Tackling Offshore Tax Evasion: A Requirement to Notify HMRC of Offshore Structures

Our Principal - Stephen Outhwaite - was recently interviewed by Alex Heshmaty (www.legalwords.co.uk) for an article published by Lexis Nexis on Government consultation on tackling offshore tax evasion. We have reproduced that article, with the kind permission of Lexis Nexis, below.

This article was first published on Lexis®PSL Tax on 24 January 2017. Click for a free trial of Lexis®PSL.

Tackling Offshore Tax Evasion: A Requirement to Notify HMRC of Offshore Structures

The Government has long been waging a war against offshore tax evasion, and as part of its ongoing strategy HM Revenue & Customs (“HMRC”) released a Consultation Document on 5 December 2016 seeking views on a proposed new legal requirement that intermediaries creating or promoting certain complex offshore financial arrangements notify HMRC of their creation.

We take a look here at the Consultation in some detail, by answering some questions relating to it.

Q. What is the background to this consultation?

A.         Historically, when tackling tax avoidance and tax evasion, HMRC focussed its firepower on the individuals and entities engaged in avoidance or evasion. Whilst it enjoyed limited success in doing this, it became apparent to the Government and to HMRC that where avoidance and evasion was facilitated by promotors – or “enablers” – a more efficient approach was to target those enablers and then attack their client base, rather than tackling singleton targets.

This led to the approach we have seen under the Disclosure of Tax Avoidance Schemes (“DOTAS”) and Promotors of Tax Avoidance Schemes (“POTAS”) legislation, which has made it much simpler for HMRC to become aware of the end users of schemes that fulfil the notification criteria, and in turn made it much easier and more cost effective to target those end users.

This latest Consultation looks to build upon this approach of targeting the “enablers” of activity the government is looking to tackle, by proposing the enactment of legislation aimed at intermediaries creating or promoting certain complex offshore financial arrangements requiring the intermediaries to notify HMRC of their creation.

Q.   What does the Consultation propose?

 

A.            The Consultation proposes a requirement for intermediaries who create certain complex offshore arrangements to notify HMRC of the details of such arrangements and to provide HMRC with a list of clients using those arrangements. This would enable HMRC to review the workings of those arrangements to see if they are technically competent (and to challenge them if not!) and to be aware of identity of the end-users of the arrangements.

The consultation document proposes that intermediaries be provided with a “notification number” that would in turn be provided to the clients who were the end users of the arrangement in question, who would in turn be expected to include this notification number on their tax returns or personal tax account.

Failure to comply would result in civil sanctions (presumably financial penalties).

It is worth noting that the current consultation is upon the broad principles of a requirement to notify HMRC of offshore structures and does not go into the minutiae of any intended legislation.

Q.   Who will have to notify the offshore arrangements?

 

A.            The consultation states that the requirement to notify would rest with the person or business who created the specific offshore arrangements for UK taxpayers that exhibit “certain characteristics”, and refers to that person or business as a “creator”.

Clients of the creator using the arrangements would also be required to notify HMRC on their tax returns or through their personal tax accounts.

The consultation envisages that the proposed new legislation would apply to creators both inside and outside of the UK, stating that to exclude offshore creators would significantly reduce the impact of the proposal, but the consultation seeks views as to whether offshore creators should be within the scope of the proposed legislation.

Q.        Is HMRC expected to take a “hallmarks” based approach to any requirement to notify?

A.         The current consultation, looking at broad principles, does not drill down into any detail on the specific characteristics by which an arrangement would be made subject to notification (known as “hallmarks”), and at this stage no hallmarks have been devised. It does seem clear that hallmarks are likely to feature in any final legislation. The consultation states that “…hallmarks would be used to maximise the policy’s ability to meet its objectives.

The consultation also states that “…the hallmarks will be carefully targeted in order to avoid imposing an unreasonable compliance burden on intermediaries and taxpayers”.

So, whilst it seems likely that there would be a hallmark based approach to any requirement to notify, the consultation does seek views on what those hallmarks should be, whether there is any concern regarding the use of hallmarks and whether there are any alternative approaches that could be considered.

Q.        Does the proposal fill a perceived gap, as HMRC argues?

A.         Notwithstanding recent developments on a global scale aimed at increasing transparency of the beneficial ownership of assets and investments – such as the Common Reporting Standard (“CRS”) and the increasing number of exchange of information agreements between jurisdictions – the Government still believes that more can be done.

The perceived gap that this consultation targets, according to the government, is that it can be difficult to understand highly complex offshore arrangements, especially where beneficial ownership is being deliberately hidden, making it difficult for financial institutions (and regulatory bodies such as HMRC) to establish the identity of the beneficial owner.

The government believes that individuals seeking to hide money or assets offshore are helped by businesses who create complex financial arrangements (the “creators” referred to above).

Whilst it seems likely that if the hallmarks can be set correctly, the requirement to notify may capture UK based creators, on the basis that enforcement action for non-compliance with the proposed legislation is effective, what is less clear is the effectiveness of the proposed legislation on non-UK based creators. Quite what effective enforcement action (if any) can HMRC take? HMRC would then be forced back into targeting end-users of arrangements created by non-UK based creators as it has always done. As long as there is an appetite for offshore tax evasion by individuals there will always be a marketplace to satisfy that market. The proposed new legislation may well make life more difficult for UK-based creators, but it could push such activity offshore.

The consultation proposes that as well as imposing civil sanctions upon and naming creators of such arrangements who fail to comply with the requirement to notify, the end user of an arrangement where the creator has failed to notify has the requirement passed on to them.

The proposed legislation would need to be underpinned by vigorous enforcement action aimed at end-users, using the civil and criminal sanctions available to HMRC targeted at offshore tax evasion. Only by such vigorous enforcement will the proposed new legislation be likely to achieve the aims of the government.

Q.        What could be the impact on offshore jurisdictions of such a requirement?

A.         At this stage, it is difficult to assess the impact of the proposed legislation on offshore jurisdictions. What we do know is that many jurisdictions have signed up to the CRS and are actively seeking to improve transparency of ownership. They are therefore likely to be supportive of the government’s efforts in this direction. However, there are other jurisdictions with a more laissez-faire attitude to transparency and tax compliance. Whether the proposed legislation, along with CRS reporting, forces a migration of creators to some of these less rigorous jurisdictions remains to be seen.

Q.        What could be the impact on advisers in this area?

A.         With DOTAS and POTAS, initially it seemed to be “business as usual” for the promotors of tax avoidance schemes. It has only been after several years of HMRC success at litigating against tax avoidance schemes, allied with controversial legislation such as Accelerated Payment Notices that there seems to be a loss of appetite from end users of schemes, and a contraction of the marketplace of the enablers of those schemes.

This, coupled with proposed new legislation targeting “enablers of tax avoidance”, has caused widespread concern amongst the traditional accountancy sector, with the main accountancy bodies advising their members to be wary regarding tax planning advice and the wording of the Professional Conduct in Relation to Taxation being tightened up in this respect. It is likely that practices governed by the main UK accountancy bodies will by and large look to minimise exposure in this area.

Creators of complex offshore arrangements are more likely to be found in the boutique tax advisory businesses both in the UK and overseas, and it is likely that the proposed new legislation will make life going forward more challenging for them.

Q.        What type of structures are expected to be targeted by this proposal?

A.         The proposed new legislation is aimed at arrangements marketed or supplied to individuals, but the consultation poses the question should the scope be extended to cover corporates.

The type of entity involved in the offshore arrangement is not specified in this consultation, and may well be covered in subsequent consultation on the detail, but it seems likely that nothing will be ruled out and we can expect to see the scope including corporates, trusts, partnerships, foundations and the like. It is likely that the legislation would be widely drafted.

Q.        Do you recommend that stakeholders contribute to the consultation?

A.         Absolutely, yes. If stakeholders have any opinions at all it is worth contributing to the consultation. Recent history shows that the government does consider all representations.

The closing date for comments is 27 February 2017.

The full consultation document can be found at https://www.gov.uk/government/consultations/tackling-offshore-tax-evasion-a-requirement-to-notify-hmrc-of-offshore-structures