Individuals and companies with undeclared UK tax liabilities associated with assets held in the Isle of Man, Jersey and Guernsey can take advantage of disclosure facilities to regularise their tax affairs.
A window is now open for persons with undeclared UK tax liabilities to make full disclosure and settle unpaid tax following agreements signed between the UK government and the three Crown dependencies in February 2013.
The new agreements follow other arrangements such as the Liechtenstein Disclosure Facility (LDF) and UK/Swiss tax agreement.
What do the agreements with the Crown dependencies cover?
The agreements are the same in all key aspects, and each has two core elements.
1. An automatic information sharing agreement
This is intended to open up information flows from the Crown dependencies to HMRC, as part of HMRC's offshore evasion strategy. As a result, from early 2015 there will be a dramatic increase in the information provided by financial institutions in these offshore locations, increasing the likelihood that HMRC will catch UK residents who have been evading tax.
2. A disclosure facility
The disclosure facility enables individuals to regularise their tax affairs by declaring all unpaid UK taxes due. Key elements are as follows:
- for each location, the disclosure facility will be available from 6 April 2013 until 30 September 2016;
- the period covered by the disclosure need only start from 1 April 1999 – rather than going back 20 years as is usually the case;
- penalties will in most cases be fixed at 10% for tax years up to 2008/09, and at 20% for 2009/10 onwards.
Who is eligible to use the disclosure facility?
An individual must have been UK tax resident in the UK at any point between 6 April 1999 and 31 December 2013.
Companies and other legal persons, such as trusts, must have been UK resident or incorporated in the UK between 1 April 1999 and 31 December 2013.
Individuals and companies must also have had a beneficial interest in relevant property (such as a bank account or trust assets) held in the relevant offshore location at any point in that period. Note that if an otherwise eligible individual or company does not have relevant property at present, they have until the end of 2013 to change that situation and so become able to take advantage of the disclosure facility.
How will potentially affected individuals be informed?
By the end of 2013, financial institutions on the islands must write to any of their customers who may be within the scope of the facility to alert them to the fact that:
- information relating to their assets will be passed to HMRC; and
- a disclosure facility is available if they are non-compliant with UK tax requirements.
The institutions must make contact again six months before the disclosure window closes.
Is everybody who receives a letter considered a tax evader?
No. There are many people, including non-domiciled UK resident individuals, who legally use Crown dependencies for their financial affairs. Financial institutions must nevertheless write to anyone who might be affected, although the disclosure facility is only aimed at those who need to regularise their past tax affairs.
Are some persons specifically excluded from taking part in the disclosure facility?
- anyone under criminal investigation by HMRC on 6 April 2013;
- anyone under 'in-depth investigation' by HMRC on 6 April 2013;
- anyone linked to another disclosure facility such as the LDF or involved in the UK-Swiss tax agreement.
Why might using the disclosure facility be beneficial?
Firstly, because disclosure only needs to cover a period beginning from 1 April 1999, unpaid tax before that date is ignored. Secondly, the penalty rate is lower than would normally be the case. HMRC typically has the power to charge penalties up to 100% or in some cases even 200% of unpaid tax.
How does the disclosure process work?
Before any individual applies to join the disclosure facility, tax agents can discuss details of specific cases on a no-names basis with HMRC. Such discussions take place through a single point of contact at HMRC.
Assuming successful registration to the relevant disclosure facility, HMRC will then expect the disclosure to be made within six months, with full payment unless instalments terms are agreed.
The disclosure must include details of the full amount of duties payable to HMRC. The disclosure must include a declaration that it is correct and complete and provide a statement of assets and liabilities (including details of offshore accounts) as at April prior to the date of the disclosure.
Note that the disclosure cannot be limited to unpaid tax associated with the Isle of Man, Jersey or Guernsey; full disclosure of all unpaid taxes will be expected. Anyone who does not make such full disclosure could ultimately face criminal prosecution. HMRC can audit the disclosure, but will otherwise look to provide agreement within nine months.
Are the offshore disclosure facilities outlined above the best way to regularise a UK tax position?
Not necessarily. The LDF might be a better route because it includes some terms which are not available under the Crown Dependencies disclosure facilities. For example, the LDF offers a 'composite rate' option: instead of calculating the exact tax owed, all income is simply taxed at 40%. This could result in a lower total tax cost, if for example multiple duties apply to the same income.
How tough can HMRC get on offshore tax evaders?
HMRC has shown its willingness to pursue criminal prosecutions against tax evaders and at the date of the 2013 Budget there were 27 ongoing criminal investigations involving offshore evasion. Also, in February 2013, HMRC secured convictions against two UK company directors who had been using Isle of Man companies to evade UK tax. The prosecutions followed a tip-off from the German tax authorities, and resulted in prison sentences for the two directors.
If I am affected, what should I do?
Everyone with relevant assets in the Crown Dependencies should review their position. If you are uncertain as to the regularity of your UK tax affairs and your ability to benefit from one of the offshore disclosure facilities, seek professional advice as soon as possible.
Although the disclosure window is open until September 2016, don't forget that if HMRC begin an in depth investigation of your affairs, the disclosure facility may then not be available. You could then face tax, interest and penalties covering the last 20 years – and with the prospect of higher penalty rates of up to 200% of tax due.
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.