In its quest for increased tax revenues, HM Revenue & Customs (‘HMRC’) has launched an initiative to identify and recover unpaid tax on undeclared interest from offshore bank accounts. It has already used its extensive enquiry powers to force certain banks to disclose offshore accounts held by their UK customers, and more banks will follow. From the information gathered, HMRC will identify any discrepancies between the amount of interest declared by account holders and the figures provided by the banks. HMRC will then claim tax, interest and penalties on the undisclosed income.
Alongside this, HMRC has announced an Offshore Voluntary Disclosure Facility, more commonly known as a "tax amnesty". This allows taxpayers who have previously failed to disclose taxable offshore income to put their tax affairs in order. It will cover, for example, tax owed on offshore bank interest or on rental income from foreign property. A similar onshore facility is available for disclosing undeclared tax on UK income, and the disclosure facility can also be used by companies and partnerships.
The disclosure timetable is tight. Notice of an intention to disclose must be made by 22 June 2007. Taxpayers then have until 26 November 2007 to make full disclosure and pay the tax, interest and penalties. The disclosure must cover a period of 20 years, unless the omissions were "trivial", in which case only the last six years are relevant. HMRC has not provided any guidance on what amounts to "trivial".
The main incentive for taxpayers is that the penalty will be fixed at just 10% of the tax due. No penalty will be payable at all if the total unreported income is less than £2,500. Normally penalties are up to 100% of the unpaid tax, with the exact level depending on the particular circumstances. Whilst the attractions of a fixed 10% penalty are therefore clear, HMRC is not obliged to accept the disclosure. HMRC will review the disclosure and has until 30 April 2008 to decide whether or not to accept it. In that sense, the disclosure facility is not a true tax amnesty, especially as HMRC can also bring a criminal prosecution if it feels the information volunteered warrants it.
Without the promise of immunity from prosecution, or any certainty that the disclosure will be accepted, the attractions of the disclosure facility are less obvious for many taxpayers. However, the danger of not using the facility is that once the 22 June deadline expires, HMRC will immediately start investigating those who it knows have offshore accounts and who have not voluntarily made a disclosure. Where there is a mismatch between the information given to HMRC by the banks and that reported by the taxpayer on previous tax returns, any penalties are likely to be far higher than 10% and possibly up to 100%.
In cases of innocent non-disclosure the facility should not be used. Currently penalties are only due where a taxpayer deliberately failed to disclose the income or was negligent in doing so. So if, for example, a taxpayer did not declare bank interest because he was unaware of having inherited an offshore account, or money in an offshore account was put in trust for him without his knowledge, then there would be no penalty.
The taxpayer would simply make a declaration to the local tax office. In contrast, under the Offshore Disclosure Facility, even an innocent taxpayer would incur a 10% penalty.
Taxpayers who may be affected should seek urgent advice by 22 June deadline.
If you would like to discuss any issues raised in this article, please contact: Andrew Goldstone.
This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.
