Summary
The settlement between the Internal Revenue Service and UBS AG has been hailed around the world as a victory for U.S. tax authorities.
In the UK similar moves against offshore tax evaders have been made by Her Majesty's Customs and Revenue (HMRC).
Will the extra tax raised cover the administration costs incurred by both HMRC and the banks?
Analysis
The Wall Street Journal reports that this week's settlement between the Internal Revenue Service and UBS AG has been hailed around the world as a victory for U.S. tax authorities, because it forces the Swiss bank to ultimately turn over the identities behind 4,450 secret accounts.
In the UK similar moves against offshore tax evaders have been made by the UK tax authority, Her Majesty's Customs and Revenue (HMRC).
HMRC have recently announced a tax amnesty for undeclared offshore accounts, and formulated a specific policy for those with offshore accounts held in Liechtenstein.
However, this dual policy has caused some confusion within HMRC and within the tax profession as a whole. This confusion may allow tax evaders to switch assets to Liechtenstein, in order to benefit from a less onerous fine.
The two disclosure facilities are:
- The Liechtenstein Disclosure Facility (LDF)
- The New Disclosure Opportunity (NDO).
The LDF offers a 10% cap on the penalties, compared with the 20% cap on NDO.
Both require filing notifications of intention to disclose by 1 September 2009.
However, there appears to be the opportunity for tax evaders to move their undeclared offshore holdings (outwith Liechtenstein) to Liechtenstein, and declare under LDF rather than NDO.
HMRC have stated that the LDF was:
"Only for new or existing investments [in Liechtenstein] at 1 August 2009".
However, in response to another query, HMRC subsequently stated that individuals with investments that have been made directly with offshore financial intermediaries "will be able to move their money to Liechtenstein after the end of the registration period for NDO, and then use the full terms of the Liechtenstein disclosure facility".
When queried about this HMRC stated:
"HMRC has the legal power to obtain information on investments where they have been opened through a UK branch or agency – say a branch of a bank in the UK.
Anyone with investments of this sort could move their investments to Liechtenstein after the end of the registration period for NDO, and use the Liechtenstein disclosure facility.
But they will get the same terms as the NDO.
People with investments they have made direct with offshore financial intermediaries will be able to move their money to Liechtenstein after the end of the registration period for NDO, and then use the full terms of the Liechtenstein disclosure facility.
They will of course have to disclose everything to HMRC in that case, or the new Liechtenstein laws will mean that they have to remove their investments or face sanction."
Tax professionals are none the wiser, and are calling for HMRC to make a categorical statement that clarifies the matter.
However, a clarification may be a long time coming as it is assumed that HMRC do not want to upset the authorities in Liechtenstein who have secured a better deal than other offshore jurisdictions in exchange for its cooperation.
Meanwhile HMRC, under the powers granted to it by Schedule 36 of the Finance Act (which came into force August 2009), now has the power to issue information notices to banks, forcing them to provide data on clients with UK addresses holding offshore investments.
Over 300 banks have been ordered to surrender information about customers with offshore accounts.
Brian Mairs, of the British Bankers' Association, said:
"No bank has any interest in shielding customers who would seek to evade their tax obligations. However, all of them have a duty under the law to keep their customers' affairs confidential.
The affected banks have yet to receive the notices, but once they receive them they will engage with HMRC to understand what information is being sought, whether it is in the power of the bank to provide it and, if so, in what time scale?"
James Bullock, tax partner at McGrigors, is quoted in The Times:
"For the financial institutions concerned this disclosure process is incredibly onerous and costly and they have to foot the bill themselves - even though they are doing HMRC's work for them."
Over 300 banks have been ordered to surrender information about customers with offshore accounts.
Brian Mairs, of the British Bankers' Association, said:
"No bank has any interest in shielding customers who would seek to evade their tax obligations. However, all of them have a duty under the law to keep their customers' affairs confidential.
The affected banks have yet to receive the notices, but once they receive them they will engage with HMRC to understand what information is being sought, whether it is in the power of the bank to provide it and, if so, in what time scale?"
James Bullock, tax partner at McGrigors, is quoted in The Times:
"For the financial institutions concerned this disclosure process is incredibly onerous and costly and they have to foot the bill themselves - even though they are doing HMRC's work for them."
As HMRC, ever desperate to plug Britain's tax shortfall, resorts to increasingly desperate measures it should consider the cost benefits of such "fishing trips".
Will the extra tax raised cover the administration costs incurred by both HMRC and the banks?
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
