Guernsey: Indecent Disclosure? Evaluating The Channel Islands’ Disclosure Facilities

Last Updated: 23 July 2013
Article by Michael Adkins and Adrian Odell

With the signing of both the HMRC Guernsey Disclosure Facility (the "GDF") and HMRC Jersey Disclosure Facility (the "JDF") and the Isle of Man having put in place similar arrangements, all three crown dependencies have now entered into memoranda of understanding ("MoU") with HM Revenue & Customs ("HMRC"). This is the next and latest step in HMRC's "No Safe Havens" anti-tax avoidance/evasion strategy which is estimated to reap recoveries of up to £1 billion in the three crown dependencies alone. Of course, HMRC's efforts are a common theme across the on-shore world, as on-shore governments seek to shift at least part of the responsibility for the global downturn (or indeed the recovery from it) at the door of so called 'tax havens'.

What do they do?

Like the other HMRC disclosure facilities which have preceded them (i.e. with Switzerland and Liechtenstein), the basic premise of the GDF and JDF (which are substantially similar) is the carrot and stick approach.

First, the carrot is favourable treatment by HMRC if you "fess up" to having previously undeclared Channel Islands assets during the life of the facility. Then comes the stick, which is the significant prospect of investigation and prosecution by HMRC once automatic exchange of information comes into place in 2016.

For financial services businesses, the GDF and JDF also envisage a positive obligation to advise their "relevant" clients of the availabilities of the respective facilities both now and just prior to the closure of the facilities.

The Carrot

Like the forerunner disclosure facilities for Liechtenstein and Switzerland, the GDF and JDF provide beneficial treatment in return for voluntary disclosure and payment of any penalty and outstanding liabilities (including interest) during the life of the facility, which in both cases is between 6 April 2013 and 30 September 2016. In summary the advantages for eligible taxpayers are:

1. a 10% fixed penalty on outstanding liabilities for years up to and including 2007/2008 and a 20% fixed penalty for 2008/2009 onwards;

2. no penalty where reasonable care has been taken;

3. a retrospective limit to accounting periods/tax years commencing on or after 1 April 1999; and

4. a 'bespoke service' offering initial nonames contact with HMRC and a single point of contact for disclosures in order to ensure consistency of treatment.

It is important to note that unlike the forerunner facilities, the Channel Islands Facilities offer no express immunity from criminal prosecution, as is the case for the Liechtenstein facility, or even high degree of assurance of no prosecution, as is the case for the Swiss agreement. Although HMRC have indicated that, all things being equal, criminal prosecution is "unlikely", they have made it quite clear that you will still remain fully subject to HMRC's criminal investigation policy.

The Stick

Whilst nothing has been set in stone with regard to the operation of the envisaged automatic exchange protocols, HMRC has recently released (26 June 2013) a consultation paper setting out its views and proposals in this regard. Unsurprisingly, the "son of FATCA" is a chip off the old block in terms of the subjects and detail of reporting envisaged. HMRC is even suggesting adopting the same defined terms as used in the US/UK agreement. One clear key difference though is in the proposed treatment of UK resident "non-doms". It is suggested that these individuals might "optin" to a more streamlined disclosure regime that only requires details on the flow of funds (between the UK and the Channel Islands) to be disclosed.

Who is this for?

Obviously you need to be a UK taxpayer with a need to regularise your tax affairs. You also need to have a beneficial interest in a Guernsey or Jersey:

1. bank account;

2. cash value insurance policy or annuity contract ; or

3. company, trust or other (from a range as defined) legal structure.

It is important to note that interests in listed companies and collective investment schemes are specifically excluded from the scope of the disclosure facilities. Therefore whilst £10 in a Channel Islands bank account will qualify, participation in a Channel Islands fund, or shares in a company listed on the CISX will not.

It should also be noted that whilst the beneficial interest test does require sufficient connection to Guernsey or Jersey, it is expected that disclosure will be made of the taxpayer's worldwide assets or income (where a UK tax liability may accrue in the particular circumstances of the taxpayer). The payoff is that the terms of the facility (i.e. the benefits) will apply to those liabilities too - thus giving the tax payer a clean slate, so far as HMRC is concerned.

A range of other persons are also expressly excluded from taking the benefit of the facility, notably where the funds are the proceeds of crime, those already being investigated for a criminal tax offence and those subject to an "indepth" civil investigation by HMRC.

For financial intermediaries?

The key messages for Guernsey and Jersey financial intermediaries at this stage are:

  • Notify clients who are known to be "relevant persons" before 31 December 2013;
  • Notify "relevant persons" again in the six months running up to 30 September 2016; and
  • Continuing to ensure the proper application of local legislation for the prevention of money-laundering.

There are some very neat questions around how an FI goes about identifying someone as a relevant person, and then the FI's AML obligations in certain circumstances which might follow thereafter. Whilst an FI will have certain information in respect to their clients and their financial affairs anyway, perhaps as part of the on-going CDD obligation or simply in order to allow them to service the client properly, they may not know the exact UK tax status of the client (do you send form letter notifications to everyone on your client list?), and if they are contacted by a client interested in the facility, do they form a relevant suspicion that must be reported in accordance with their AML obligations?

Why good for the Channel Islands?

In short, whilst the facilities are of value to persons who wish to avail of them, they are actually also of benefit to the Channel Islands. Given the economic climate and international drive to protect the tax base of onshore jurisdictions, the integrity and credibility of the Channel Islands is enhanced when it facilitates initiatives of value to others. Arguments against offshore are broken down. This is a win-win when cooperation reaps benefit without unreasonable infringement of domestic interests, much as could be argued in the case of the disclosure facilities. However, reputation aside, the Channel Islands will also benefit financially from the provision of advice and assistance in administering and implementing the disclosure facilities locally. Better a brain gain than a brain drain, and another reason why the Channel Islands are seen as fast developing a new and evolved pool of sophisticated service providers and qualified staff in the finance industry. The growing arsenal is both savvy with the fast coming international initiatives and well capable of maintaining the position of the Channel Islands at the pinnacle of the offshore finance industry. And that is surely not Indecent Exposure?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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