In early December 2016, HMRC launched a consultation on a proposed new legal requirement that intermediaries creating or promoting certain complex offshore financial arrangements notify HMRC of their creation.
As well as requiring businesses that create or promote these arrangements to notify HMRC in this way, these businesses would also have to provide a list of clients using them. Clients would be expected to notify HMRC of their involvement via a notification number on their personal tax account.
HMRC acknowledges that the government has already introduced a range of measures to toughen the sanctions for those involved in offshore tax evasion, including a new criminal offence for tax evasion, increased civil sanctions for offshore tax evaders and new civil sanctions for those who enable offshore tax evasion in the Finance Act 2016.
However, it observes that a single enabler (such as an accountant, law firm, adviser or wealth manager) may support a number of individuals in evading tax and that tackling these enablers will provide an additional tool to take on offshore tax evasion on a “one to many” basis.
John Shuker, deputy director of HMRC’s Centre for Offshore Evasion Strategy, says the consultation should be seen in the context of its wider offshore evasion strategy.
“Sanctions for helping other people evade tax that came into effect from the start of this year are part of the process of getting tougher on tax evaders and those who help them,” he says. “Improvements in international tax transparency have assisted this process – if people don’t come forward, in future we will be better able to detect them.”
The key message for tax advisers is that this is a final opportunity to correct any errors in offshore tax before significantly tougher penalties (minimum 100% of the tax owed) are introduced in October 2018, adds HMRC Centre for Offshore Evasion Strategy policy officer, Steve Manning.
“Part of the challenge with Requirement to Correct is to ensure that individuals and their representatives are aware of this window of opportunity to put matters right before penalties increase,” he says. “It is also designed to encourage more regular, proactive ‘health checks’ of offshore tax management even for those who are fairly confident that their affairs are in order.
“It is in the interests of clients to recommend a review for those who might have received advice in the past but not updated it for a few years.”
Shuker accepts that the notification of information to HMRC would be an additional requirement for advisers who designed such structures. “However, we are not suggesting that everyone who uses an overseas structure is evading tax. It is about greater tax transparency, making people aware that these structures can be used for wrongdoing and whether we should be notified of their use.”
He also stresses that the notification measure being consulted on would be carefully targeted at those structures most likely to be used for evasion rather than the whole range of structures that might be used by clients.
I cannot see that it is in the interests of the UK either to turn away overseas investment or to discourage non-residents from using UK advisers (CBW London tax consultant Robert Maas)
The proposed rules would apply regardless of where the adviser is based, although this is another issue HMRC hopes to get industry feedback on.
“Once we have considered the responses it will be up to the minister to decide the next steps,” adds Shuker. “If the minister decided to proceed with legislation there would be at least one more round of consultation to ensure the rules were proportionate.”
According to HMRC, its requirement that businesses creating or promoting specified offshore arrangements must notify it of the arrangement and the clients using it would increase transparency, allowing HMRC to improve its ability to assess risk.
Tax advisers in the UK have expressed concern about the implications for their business as well as the efficacy of the proposed measures, though.
“HMRC refers to provisions applicable to both onshore and offshore tax evasion,” explains ICAEW head of tax, Frank Haskew. “However, I would suspect the vast majority of this activity is being run offshore. Enforceability is an issue for any provision.”
While recognising the difficulties faced by HMRC, Haskew cautions against the imposition of additional regulations on tax advisers. “We support reasonable measures to tackle tax evasion and appreciate the policy purpose behind the proposals. But it is important any measures are effective against those engaged in such activity and do not merely add a further compliance burden on reputable advisers.”
He observes that more rules will not necessarily address the problem and suggests that greater clarity on existing rules – such as money laundering legislation that requires reporting of criminal activity through the Serious Organised Crime Agency – might be a more beneficial approach.
“Deterrents such as the General Anti-Abuse Rule (GAAR) are helpful,” he says. “They deter practitioners who are determined to flout the rules. However, it remains to be seen whether these provisions will be effective against those who are determined to flout the rules.”
Haskew accepts that there might be some value in new legislation if it enabled tax advisers who were accused of fraudulent activity to prove they were not breaking the law, although he also stresses the importance of creating “clear blue water” between the vast majority of compliant advisers and those who facilitate tax evasion.
“HMRC relies on the support of compliant tax advisers to make the system work and it would be helpful if protections were built in for the majority who adhere to strict codes of conduct,” he adds.
John Cassidy, partner at Crowe Clark Whitehill and deputy chairman of ICAEW’s Tax Faculty Enquiries and Appeals Committee, says advisers require greater clarity on the types of activities the proposal is designed to catch and don’t want to be in a situation where any time they are doing any kind of offshore planning for any client, they face an added disclosure burden.
“What we saw in the early days of the Disclosure of Tax Avoidance Schemes (DOTAS) legislation was that many promoters of schemes made disclosures as protective measures just in case they were challenged by HMRC,” he observes. “Years later we have accelerated payment notices being issued on the back of those schemes being DOTAS-notified when maybe they shouldn’t have been and some have been withdrawn because they shouldn’t have been notified.”
Cassidy also warns that an overload of information will be of no benefit to HMRC. This is a view shared by CBW London tax consultant and chairman of the Enquiries and Appeals Committee, Robert Maas, a fellow of ICAEW who describes the proposals as akin to deploying a very large sledgehammer to crack a fairly tiny nut. “I very much doubt that many people set up complex structures to seek to evade tax – there are much easier and cheaper ways of doing this,” suggests Maas. “The main effect is likely to be not on those who are seeking to evade tax, but on those who are seeking to avoid it. My worry would be that HMRC would seek to use the information provided to it to seek to combat avoidance far more than to seek to combat evasion.”
He says that since he is confident that any structures he uses would withstand HMRC’s scrutiny, the worry is that any client who uses an overseas structure would make himself or herself a target of an HMRC investigation into their overall tax affairs. “This would be very costly to the client and would divert HMRC resources that are better used for other things into fishing for red herrings in a worldwide financial pond.”
Maas observes that he sets up overseas structures for only two categories of people – non-UK residents wishing to invest in the UK (either in UK property or to create a UK business) and UK residents who are non-UK domiciled and entitled to use the remittance basis of taxation. “There is no point in setting up an offshore structure for other UK residents because the UK anti-avoidance provisions are widely drawn and likely to effectively counter the supposed benefits of such a structure.”
As the number of UK resident non-doms who are entitled to use the remittance basis reduces significantly from 6 April 2017, the main effect is likely to be on non-residents. Maas reckons that if the proposals were enacted, they would scare non-residents off using a UK adviser and possibly from investing in the UK.
“Ethically I would need to tell the client when I took them on of the obligation to notify HMRC,” he concludes. “I cannot see that it is in the interests of the UK either to turn away overseas investment or to discourage non-residents from using UK advisers,” says Maas.