HER MAJESTY’S Revenue & Customs – HMRC are the new initials for the Inland Revenue – appear to believe that there are tens of thousands of UK taxpayers who have offshore bank accounts and assets which are undisclosed. It has led to the creation of the Offshore Fraud Projects Team (OFPT), focussed entirely on looking for offshore assets.
In February 2003, the National Audit Office published a report entitled Tackling Fraud against the Inland Revenue. It stated that offshore accounts and structures are used to commit substantial tax fraud.
As a result, the OFPT was created and HMRC are spending £66 million over three years to raise additional revenue, they believe, of at least £1.6 billion. One of the key objectives is to identify offshore bank accounts and structures to which they have no prior knowledge.
Approximately 50 investigators are apparently assigned to the project, including financial analysts.
There are three main areas that are subject to their scrutiny:
1. Sundry parties’ accounts
There is a belief that undisclosed profits or income are paid into offshore accounts in order to hide them from the UK taxman. The OFPT is approaching UK banks for information in respect of customers for whom funds have been moved offshore using such accounts.
2. Debit & credit cards
Based on a similar exercise carried out in the US by the Internal Revenue Service, the OFPT is also gathering information about debit and credit cards held by UK residents, where the credit card bills are sent to an offshore address for settlement and paid from an offshore bank account. They intend to identify offshore accounts and structures that were previously unknown.
3. Inheritance taxes
They wish to identify offshore structures that were previously unknown to them where assets are hidden in Trust, or similar structures, to evade UK inheritance tax. The assets might also represent undisclosed profits, income or gains. They also want to establish whether distributions from offshore Trusts to UK resident settlors and beneficiaries have been reported in their tax returns.
The OFPT have been targeting financial institutions for relevant information and, indeed, in one case alone a container was needed to transport all of the information to the tax offices.
All this will result in thousands of UK taxpayers being investigated as a result of the information obtained and it will undoubtedly lead, in some cases, to prosecution. There is concern among many professional tax advisers that there is potential for investigations into the tax affairs of many individuals, who have legitimately used offshore structures to legally reduce their UK tax liabilities.
It is very important to understand the distinction between tax avoidance and tax evasion. Tax avoidance is taking steps within the law to legitimately reduce one’s tax liabilities. Tax evasion is avoiding tax by illegal means. Anybody who has strayed into the area of tax evasion would be advised to make unprompted voluntary disclosures at the earliest possible opportunity in order to secure immunity from any possible prosecution and to minimise the level of any tax geared penalties.
This project’s team is in addition to the various other ways, which the HMRC can obtain information on overseas tax matters. These include:
a) International exchanges
Exchanges of information with overseas tax authorities fall into three categories:
The latest figures published by HMRC show that there were more than 809,000 items of information received from other countries and over 210,000 items sent.
Automatic exchanges of information primarily consist of items collected from third parties (bank interest, dividends and commissions).
The UK – and all EU States – is bound by the Mutual Assistance Directive, adopted by the Council of the European Communities in 1977. The Directive requires Member States to exchange information in order to combat international tax evasion and avoidance, and was brought into UK law in 1978.
b) EU Savings Directive
On July 1, 2005 the EU Savings Directive came into force. This requires EU Member States to automatically exchange information on savings income paid cross-border to individuals resident in other Member States. The Directive also applies to income paid to certain entities such as Trusts or investment clubs.
Agreements have also been reached with various non-EU countries, including the British Virgin Islands, Guernsey, Jersey, Switzerland, Isle of Man and Liechtenstein, whereby a transitional withholding tax is applied. Certain other countries, such as Gibraltar, Cayman Islands, Anguilla, Montserrat and Aruba, have agreed that they will exchange information automatically.
c) Double taxation agreements
Double taxation agreements are another source of information for HMRC. The UK has agreements with more than 100 countries and they provide information to each other as and when requested.
d) Tax information exchange
These reciprocal agreements have also been signed between the UK and various territories, including Jersey, Guernsey, Isle of Man and British Virgin Islands. They are not full double taxation treaties, but rather simply mutual assistance exchange agreements.
e) Informers and informants
Undoubtedly one of the main sources of information for the HMRC are informers. They include former business partners, ex-employees, ex-spouses, neighbours and spurned lovers. HMRC will not disclose that information has been provided by an informer and they try to keep it secret.
f) Surveillance operations
Surveillance operations undertaken by HMRC must comply with the Regulation of Investigatory Powers Act 2000. Surveillance can have an international aspect and HMRC can enlist the assistance of overseas tax authorities.