The Lawyer global offshore report

The National Audit Office’s February 2003 report ‘Tackling Fraud Against the Inland Revenue’ noted that offshore accounts and structures present a “major threat of serious fraud”. Since then the UK has seen a raft of new information-gathering approaches and a more robust approach to some longstanding reporting requirements.

HM Revenue & Customs’ (HMRC) aim is clear: increased intelligence will throw up increased information about offshore structures and funds; disclose unreported distributions, remittances and profits; increase the number of investigations into taxpayers’ affairs; and increase the tax take. The Government envisages that the investigation of offshore accounts and structures can generate an additional £1.6bn in revenue. It may well provide ammunition for the longstanding domicile and residence review.

But its width means that it may be a blunt instrument for distinguishing fraud from structures and funds which are run properly and legitimately. Advisers to international clients, offshore trustees and managers, then, need to be sure that they are fully in the picture about their clients and that all concerned understand the client’s UK tax profile and reporting requirements in the UK (and other jurisdictions).

Undisclosed offshore bank accounts

The new Offshore Fraud Projects Team (OFPT) is seeking information from financial institutions about their customers and the movement of funds offshore. In particular, it is understood that the OFPT is approaching UK banks for information in respect of customers for whom they have moved funds offshore using sundry parties or suspense accounts, thereby bypassing these individuals’ UK bank accounts.

As part of a pilot exercise designed to find the most effective way of flushing out undisclosed offshore funds, HMRC’s Cross-Cutting Policy Unit is writing to taxpayers where it has reason to suspect that the individual in question has undisclosed offshore bank accounts to ask why there is no tax liability from their bank accounts. The letters require the recipient to respond within 30 days. The letters apparently do not constitute an enquiry under Section 9 of the Taxes Management Act 1970, but if no response is received within the specified time, then the Inland Revenue (the Revenue) is likely to open an investigation.

Offshore credit and debit cards

HMRC has undertaken a project to identify UK taxpayers who have credit cards or debit cards issued by offshore banks, examining the use of those cards in the UK and extracting details from the credit card companies themselves.

While it is true that in some cases offshore cards may indicate fraud, many UK-resident and non-UK-domiciled individuals legitimately limit their UK tax liability by having cards from more than one jurisdiction to ensure that they do not remit foreign income and gains to the UK. Inadvertent payments on the ‘wrong’ card should be reported and, if necessary, advisers should check statements. 
This investigation may also be relevant for individuals who claim that they are non-UK resident because they are only in the UK for a relatively small part of each year.  The Revenue might use the credit card information to garner more detail on exactly when they are in the UK and whether the taxpayer’s records are accurate.

European assistance

The EU Savings Directive, which came into effect on 1 July 2005, requires certain information to be exchanged between national tax authorities to combat tax evasion by individuals on cross-border savings income.

The new rules stipulate that UK paying agents must report to HMRC any payments of savings income they make to individuals resident in a prescribed territory other than the UK (currently the 25 EU member states as well as Aruba, the British Virgin Islands, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat and Netherlands Antilles). HMRC will then report this savings income to the individuals’ own tax authorities. Income paid to individuals as beneficiaries of estates and some types of trusts will also need to be reported. Paying agents in the other prescribed territories will be making similar reports to their own tax authorities, which will pass information on in the same manner, thereby establishing a complete network.

The directive has not changed the tax position, but it will enable HMRC to compare the information it receives from the tax authorities of the other countries with that contained in an individual’s tax return. This means that any past or future errors are likely to come to light.

Section 218, Inheritance Tax Act 1984

Section 218 imposes an obligation on any person who, in the course of a trade or profession (other than that of barrister), has been concerned with the making of a settlement by a UK-domiciled settler with non-UK-resident trustees to give details about the settler and trustees to HMRC within three months of making the settlement.

It now seems that HMRC is taking the view that the words ‘concerned with’ are broad enough to include persons (legal persons and individuals) through whom funds are transmitted, and that Section 218 does apply to non-UK persons.

In some instances, HMRC has been writing to UK parent companies to enquire as to whether their offshore subsidiaries have made the appropriate returns under Section 218. A number of non-UK financial institutions have provided details of previously unreported trusts. HMRC is thus building up a greater picture of offshore trusts.

Forms 50(FS)

Forms 50(FS) are issued by the Centre for Non-Residents and ask for information about capital gains, offshore income gains and distributions to beneficiaries. Care is needed before a decision not to comply is taken. Where the Revenue has been unsuccessful in extracting information from the trustees of offshore trusts, it will generally put pressure on UK-resident settlers and/or beneficiaries to provide that information and may back up initial requests with the penalty regime, even though the settler or beneficiary may have no control over the production of the information needed.

HMRC’s intelligence-gathering efforts will doubtless reveal some crude tax planning and tax ignorance. But at the same time, none of this should undermine the position of the client in a well-run offshore structure where advice is taken and implemented properly. For the correctly advised client, the extent and limits of compliance will be understood; they will no doubt be reviewed and discussed as necessary, and any HMRC enquiries received will be dealt with effectively.

Helen Ratcliffe is a partner and Sophie St John a solicitor, both at Bircham Dyson Bell