Worldwide Disclosure Facility – Last Chance to Disclose?

HMRC have announced the Worldwide Disclosure Facility (WDF) the latest in a long line of disclosure facilities designed to encourage taxpayers to come forward to disclose previously unreported offshore tax liabilities.

Unlike its predecessors, the WDF does not offer any favourable terms, other than the fact that HMRC state that where the disclosure is correct and complete and the taxpayer fully co-operates by supplying any further information they ask for to check the disclosure, they’ll not seek to impose a ‘higher penalty’, except in specific circumstances (e.g. where the taxpayer was already under enquiry) and they will also agree not to publish details of the disclosure. This last ‘benefit’ may appeal to higher profile individuals who may prefer to remain anonymous in their previous failures.

This is a marked difference to previous disclosure facilities that offered much reduced penalties (such as the 10% rate offered by the Liechtenstein Disclosure Facility) and guarantees against prosecution.

The WDF is targeted as a ‘last chance’ by HMRC before even more strict penalties come into force, as well as their claims that automatic exchange and data from the Organisation for Economic Co-operation and Development Common Reporting Standard (CRS) will then be available.

After 30 September 2018, new sanctions will be introduced that reflect HMRC’s “toughening approach”. They state that you will still be able to make a disclosure after that date “but those new terms will not be as good as those currently available”.

Previous experiences suggest that making a disclosure under one of HMRC’s facilities is usually a more streamlined process compared to simply writing to HMRC.

Eaves and Co would be very happy to discuss matters if you are concerned that you or your clients may have an undisclosed offshore liability, suitable for the Worldwide Disclosure Facility. We have extensive experience of making disclosures under previous facilities that HMRC have offered.

VAT Penalty Reduced – J & W Brown

A recent case concerned penalties that arose on a taxpayer due to a technicality. The taxpayer had run a business as a VAT registered sole trader. He brought his son in as a business partner, which was therefore technically a transfer to a partnership and a transfer of a going concern (TOGC) for VAT purposes.

The taxpayer did not realise this and did not notify HMRC until around 2 years later. However, he continued to submit his sole trader VAT returns and pay the tax due through this period. Two of the returns in the period were submitted late.

HMRC therefore sought penalties for late registration by the new partnership of more than 12 months and charged an 18% penalty. They did, however mitigate this by 70% as the VAT returns and tax were submitted through the sole trader registration and there was therefore no loss of tax.

The First-tier Tribunal felt that as the error was a technicality and that there had been no loss or administrative inconvenience to HMRC, the penalty should be reduced by 90% instead and lowered the 18% penalty to 12.5%. They also noted that the taxpayer had made a voluntary disclosure and that HMRC’s protracted case management had been inappropriate, causing “significant inconvenience and expense’” to the taxpayer

Overall the penalty was reduced from £582 to £100 and so the taxpayer’s appeal was allowed in part.

This case shows the continued firm approach that HMRC appear to be taking with penalties for minor mistakes. However, the Tribunals continue to provide a safety net to taxpayers and the comments of the Tribunal showed the importance of taking the first steps and making voluntary disclosure before HMRC find the error. If you would like assistance with making a disclosure or have any concerns about past transactions, please get in touch with us as we would be delighted to assist.

Farce: Manchester United and HM Treasury

Hello,

1)      Sorry for the informality of the greeting but if you were doing a training exercise on fake bombs and security, would you not (at least) count up the number of imitations you had hidden – and then count them back in to avoid scaring/annoying 75,000 people?  See Manchester United and fake security issue?

2)      Secondly, if you were trying to convey ‘good news’ about the ‘initiative to automatically exchange information on beneficial ownership’ (See HM Treasury Press Release), there may be ‘marginal’ concern about the absence of countries [on HM Treasury List dated 13 May 2016] such as China, Russia and the USA (for example)

3)      Thirdly, by definition, dishonest people are going to tell lies, especially if they can get away with it.  Hence, how (for example) is a relatively poor country (say the UK (?)) going to enforce disclosure?

Offshore Update – HMRC Clamp Down and Starbucks EU Tax Case

HMRC have recently purchased advertising pointing out that offshore income and gains may be taxable in the UK. This is true. In general, for UK domiciled residents, all worldwide income and gains are taxable (even where you reinvested the proceeds and did not remit them to the UK). For non-residents, UK source income may be taxable.

This is where it gets complicated (as if it was not before!). Like many other matters in the international tax world, circumstances can alter cases . Domicile, double tax treaties and all the new statutory residence test may all have an impact.

If you have offshore assets, review them now, before HMRC really clamp down next tax year. If in doubt, seek tax expert advice.

In an interesting twist to the European Question, the EU authorities have just issued a decision on the advance tax ruling given to Starbucks by the Dutch Revenue, helping Starbucks avoid tax in other jurisdictions. This was done by Starbucks having higher tax deductible costs with a lower tax rate in the Netherlands, thus meaning there was only immaterial profit in countries such as the UK, so minimal UK corporation tax. The EU Authorities feel this amounted to illegal State Aid, such that Starbucks should be enforced to repay it in full.

The political question is whether this is:

a) A good example to tax abuse by multinational corporations?

b) An unacceptable interference in Dutch sovereignty because tax is not supposed to be controlled at EU level?

Is that the smell of coffee or the protagonists’ lawyer preparing their morning shot of napalm?

Discovery Allowed by Tribunal – N Pattullo v HMRC

The question of what constitutes a discovery remains an area of ambiguity, although recent cases tended to have sided with HMRC’s view that virtually anything can be considered a discovery.

A further recent case was heard on the subject in N Pattullo v HMRC (TC03958), although the decision in the case is unlikely to be too controversial or unexpected, especially considering the case involved an avoidance scheme.  In the current climate, the courts are tending to be reluctant to favour taxpayers in cases where they have used an avoidance scheme.

Mr Pattullo participated in a scheme which generated capital losses of around £2.6m which he reported on his 2003/04 tax return.  HMRC concluded that he had participated in an avoidance scheme and issued a notice under TMA 1970, s.20(1) requesting relevant documents.  The taxpayer did not comply with this request and instead sought a judicial review to revoke the notice, but this request was dismissed by the Court of Session in 2009.

In the meantime, the Court of Appeal had found in favour of HMRC in the case of J Drummond v CRC (2009) which involved a similar second-hand insurance policy scheme.  Therefore, HMRC raised a discovery assessment for £835.400 as they were now satisfied that his original return was incorrect.

The taxpayer appealed, arguing that there had been no discovery as no new information had come to light.  The Tribunal found that the decision in Drummond v CRC constituted a discovery as it converted a “suspicion” of an underpayment of tax into a “positive view”.  It was doubtful that a hypothetical officer would have been aware of these avoidance schemes before the Drummond case was heard.

The taxpayer made a final attempt to protect his position by arguing that the grounds of his appeal should be amended to argue that the original avoidance scheme actually worked.  This was again dismissed by the tribunal who felt that, bearing in mind there were a number of appeals on similar schemes to Drummond pending, he was trying to jump on a “bandwagon” allowing other taxpayers to argue his case for him.  They felt the amendment was too vague and dismissed the appeal.

The final decision will likely not be a surprise to many, but does highlight the current attitude of the courts to the use of such avoidance schemes, and the wide definition of “discovery” that HMRC are using.

New HMRC Proposals to Target Offshore Tax Evasion

HMRC have announced that they intend to introduce a new powers making it easier for them to prosecute failure to declare untaxed offshore assets.

At present, HMRC need to prove that individuals who have undeclared offshore income has intent to evade tax, in order for a criminal conviction to be successful.

Under the proposed new plans, HMRC would only have to show that the income was taxable and undeclared.  A consultation will be published but the plans have not progressed this far yet.

These new proposals continue the recent trend to come down hard on offshore tax evasion and mean that anyone with undeclared offshore assets would be at risk of criminal prosecution.  Affected individuals may wish to consider using one of the numerous offshore disclosure facilities currently available, before it is too late.

Eaves and Co have assisted with numerous offshore disclosures and would be happy to help if you have concerns.

Employer-Financed Retirement Benefit Schemes (EFRBS) Settlement Opportunity

HMRC Offer EFRBS Settlement Opportunity

HMRC are giving employers the chance to settle open enquiries into the use of employer-financed retirement benefit schemes (EFRBS).

The settlement opportunity applies to contributions made by employers on or after 6 April 2006 and before 6 April 2011.

HMRC are of the belief that such arrangements do not work and therefore the settlements will avoid the need to take part in potentially costly litigation, thus benefiting both sides.

Firms will have until 31 December 2013 to enter into an agreement with HMRC.

Two Options Available

They will then be required to choose one of the following two options offered by HMRC:

i) No Corporation Tax deduction can be claimed on contributions to an EFRBS until the relevant benefits are paid out by the scheme, HMRC also expect PAYE and NICs will be due when they are paid out or

ii) A Corporation Tax deduction can be claimed when contributions are made to the EFRBS.  However, when those contributions are made they will be subject to PAYE and National Insurance contributions.

If an employer chooses to settle with HMRC by choosing one of these options they will have until 30 June 2014 to finalise the arrangement.

Interest & Penalties

Under option 1 interest will run from 9 months and 1 day from the end of the accounting period for which the additional amounts are due.

Under option 2 interest will run from 19 April following the end of the tax year in which allocations were made to the date the PAYE Income Tax and NIC is paid to HMRC.

HMRC have said that they will only seek penalties regarding any tax due in exceptional circumstances. However this is caveated by saying that every case will turn on its own facts.

Net Closing In as Guernsey and Jersey Sign Automatic Information Exchange Agreements

Guernsey and Jersey signed Automatic Information Exchange Agreements with the UK on the 22 October 2013 – the ‘UK-Guernsey Agreement to Improve International Tax Compliance’ and the ‘UK-Jersey Agreement to Improve International Tax Compliance’.  This means transparency between the tax authorities will be higher, and taxpayers trying to hide funds offshore will find that details are sent to HMRC.

The new agreements mean that all the Crown Dependencies have now entered into automatic tax information exchange agreements with the UK, with the Isle of Man having signed on 10 October 2013.

The net is closing in on taxpayers trying to evade tax, but for those wanting to come forward, beneficial disclosure regimes are still in operation in the Isle of Man, Guernsey and Jersey, as well as the on-going Liechtenstein Disclosure Facility.

Eaves and Co have assisted a number of clients with making disclosures of offshore income to HMRC and would be happy to hear from anyone wishing to come forward under these schemes.

‘Raising the Stakes on Tax Avoidance’ – A Response

For those of you who failed to find the exciting Government Consultation Document, ‘Raising the Stakes on Tax Avoidance’.  It is a fluffy, woolly document which proposes that the HMRC should have discretion to label someone as a “High Risk Tax Provider” [of Tax Avoidance] and then fine them up to £1m (plus £10,000 per day) for … well read and find out.

I am sure HMRC may mean well, but surely this is not the answer?  It is extra resources they need not new powers?

Anyway, for those now champing at the bit, here is my submission to HMRC on the Consultation.

“Please accept this as a formal response to the Consultation Document “Raising the stakes on tax avoidance.

SUMMARY

In my opinion the approach suggested is:-

a)     Wrongheaded.

b)    Risks bullying, corruption and, in the longer term, a reduction, rather than increase in tax compliance.

c)     Is an abuse of Parliamentary process, because (according to HMRC figures in Section 8 of the Document) the estimate is that there are only 20 businesses who may be affected.  Such as issue could and should be dealt with under existing powers.

d)    It risks undermining the Rule of Law, because it proposes severe sanctions (including £1m initial fine plus £10,000 per day subsequent fines) with the penalties being imposed on woolly, ill-defined criteria which are ultimately at the whim of State dictat.  This is particularly a concern because none of the alleged criteria require there to be any criminal behaviour on behalf of the so called ‘high risk promoter’.  Fines of such a size would ruin most individuals – taking their families down with them.  How can such penalties be compatible in human rights or any version of equity with recent lenient policies on penalties for theft and burglary?  Those activities are illegal.  On the other hand tax avoidance is generally thought to be legal. [Collins Dictionary 1995: tax avoidance n. reduction of tax liability by lawful methods].  How can it be appropriate to punish someone for obeying the law to a greater extent that the sanction chosen by the state for illegal attacks on an individual citizen’s property?

QUESTIONS

I           Identifying a ‘high risk promoter’.

  1. Question I incorporates a value judgement and states (in 3.16) that ‘the lack of flexibility leads to the conclusion that this would not be workable, consequently the Government does not intend to adopt this approach’.

I agree the lack of flexibility represents a problem, especially as common professional advice is (in relevant situations) to request HMRC use formal powers, so as to avoid the risk of the client suing the advisor for breach of confidentiality.  However, to then make it down to the whim of a Revenue Official whether a law abiding citizen and his/her family could be financially ruined is totally unreasonable.

  1. The ‘key individual’ concept is especially iniquitous as it could effectively lead to a person being unemployable in their field of training without having committed any crime whatsoever.
  2. Whilst the consultative document uses the currently fashionable term ‘transparent’, this does not take account of:-

a)     The risk that the client may not be truthful to the advisor, so what looks like a reasonable assumption/conclusion to him may not tie in with all the facts – especially events occurring after his input.

b)    The fact that any commentary on planning must, by definition incorporate assumption on future events.

  1. A key risk of a taxpayer using an avoidance scheme is that it does not work.  It is the role of HMRC to identify such schemes and challenge them.  If they are quickly shown to fail taxpayers will not waste money on purchasing them!  I agree they should be diligent and do this.  They need extra resources, not extra theoretical powers
  2. If (Para 3.6) the schemes have negligible chance of working and rely on ‘concealment and mis-description of elements’ then surely they are fraudulent, representing illegal tax evasion.  This is not avoidance and should be subject to separate penalties/criminal sanctions.  However, HMRC does itself no favours, nor any to the debate on tax compliance to mix up, as it seems to deliberately, lawful and unlawful behaviour.
  3. I agree that taxpayers should have the right to see the pros and cons of technical advice and if necessary, the right to show that to different advisors.  Advisors (and HMRC) should then be obliged to debate the merits of any technical issue in a reasonable timescale in full light of the facts properly disclosed.  Similarly though the client should be entitled to claim professional privilege in terms of the advice elements.

 I am conscious in this context that when asking for data under the Freedom of Information Act I was told that keeping the advice of legal counsel secret was vital to the administration of justice and good governance.  If a taxpayer is not allowed to see the advice given to public servants he has effectively paid for via taxation in the context of a ‘consultative document’, why should the State have the right to see advice given to him  specifically with regard to his own affairs, to his possible prejudice?

  1. Although penalties are proposed for doing ‘it’, tax avoidance is not even defined here.  However, readers considering the current provisions should recognise that the recent comments by Jamie Oliver promoting home made healthy food, would (under the last published HMRC definition of tax avoidance) amount to ‘tax avoidance’.  This is because he was promoting zero rated food purchases rather than take away food liable to VAT at 20%.

II          High risk promoter regime

  1. Without identifying a proper definition of High Risk Promoter and Tax Avoidance it is totally inappropriate to have a ‘regime’ at all.
  2. A better route may be to consider HMRC ‘endorsing’ professional advice by advertising those regulated by ICAEW, CIOT, ACCA etc., are subject to proper professional standards and then naming those who failed to live up to it – within the normal and limited restrictions imposed by libel and defamation.  It would only seem fair that a business so challenged should have access to those standard defences.
  3. There should be no need for extra time limits.  If the time limits are not long enough then that should be addressed generally.  HMRC needs sufficient resources generally to carry on, but that compliance effort should be targeted widely and fairly.  By all means focus sensibly on perceived targets and risk areas.  It is sensible.  However, all should be equal before the law and it is not just this week’s ‘Group Hate’ Victim.  Others may turn out to be equally naughty.

III         Penalties for Users of Failed Schemes

  1. My experience both as an advisor and Inspector of Taxes is that people do not like the risk of litigation, let alone the consequences of losing.  If a judicial decision goes against them, or their technical stance most well advised litigants will be only too willing to drop the case and ‘amend’ their returns.  I would therefore be surprised if there was evidence that taxpayers were simply ‘stringing things out’, because of the resulting high professional cost to them.
  2. It follows that the risks of failure with costs being awarded against them are already a dis-incentive to taxpayers, in which case there should be no requirement for a ‘penalty’.  This would just seem to be an arbitrary risk to be imposed by HMRC for going second, enabling them to bully taxpayers into settling where in law they may have valid distinguishing features.

CONCLUSION

I used the words ‘wrongheaded’ to describe the proposals.  In my view this is because it is seeking statutory measures to try to solve a problem of resources.  HMRC does not need more powers, it needs the personnel, resources and training to impose the powers it already has.

In the 17th Century Governments chased lawless behaviour by imposing greater and greater sentences on people without really addressing the probability of being caught.  It resulted in the saying that someone ‘might as well be hung for a sheep as a lamb’, because the sentences got so arbitrary that sheep stealing was a capital offence.  Tax compliance is a delicate flower.  It has been nurtured over time by HMRC fairness and the associated co-operation resulting from qualified professionals.  It is never going to be perfect, but generally I believe the profession wishes to continue to help by encouraging good compliance.  However, this will not happen if they are bullied out of explaining reliefs and the ‘upside’ of compliance.  That is another way of interpreting the tendency for professionals to avoid giving tax advice.

I think it unlikely there would be a change of behaviour by diligent professionals.  It will follow the financial services advice model of 20 years ago, where independent professionals will be excluded with the result that clients will go to the unscrupulous.  Reality in the commercial world being as it is, I fear clients would be likely to refuse to pay fees to learn what they are not allowed to do, without associated sensible advice on what they may do lawfully.

Whilst I still have admiration for many HMRC staff, the fact remains it has suffered and is suffering from a lack of trained staff, and people who are authorised to take decisions.  My colleague was on the phone for 1 hour this morning (without getting through) to ask why we were being threatened with penalties for ‘failing’ to file a form which has already been filed.  Currently, I have more than 1 case where we have written to HMRC to try to pay extra tax due but have been ignored or fobbed off for over a year.  Give HMRC the resources to do their job properly.  Do not impose extra arbitrary penalties and lose the sympathy of the majority.  When HMRC think it ‘reasonable’ to seek penalties for a ‘late return’ when it was actually lodged 10 days early as they did recently [Estate of Teresa Rosenbaum (deceased) 2013].  I fear they risk moving the rather fickle mood of public opinion against them.  It is an example of a bullying bureaucratic mind set which promotes a natural fear that, if not now, at some stage in the future, the arbitrary powers envisaged by the Consultative Document may be misused – to the detriment of us all as free citizens supposedly equal under the law.

I recommend the provisions are abandoned.  Use the money to train some Inspectors.

Paul Eaves”