RSS feedsWhere is the attack on offshore banking arrangements coming from?
Three years ago, the Inland Revenue set up the Offshore Fraud Project Group. Based in Bootle, the OFPG has built up a substantial amount of information from credit card issuers about customers with UK addresses, whose cards are associated with offshore bank accounts.
Is there anything wrong in having an offshore account?
Absolutely not. There is no suggestion from HM Revenue & Customs that offshore bank accounts are inextricably linked to tax evasion. However, if the account pays interest and the account holder is resident and domiciled in the UK then the interest must be declared on the UK tax return.
Does that mean that there is no problem for clients who are not domiciled in the UK?
If an individual is resident but not domiciled in the UK, and remits income to the UK, then there will be tax to pay on the remittances.
Is HMRC only interested in the interest arising on offshore bank accounts?
No. If interest that should have been declared has been omitted from a return, HMRC will investigate whether the funds in the account have been diverted from a taxable source in the UK without having been fully declared for tax purposes.
What has been happening recently?
In December 2005, a special commissioner granted the OFPG leave to serve notice on an unnamed bank requiring the bank to hand over details of customers (other than quoted companies) with UK addresses and credit cards linked to an offshore account.
Does this amount to a legalised fishing expedition?
The legislation in s20 TMA 1970 enables HMRC to serve a third-party information notice on an institution without naming the taxpayer to whom the notice relates. To do this, it needs the permission of a special commissioner, who will only give that permission if they are satisfied that: (i) the notice relates to a taxpayer whose identity is not known to HMRC or to a class of taxpayers whose individual identities are not so known; (ii) there are reasonable grounds for believing that the individuals concerned may have failed to comply with any provision of the Taxes Acts; (iii) any such failure is likely to lead to serious underpayment of tax; and (iv) the information requested is not readily available from another source.
How did HMRC convince the special commissioner that the conditions were satisfied?
OFPG prepared very thoroughly before making its application. It already had information about a number of customers of the bank concerned who had an offshore account – only a small proportion were declaring interest on their tax returns. Then it wrote to 500 such taxpayers inviting them to make disclosures if income had been omitted from returns. By the time HMRC made the application in late 2005, it was estimated that about half of the cases would give rise to additional tax. The estimated yield was £1.4m and many payments on account had been made.
HMRC estimated that, if it was given permission to proceed, the potential tax yield would be almost £350m. This was sufficient evidence to convince the special commissioner that there was a significant amount of tax at risk.
What developments have there been since December?
In February 2006, the OFPG made a further successful application for permission to serve notices on the same high street bank, and its private banking and trust company subsidiaries, requiring them to give details of customers, other than public limited companies, with a UK address and an offshore account. Without doubt, these are two of the most significant decisions, in relation to HMRC powers, handed down by an appellant body in the UK in recent years.
What are the implications of these decisions for clients?
HMRC will proceed with identical applications in relation to all financial institutions in the UK. Anyone who thinks they may have a problem should consider making an early approach to HMRC to make a disclosure.
How will HMRC deal with the cases arising?
AHMRC has already set up eight new offices nationwide to help deal with the anticipated influx of work.
Many of the cases will be dealt with under the new Civil Investigation of Fraud (CIF) procedure. Advisers who are not familiar with CIF should be aware that it is the same high-level investigation that is normally the prerogative of SCI. The investigations carry an inherent risk of prosecution should false statements be made in the course of the investigation and great care needs to be exercised in dealing with them.
Andrew Watt is director of tax investigations for Chiltern plc
