The arrangements originally came into force on 1 July 2017 and provided UK law enforcement agencies (including HMRC) involved in criminal investigations with fast access to beneficial ownership information for half a million corporate entities based offshore. The participating jurisdictions are the UK, Crown Dependencies and six Relevant Overseas Territories (Jersey, Guernsey, Isle of Man, Anguilla, Bermuda, BVI, Cayman Islands, Gibraltar and Turks & Caicos Islands).
The beneficial owner is defined as any natural person that ultimately owns or controls a corporate or legal entity through ownership of shares or voting rights or interests in the entity.
In the first 18-months, 296 requests were made and in all but four cases the information was exchanged within 24 hours. The report states that the information exchanged does not appear to have become public knowledge.
To demonstrate the effectiveness of the EoNs, the report provided several case studies, including an example where the National Crime Agency (NCA) used the powers for an Unexplained Wealth Order (UWO). The report states that the exchange of information enabled the investigators to confirm the beneficial ownership of a company holding high-value London property - and to satisfy the requirements of the UWO.
Several recommendations were made, including that all registers of beneficial ownership should be completed by the end of 2020. Significantly, HMRC highlighted that further benefits could be realised if the powers were extended to include civil tax cases and investigations into the beneficial ownership of trusts.
The extension of the powers to cover civil tax cases and investigations into the beneficial ownership of offshore trusts would provide HMRC with a legal gateway to gather information on UK taxpayers with overseas assets. Crucially, the exchange of information could take place before HMRC writes to the individual concerned to notify them of their enquiry. In fact, the report highlighted that HMRC is one of the agencies most often utilising EoNs. It begs the question whether any of the information has already been used in a civil enquiry or investigation?
HMRC’s powers to gather information offshore continue to grow and the problem now faced is how to utilise the information at their disposal rather than how to gain access to information that, until 5-years ago, was beyond their reach. If it is agreed by the participating jurisdictions to grant HMRC access to the EoNs for civil cases this would lead to a significantly higher number of requests and put pressure on the Crown Dependencies and six British Overseas Territories to comply within the 24-hour timeframe. There would need to be HMRC safeguards to ensure that the powers are used sensibly and reasonably.
A balance needs to be struck between protecting the economic wellbeing of the UK and the right to privacy - as investigations of this nature are time consuming, disruptive and costly. Offshore structures have traditionally been set up by individuals that may only wish to remain in the UK temporarily. They may understandably not wish to move all their assets to the UK or would prefer to keep details of their wealth private. Alternatively, there are often commercial reasons for setting up an offshore corporate entity. There is most likely no intention to disguise ownership of their worldwide assets from the relevant tax authorities.
The difficulty with HMRC gaining access to this type of information is that there is no requirement in a civil tax enquiry for HMRC to disclose the information that they hold. The HMRC investigators are perfectly aware that they might only be told about the corporate or legal entity that has been asked for or disclosed through clenched teeth - and not about all the other offshore assets or interests the individual holds. The dilemma is often how to protect the client’s privacy while ensuring that HMRC are comfortable that a full disclosure has been made.
There have been situations where HMRC have found out about an individual’s offshore interests and used their powers to investigate suspected tax evasion. While this might be appropriate in the most serious of cases, is this approach proportionate to the risk? Does the potential extension of the EoNs powers to civil tax cases mean that more individuals face the risk of being investigated for suspected tax fraud, or will HMRC take a more balanced view and use their normal enquiry powers to investigate the tax affairs of the individual?
John Hood is a tax partner and leads the Tax Dispute Resolution team at Kingston Smith LLP.