Her Majesty's Revenue & Customs is consulting interested parties about its plans to persuade Parliament to introduce new legislation to compel HNW taxpayers with outstanding tax liabilities relating to offshore interests to come forward and correct those liabilities by September 2018.

The consequence of not doing so, HMRC hopes, will be a heavy penalty for ‘failing to correct.’ Compliance Matters spoke to Tessa Lorimer (pictured), a special counsel at the international wealth management law firm of Withers.

“Compliance officers at private banks definitely do need to concern themselves with it, especially in the light of the Government's other recent consultation – the corporate criminal offences – failure to prevent tax evasion, which is based on s7 Bribery Act 2010. The days of compliance officers looking at tax and saying "it's not my department" are over.

Compliance in the run-up to September 2018

“This consultation is about requiring taxpayers to 'regularise' (which is an HMRC term for 'correct') their tax returns in relation to offshore non-disclosures if they have outstanding non-payments. HMRC says that this is a transitional regime that will take effect until the 'late adopters' of the Common Reporting Standard [the Organisation for Economic Co-operation and Development's initiative to allow states to send each other account information automatically, see lists of early and late adopters below] begin sending the account information of their financial institutions' British customers to the UK in September 2018, when HMRC will impose a new, tougher set of sanctions. The CRS early adopters will start reporting in September 2017, but these countries signed up for early adoption because they are pretty much reporting this information already – that's why they joined early. The meaty stuff will come in 2018.”

Penalties after 2018

If he does not regularise his affairs before September 2018, the taxpayer will be subject to a new, tougher, set of sanctions for 'failing to correct.' Tessa Lorimer said that after that date, penalties for previous non-disclosures might be set at up to 200% of the 'uncorrected' amount for accounts in 'category 2' countries. At the moment, HMRC's system of penalties makes a distinction between 'unprompted disclsoure' (where the taxpayer, or non-taxpayer as the case may be) comes forward with a confession, and 'prompted disclosure,' where HMRC finds the taxpayer out, starts asking questions and ultimately imposes a higher penalty. The penalties also go up according to the category of country he hides it in, with category 1 representing those states from which it is the easiest for HMRC to obtain tax information. One proposal in the paper (at 5.14) is for a maximum penalty of 200% for the worst cases of category 2 prompted disclosure.

Tessa Lorimer confirmed this: “HMRC deal with offshore tax evasion according to the category of country. If they can get your information easily from a country, they put that country in category 1. The less compliant the country is, the higher the percentage. It's quite ingenious. I'd be surprised if this hasn't been employed elsewhere by other tax authorities. All these measures radical for HMRC. They've been incredibly aggressive. They're on the front foot for the first time.

Criminal treaties

“CRS will allow HMRC to use criminal treaties to a much greater degree because the information coming in after September 2018 will give them reasonable grounds for suspecting a crime. This will open the floodgates.

“Criminal treaties exist between lots of countries in the world but mainly between EU countries. They guarantee nternational co-operation in criminal proceedings. They are like mutual legal assistance treaties or MLATs, but they're not – they're administrative assistance. HMRC uses them to ask foreign courts to obtain bank statements for it, or information about legal arrangements such as trust structures, or to find out who opened a bank account. It also asks them to authorise the serving of warrants on people in their countries, to order extraditions, to have people followed...things you have to go through a court to obtain. You need these treaties if you want coercive powers to be used.

“Whenever HMRC wants that from abroad, they need reasonable grounds. You need a court in a European country to issue special procedure warrants, which are touched off by letters of request. All this is accessed on the back of international treaties. The main treaties are:

• the Council of Europe's 1959 convention on mutual legal assistance in criminal matters; and
• the Convention on Mutual Assistance in Criminal Matters between the Member-States of the European Union, Annex A3, from 2000.

There are 47 member-states of the Council of Europe. Most of the non-EU members have also ratified them, including Israel.”

HMRC is likely to require some considerable extra manpower to deal with the flurry of cases that are likely to spring from CRS information in 2018, but help is at hand. The consultation paper goes on: "The UK has established a new multi-agency taskforce to tackle offshore evasion that will have access to the most sophisticated technology, experts and resources in tackling money laundering and tax evasion specifically relating to the Panama Papers."

All mouth and no trousers?

As in so many recent regulatory pronouncements, there seems to be a certain amount of bluster in the consultation paper. HMRC burdens the document with threats and references to the alliances it already has with other countries in an attempt to bludgeon the reader into quiescence, but its blandishments might appear to some to be overdone. It uses the words 'consequences' and 'final chance' more than necessary and there are numerous references to 'sending a message.'

One of HMRC's concerns might stem from the fact that it has been losing many cases lately as HNW taxpayers and others go to court for remedies against its unprecedented aggression. According to figures obtained by the City law firm of Pinsent Masons, more than half of the challenges that taxpayers mounted against HMRC last year were successful. Heather Self, a partner at the firm, is on record as saying: "Many of HMRC's recent successes relate to complex avoidance schemes implemented some years ago. We...expect taxpayers to win an increasing proportion of future cases."

Early and late adopters

The OECD's latest list of 'early adopters' that intend to start sending information by 2017 consists of Anguilla, Argentina, Barbados, Belgium, Bermuda, the British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, the Czech Republic, Denmark, Estonia, the Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, the Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, the Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, the Seychelles, the Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, the Turks and Caicos Islands and the United Kingdom.

Late adopters comprise Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, the Bahamas, Bahrain, Belize, Brazil, Brunei, Canada, Chile, China, the Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong, Indonesia, Israel, Japan, Kuwait, Lebanon, the Marshall Islands, Maçao, Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, the United Arab Emirates, Uruguay and Vanuatu.