UK: Tax Investigations: Undisclosed - December 2012

Last Updated: 9 January 2013
Article by Smith & Williamson

Welcome to Tax investigations: undisclosed – our half yearly e-newsletter highlighting tax investigations issues which may affect you.

Further to the Chancellor's Autumn Statement and HMRC's Closing in on Offshore Tax Evasion document being published, HMRC has clearly stated its plan to focus on affluent taxpayers who are non tax compliant. It has never been more important to take professional advice on how to put matters right. We will keep you informed of any further developments.

Leo Coyle
Head of Tax Investigations


What are your plans for 2013? Business and some pleasure? Possibly a nice break in the summer and skiing in the winter? HMRC has clearly stated its plan to focus attention on affluent taxpayers residing in the UK on a number of fronts including their offshore assets and investments.

Published alongside the Chancellor's Autumn Statement, a short and succinct document spelt out HMRC's approach to the New Year. Entitled Closing in on Tax Evasion, the document highlighted the following specific plan in relation to the affluent taxpayer group.

January 2013

Use 2011/12 self assessment returns to identify potential evasion among affluent taxpayers.

February 2013

Identify more people whose income and wealth does not match what they have told HMRC, by investigating the first 500 cases identified under a new approach which has cross checked information held by credit reference agencies to cases chosen from HMRC records.

March 2013

Commence a campaign to target those with second or multiple properties in the UK or abroad who have not declared any profits or gains they have made from those properties.

April 2013

Increase in the number of specialist investigators dedicated to pursuing affluent evaders and avoiders with more than 300 staff focused within the specialist team.

Utilise investigators specially trained in trusts, offshore assets and wealth management within the affluent team.

Develop a dedicated affluent team intelligence unit with extensive research capabilities, making use of all available intelligence sources to identify tax evaders with hidden or unexplained income and wealth.

May 2013

Identify offshore trusts being used to hide income and assets overseas.

Roll out new data driven tools to help identify affluent individuals who are evading tax.

Seek out new data sources to improve the ability to spot wealthy tax evaders – including information from overseas jurisdictions and data accessible openly on the internet if you know where to search. HMRC has recruited external specialists to assist in undertaking analysis.

Use new data to identify and investigate offshore property ownership.

This improved and enhanced data collection and analysis coupled with worldwide cooperation and information exchange between countries means that that the world is becoming smaller – and more importantly transparent from a tax jurisdictional perspective. Recent press reports on wealthy individuals, on non-domiciles and large multinational corporations highlights the increasing pressure politically to take action to eradicate tax evasion and avoidance by offshore means.

Individuals with affairs which are complex, multi-jurisdictional and involve offshore companies, trusts and assets will need to ensure that their affairs are:

  • correctly disclosed for tax purposes
  • correctly set up to achieve the investment and tax compliance requirements
  • regularly reviewed and managed from a tax and investment perspective.

If this is not the case then a discussion needs to be had with a specialist adviser regarding what needs to be done to ensure matters are tax compliant.

If such action is not taken then any matters which are not tax compliant and are discovered on challenge by way of an HMRC enquiry will be penalised - at worst by criminal prosecution and at best by a significant financial settlement involving tax, interest and penalties. This could even be followed up by public naming and shaming of the individual along with a further five years of close scrutiny by HMRC after the settlement of that enquiry.


The recent news that HMRC plans to follow the US's Internal Revenue Service and enter into agreements with the Crown dependencies and overseas territories similar to those adopted in the US Foreign Account Tax Compliance Act (FATCA), sounds a loud warning bell for tax evaders with undisclosed bank accounts and those using opaque structures in these jurisdictions. The most commonly used of these jurisdictions are the Isle of Man, the Channel Islands, Bermuda, British Virgin Islands, Caymans Islands and Gibraltar.

If the agreements go ahead they will allow for automatic exchange of information in relation to bank account holders and persons associated with tax structures who have a UK address or passport noted in the offshore bank's records.

The consequences for tax evaders discovered by HMRC are serious to say the least. These range from possible penalties of between 100-200% of the tax evaded, right up to criminal prosecution in the most serious cases.

However there are options for those who want to manage the financial pain of being discovered by HMRC and the Liechtenstein Disclosure Facility (LDF) will be of particular interest for those wishing to voluntarily notify previously undisclosed offshore assets.

The LDF is an agreement between HMRC and Liechtenstein to encourage people who have funds offshore on which they have paid insufficient tax to put matters right. In our view, it is the best option for most people in this position and so it should be very carefully considered.

To take advantage of the LDF a person has to have:

  • UK tax problem
  • an offshore account or asset at 1 September 2009
  • relevant property in Liechtenstein (such as a bank account - which can be opened now).

The LDF is a government sponsored initiative and the benefits of coming clean using this facility, include:

  • a look back period restricted to 6 April 1999 (i.e. 13 years instead of the normal 20 years for this type of offence)
  • a penalty of only 10% on the omitted tax for the first 10 years and then 20% for the 3 most recent years
  • a guarantee of no criminal prosecution.

HMRC has, in recent years, been relentless in its pursuit of people with undisclosed offshore wealth and should these FATCA style agreements be concluded with the territories and dependencies it will surely provide further stimulus for it to pursue similar agreements with other jurisdictions on its offshore radar. The hunt down for tax evaders continues.


Subject to legal challenge, the UK/Swiss tax agreement has become law and will proceed on 1 January 2013. For those with a Swiss bank account it will be decision time. Disclose the account to HMRC, or suffer the past and future withholding tax (retaining anonymity), or utilise the Liechtenstein Disclosure Facility (LDF).

The Swiss banks are now writing to all their clients within the UK requesting a decision on which option they wish to take. No response will result in the bank disclosing to HMRC their name, address, date of birth and extensive bank details from 2002 to 2010.

As the guidance emerges from the UK and Swiss Governments and relevant bodies it is clear that for many individuals the agreement does not provide reassurance that their Swiss assets will be regularised from a UK tax perspective. A few key points are worth highlighting.

  • Withdrawals from the accounts which have not been redeposited before 31 December 2012 will not be cleared. They will therefore be exposed to a tax charge on challenge by HMRC. Additionally the re-deposited funds cannot come from the UK – if they do they will not be cleared.
  • The agreement does not clear any liability in respect of corporation tax, national insurance contributions or tax on overdrawn directors loan accounts.
  • Individuals who choose to suffer the withholding tax going forward at the rates prescribed in the agreement (which are at the top end of UK tax rates) will retain anonymity. If the relevant income is not included on a tax return then on any challenge no additional liability or penalties would be chargeable in respect of that income, in accordance with the agreement. However, personal allowances are withdrawn on income levels over £100k and so an individual whose Swiss income would take them over the threshold will be submitting an incorrect tax return which will result in an additional tax charge liable to a penalty. This is an unfortunate position.
  • The agreement does not deal with the matters which arise before 2002 and income that arose prior to that date will not be effectively dealt with in the past tax calculation. For example, if funds which arose within the time limits for HMRC to recover (back to 1992/1993) were undeclared and have subsequently been spent (so that they are not reflected in the Swiss bank deposits), then they will remain at risk of a HMRC enquiry and a substantial penalty (40-50%).

The LDF however can be used to address and deal with all these issues. Clients and advisers considering the letter from the Swiss bank are well advised to take the advice of an experienced tax investigations specialist to ensure that the client can achieve finality in respect of any undisclosed funds, and use them in the future without having to look over their shoulder.


Since the dawn of the desktop computer, massive advances in obtaining information have been made by tax officials around the world. More and more treaties, whether they be tax information exchange agreements (TIEAs) or full double taxation agreements (DTAs) are being entered into with the full support and encouragement of the Organisation for Economic Co-operation and Development (OECD). Indeed, not only is the OECD keen to see more treaties but it has also established a peer review system to ensure the treaties are being utilised.

While it depends on the jurisdictions involved, exchanges can be extremely fast and the information available quite extensive. Over the last five years the exchange of information between countries has grown considerably. This is largely due to the introduction of TIEAs and the focus by the major jurisdictions on the pursuit of bank information.

The UK, USA, Australia and Canada have all been successful in obtaining information from banks about residents with offshore accounts using their internal information powers. Some of this information relates to taxpayers from other jurisdictions and it has therefore been provided to the appropriate country under the existing treaties in place.

Probably the most extensive exchange of information within Europe is as a result of the European Savings Directive (ESD). A recent EU Commission memo stated that, on average, 20 billion euros worth of savings information is exchanged between Member States each year and this information is used to help combat the shadow economy which the EU Commission estimates to be nearly one-fifth of GDP on average across Member States, representing nearly 2 trillion euros in total. Such is the success of the ESD, talks are currently underway with Singapore, Hong Kong and Macao with a view to bringing them within the Directive.

Should these countries agree to join this exchange mechanism the tax officials in the major European countries will hope to receive vast amounts of information if, as it is believed, large amounts of monies flowed out of Liechtenstein and Switzerland to those countries following Switzerland's recent agreements with the UK and Germany, and Liechtenstein's Memorandum of Understanding with the UK.

Countries previously considered 'havens' and viewed with suspicion by tax authorities everywhere are now eager to demonstrate their tax transparency, not just by entering into a TIEA or DTA, but by going one step further with agreements such as the ESD and bespoke disclosure facilities.


In 2008 HMRC embarked on the biggest change in its compliance powers for over a decade – Schedule 36 Finance Act 2008 brought HMRC improved and broad ranging powers to undertake its enquiry programme. A key point of Schedule 36 was its interaction with Section 9A TMA 1970 and Paragraph 24 Schedule 18 Finance Act 1998 - the legislation enabling enquiries into individual and company tax returns respectively. Generally, if a return has been submitted and HMRC wishes to enquire, then it should issue a formal enquiry notice under the relevant section of the Taxes Acts, in accordance with its guidance and Codes of Conduct.

Schedule 36 also allowed HMRC to undertake enquiries in real time, prior to a return being issued for that year. However, increasingly we are seeing HMRC utilise the Schedule 36 powers to undertake 'informal' enquiries. Not simply enquiring about transcription errors, HMRC can issue several pages of detailed questions about a tax return or entries upon it. Without an appropriate formal enquiry notice which provides the safeguards of a code of conduct and the legislative support of Section 28A (closure notices) TMA 1970 then the ground upon which that process is being undertaken would appear to be at best shaky. From a client's perspective does such an informal enquiry preclude HMRC coming back at a later date with a Section 9A enquiry? From an adviser's perspective, is encouraging the client to respond a breach of the duty of care which all professionals have to their clients?

It is essential that any approach from HMRC is dealt with professionally, in good time and co-operatively. That does not preclude an adviser from ensuring that the enquiry process being undertaken is within the legal parameters afforded to HMRC by its extensive compliance powers. 'Informal' requests for information, enquiries into submitted tax returns and requests to participate in meetings to discuss similar matters, must be dealt with as if they are a formal HMRC enquiry and the basis upon which HMRC are acting must be understood before responding. Indeed it is good practice to engage the HMRC officer and understand the risks which have generated the enquiry, something that HMRC are advised to participate in.

An experienced tax investigation specialist can assist you and at the outset save the client and adviser from potentially difficult consequences of acting outside of the law.

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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