Tackling offshore tax evasion
There will be increased penalties for individuals who fail to pay taxes due on
offshore income or gains, with penalties of up to 200% of tax for deliberate and
concealed tax evasion. This represents a doubling of the existing maximum
penalty. The tax geared penalties that can arise for inaccurate tax returns,
failure to notify tax liabilities and failure to submit tax returns will all be
The level of the maximum penalty will be determined by the level of information exchange between the overseas country and the UK. The government will list which territories are in each category in secondary legislation;
- Where there is automatic information exchange (as, for example, under the European Savings Directive) the increased penalties will not apply;
- Where there is information exchange on request, the new maximum penalty will be 1½ times the existing limit of 100% of the tax;
- Where the non-compliance arises in a jurisdiction which has not agreed to exchange information with the UK, the penalty will be double the existing limit of 100% of the tax.
A forthcoming consultation on possible information requirements and disclosure obligations regarding offshore assets was also announced
Who will be affected?
The new penalty regime will apply to income tax and capital gains tax. It will affect individuals and businesses with offshore assets that fail to declare the full extent of their tax liabilities.
It is expected that the new penalty regime will apply to tax periods commencing on or after 1 April 2011.
Proposals to tackle offshore evasion were the subject of a consultation document
published in December 2009. The Budget proposals reflect the Government's
acknowledgement of the responses received since then, which were also published
today. The Government's acknowledgement that there should be no additional
reporting requirements for overseas bank accounts is to be welcomed, as is the
acknowledgement that not all taxpayer errors will be treated as being
The Government is continuing to target tax evasion associated with UK taxpayers holding undeclared assets offshore. In this, the UK is in line with all of the major economies which are counteracting tax leakage by a combination of information exchange and new reporting requirements. The UK approach is to incentivise early disclosure by offering reduced penalties and partial amnesties such as the Liechtenstein Disclosure Facility, which will run until 2015, with the corresponding risk of increased penalties becoming increasingly evident.
We are waiting for the detail of the proposed legislation, particularly on how the penalties will be applied in practice where there are both UK and overseas tax failures.