwhelming success rate in challenging avoidance) tax is legally due but unpaid. This perspective has justified a barrage of measures in recent years.
Penalties for enablers of avoidance
The most contentious measure is the suggested imposition of penalties on the 'supply chain' in avoidance – not just the designers and promoters, but those who provide advice and who sell the arrangements to others.
A first consultation drew gasps from among the tax industry as it suggested penalties would be applied to any bank or adviser whose client was successfully challenged under, among other things, a targeted anti-avoidance rule. The penalty would be up to 100 per cent of the tax due from the client.
Thankfully HMRC listened to stakeholders' concerns about the breadth of the proposals and the draft legislation for inclusion in Finance Bill 2017 provides that the measure will only apply to 'abusive arrangements'. This uses the 'double reasonableness' test used for the general anti-abuse rule (GAAR) – arrangements which cannot reasonably be regarded as a reasonable course of action having regard to all the circumstances. The penalty will be capped at the fee received by the adviser/intermediary. It is proposed that the new rules will apply to activity taking place after Royal Assent is given to the 2017 Finance Bill.
Serial tax avoiders
A new 'serial tax avoiders' regime has been in force since 15 September 2016. It applies where a tax avoidance scheme is 'defeated' (either by the decision of a tribunal or court or by settlement with HMRC). Anyone who has participated in a scheme on or after 15 September 2016 can be issued with a warning notice which lasts for five years and imposes an annual obligation to notify HMRC of further schemes used, with enhanced penalties, possible 'naming and shaming' and restriction of access to tax reliefs if any schemes used within the period are defeated. A warning notice can be issued to those who entered into schemes before 15 September 2016 which are defeated on or after 6 April 2017, but then only the annual notification requirements apply and not the other sanctions.
Tied in with international measures and the fight against tax evasion and avoidance we have also seen a number of measures to increase transparency. These include the requirement since April 2016 for certain UK companies and LLPs to formally identify and keep a register of 'persons with significant control' over them and to provide this information to Companies House at least annually. There are also proposals for a register of people controlling non-UK companies owning UK real estate as well as a register of settlors and beneficiaries of trusts which generate UK tax consequences. Further details are expected this year.
Large businesses will also be required to publish their tax strategy online. This will include details of their attitude to tax planning and their appetite for risk. Country-by-Country Reporting, under which large companies have to formally break down where they make profits and where they pay tax, will also go live in 2017.
Clause 95 of the Finance Bill 2017 provides for a new penalty which will apply to anyone found to have claimed input tax on a transaction which they 'knew or should have known' was connected with a VAT fraud (the input tax claim thus being bad in law). HMRC say that the current VAT penalty regime (which identifies careless or deliberate errors) requires HMRC to specify whether they are alleging one or the other of actual and constructive knowledge for the purposes of the penalty, whereas they do not need to make this distinction for the legal test in respect of the tax itself. Under this new fixed 30 per cent penalty, liability is engaged irrespective of the type of knowledge. The penalty cannot be reduced for co-operation with HMRC and company officers can be personally liable.
Tax Avoidance Disclosure Regimes for Indirect Taxes and Inheritance Tax
The Government will revise the VAT avoidance disclosure regime (VADR) and widen it to cover other indirect taxes from September 2017. Among the proposals is to move the principal obligation to report schemes from VAT-registered businesses to scheme promoters and align the penalties for non-compliance with VADR obligations with those chargeable under DOTAS. The Government insists that it will reduce burdens as the focus for compliance shifts from all taxpayers to a much smaller number of promoters. HMRC plans to introduce a wider disclosure mechanism applicable to all IHT arrangements that are contrived or abnormal, or which contain contrived or abnormal steps. More details are to be included in the regulations.
Although the pace of change has already been very rapid, a significant number of the measures outlined above are due to take effect in 2017. This will give HMRC considerably more fire power in its battle against tax evasion and avoidance. 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.