Tackling offshore tax evasion
The measure
The Government has published proposals aimed at counteracting offshore tax evasion. HMRC has already obtained significant data on offshore accounts, largely thanks to the information notices it has served on banks. The proposals introduce new penalties and disclosure requirements.
A specific penalty for tax evasion linked to assets held offshore is proposed, so that any such non-compliance attracts a penalty at the same level as domestic tax evasion. The penalty framework will be changed to charge a new separate penalty, on the same scale as deliberate non-compliance.
It is proposed that taxpayers are required to notify the opening of overseas bank accounts to HMRC. Notification would be required within 60 days of the offshore bank account being opened. A complete overseas account notification would also include some indication of the source of the funds deposited in the account.
The proposal would be subject to HMRC's classification of the tax transparency of the jurisdiction concerned. All new offshore bank accounts in jurisdictions without information exchange with the UK would be notifiable. Accounts in some other jurisdictions would be notifiable if the balance in the account was over £25,000.
The proposed new notification requirement would be supported by a new penalty, to be assessed independently of (and therefore potentially in addition to) any penalty due for offshore non compliance.
Those who fail to declare an account would face both: tax geared penalties for failing to declare any tax liability linked to the account; and tax geared penalties for failing to disclose the account. This could lead to a total penalty in excess of the tax due.
Who will be affected?
The new notification requirement will only apply to individual taxpayers.
HMRC proposes that the accounts notification requirement will not apply to those
who are non-UK domiciled and who use the remittance basis. However, where an
individual chooses to be taxed on the arising basis, they will be subject to the
requirements.
There are additional new reporting proposals for offshore trusts, including a
requirement for UK resident settlors to notify HMRC of transfer values into
non-resident trusts or subsidiary companies of such trusts.
When?
The Government's intention is that these new penalties would apply for tax periods commencing from 1 April 2011.
For periods between April 2009 and April 2011, where undeclared offshore income or gains are identified, HMRC would seek penalties on the basis that the non-compliance is deliberate.
For periods prior to April 2009, HMRC will view non-compliance involving an offshore element as conduct of the utmost gravity and will seek corresponding penalties. The maximum penalty prior to the introduction of the new Finance Act 2007 penalties is 100%.
The toughening of the penalty regime for tax evasion associated with offshore bank accounts is closely linked with HMRC's New Disclosure Opportunity which is aimed at inducing disclosures of tax evasion. Registration for this closes on 4th January 2010.
It will be interesting to see whether HMRC restricts the application of this proposal to tax evasion linked with offshore bank accounts, or whether it seeks to apply it more broadly to tax evasion linked with offshore assets.
Requiring the disclosure of overseas bank accounts is not a novel concept. Other countries already have similar requirements in place. For instance, the United States requires taxpayers, including corporations, to file an annual return of offshore bank accounts. France requires a form to be filed alongside the annual tax return declaring all foreign accounts opened or used during the year.
At present, only those countries which have fully implemented the European Savings Directive operate automatic exchange of information with the UK. It appears that the notification requirements will impact more heavily on those individuals that bank in other jurisdictions.
