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Tax Evasion – Why HMRC are not prosecuting more people

Introduction

Tax evasion has been in the news over the last two weeks following the articles in the press about bank accounts at HSBC in Geneva. Criticism has been levied at HM Revenue & Customs in Parliament and in the press, for not prosecuting people who had bank accounts in Geneva and who had not disclosed the income on their tax returns. The policy of HM Revenue & Customs has been to encourage people to make a full disclosure under a Disclosure opportunity and, if they don’t take advantage of this, they face the risk of prosecution.

Disclosure Facilities

Currently there are Disclosure Facilities for the Channel Islands and Isle of Man. These are primarily aimed at giving people a chance to disclose undeclared income from bank accounts held in these jurisdictions and the deadline for registering with HMRC to use these facilities is 30 September 2016. These facilities can be used to make other disclosures to HMRC apart from undeclared income on bank accounts or securities portfolios held at banks in the Channel Islands or Isle of Man. There is also the Liechtenstein Disclosure Facility. This remains open until April 2016. The terms of this facility are particularly favourable and it has been used extensively in order to regularise the position for people who had undeclared Swiss bank accounts. This facility can also be used in some cases to address other sources of undeclared income and gains.

UK/Swiss Tax Agreement on Swiss Bank Accounts

In 2012, the UK Government made an agreement with the Swiss Government regarding Swiss bank accounts. As a consequence of this agreement people with undeclared Swiss bank accounts faced a choice; agree to voluntary disclosure of income and gains on the account or face a one-off tax charge (typically about 20%) on the capital in the account and ongoing high rates of withholding tax on income and gains. Many people chose to use the Liechtenstein Disclosure Facility in order to deal with the past and avoid having to pay the one-off charge. This facility may still be useful for people who have paid the one-off charge in some cases.

Other Disclosure Opportunities

HM Revenue & Customs have also announced various other disclosure opportunities aimed at particular sectors to encourage people to make disclosures. Previous initiatives were aimed at the healthcare sectors, plumbers and electricians. The latest such initiative was announced recently and is called the Solicitors Tax Campaign. People working in the legal profession as a solicitor in a partnership or company or as an individual can make a voluntary disclosure of any undeclared income. Anyone wishing to use this disclosure opportunity must notify their intention to HMRC by 9 March 2015 and make the disclosure by 9 June 2015.

Automatic Exchange of Information

The UK Government has signed a large number of information exchange agreements with other countries. These include the Channel Islands, Isle of Man, Bermuda, British Virgin Islands, Cayman Islands and Gibraltar. Under these agreements there will be automatic exchange of information so that income earned by UK residents in countries which have signed these agreements will automatically be notified to HMRC.

We have a good deal of experience in making disclosures under the HM Revenue & Customs disclosure opportunities. If you have any issues that you would like to discuss in connection with the above then please contact a member of our tax team.

Swiss Bank Accounts – the Clock is Ticking

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The hands of the clock are approaching midnight for UK taxpayers with Swiss bank accounts.

Under an agreement signed between the UK and Swiss governments, Swiss banks will be required to make a one-off payment to HMRC. The amount of the payment is based on a complicated formula and produces an effective rate of tax of between 21% and 41% of the capital on Swiss bank accounts holding bankable assets (cash and investments – real estate and safety deposit boxes are excluded) where the accounts are registered to a person in the UK. The deduction applies where the account was open as at 31 December 2010 and is still open as at 31 May 2013. The one-off payment will be made by deduction from the account on 31 May 2013.

Income earned on these investments from January 2013 will face high withholding taxes at rates of up to 48%. These taxes will be deducted without disclosing the identity of the accountholder to HMRC.

As an alternative to paying these high tax charges, it is possible to authorise the Swiss bank to disclose the identity of the accountholder. However if tax has not been paid on the income in the past, the accountholder will be exposed to the possibility of an Inland Revenue investigation into their affairs which will result in having to pay tax on all undisclosed income and there will also be high penalties, possibly as high as 150%, on the tax liability. In extreme cases the accountholder could be prosecuted by HMRC.

For non-UK domiciliaries, they can choose to disclose to HMRC UK source income and gains which have been remitted to the UK where UK tax has not been paid and make a one-off payment of 41%. Alternatively they can inform the Swiss bank that they wish to opt out and will not choose any of the options. However this will give no tax clearance for past liabilities.

The Swiss banks have been sending out letters to accountholders informing them of the options and prompt action is required to respond to these letters.

Where the income has not been disclosed, it is possible to take advantage of a special disclosure arrangement, known as the Liechtenstein Disclosure Facility (LDF) in order to regularise matters. The advantages of using the LDF are:

The funds in Switzerland are “cleaned up” and the bank can be authorised to disclose the identity of the accountholder; thereby avoiding the one-off tax payment;

Tax will be due on income and capital gains only from 6 April 1999 onwards. Income and gains prior to that date are ignored;

The penalty on the tax due is only 10% on the tax due on the income and gains up to 5 April 2009. The penalty for later years will be a little higher but this may only affect one or two years;

Where the money in the Swiss accounts has been inherited it is possible, in most cases, to avoid the 40% inheritance tax liability that would have been due if the account had been declared when probate was applied for;