Taxman takes a tour
What are the implications of the Special Commissioners' recent decision to allow the HM Revenue and Customs to request information from banks on offshore bank accounts without having to produce customer names?
Fleming: This gives HMR a quick and easy way to identify individuals and businesses that have made use of these accounts. Offshore accounts have been used to conceal substantial taxable income in the past, to the extent that the mere existence of an account held offshore rings alarm bell in the minds of HMRC.
Jago: This means the Revenue can use UK information-gathering powers to collect information about individuals with offshore banks and can then compare this with the tax returns of the account-holders, throwing up cases where they may suspect that tax has been evaded. In such cases, HMRC should be expected to seek an explanation of the bank account interest. Where tax has been underpaid, they may pursue the account-holder for payment of the tax, associated interest and tax-based penalties. In extreme cases and depending on the wider circumstances, formal prosecution could take place.
Hull: It is my understanding the HMRC is not able just to request the details of offshore bank accounts without good reason. It seems that holders of offshore bank accounts with an associated credit or debit card may be targeted as HMRC will have a link between the UK-issued credit card and an offshore bank account. If investigation of a tax return does not show the disclosure of offshore income, this may give HMRC reason to request information. However, a court order or consent of the account-holders would be required before a bank would disclose details. The matter may be made easier for the Revenue if the offshore bank holds its customer data in the UK which may make it accessible to HMRC via a UK court order. Alliance & Leicester International holds its customer data in the Isle of Man.
How ddoes this change the way in which the HMRC will be able to investigate offshorw accounts?
Fleming: It will not change much but will encourage routine use of the powers. By obtaining details of credit cards that are linked to offshore bank accounts, they will be able to compare information declared in tax returns to the information received from the banks.
Enquiries can then be opened quickly and with a greater degree of certainty that irregularities will be uncovered. They will also be able to make use of the discovery provisions to start investigations in cases that would normally be out of time, removing protection that taxpayers may have believed they had.The other point is that HMRC will be able to identify those who have failed to submit tax returns to them at all.
Jago: HMRC would previously have had to ask the offshore bank for the information but whether it could compel a response would have depended on the provisions of the relevant double-taxation treaty. Alternatively, the existence of undeclared offshore bank interest would have come to their attention only as a result of disclosures made under the savings dir-ective or as a result of invest-igations into other matters. This decision means that HMRC investigation of offshore bank interest is likely to be more systematic but, more important, will improve voluntary disclosure.
Hull: HMRC does not have automatic access to offshore bank accounts. It cannot just write to a bank requesting details on all UK-resident accountholders or even confirmation that a taxpayer holds an offshore account. It seems that HMRC is following the success of the US and Irish tax authorities in obtaining information about credit card transactions processed in their countries where the accounts used were offshore, but where the accountholder resides in their territory.
It seems to me that an offshore account with an associated credit or debit card issued by a UK card issuer is very susceptible to investigation. If the debit or credit card is issued by an offshore issuer or one outside of the UK, the investigation by HMRC would be more difficult.
Do all UK residents need to declare offshore bank accounts to HMRC? Does this include non-domiciled individuals?
Fleming: No. In broad terms, non-domiciled individuals are not subject to UK tax on non-UK income placed in offshore accounts, provided the income is not brought into the UK.
Jago: UK residents domiciled in the UK have to disclose interest on offshore accounts, even where it remains invested offshore as income tax is a tax on worldwide income. Non-domiciled individuals only have to disclose interest remitted to the UK so they only have to disclose interest that is enjoyed in the UK either directly or indirectly.
Hull: Tax is determined by domicile, ordinary residence or residence. The issues are complex and the rules are under review. The rules are different for UK-resident domiciles as compared with UK residents who are not domiciled in the UK. Both categories of taxpayer are liable to UK tax on all income that arises in the UK but the liability for tax on offshore earnings is different. UK-resident domiciles need to declare all income received on offshore investments and savings even if the income remains offshore but UK-resident non-domiciles need only declare any income from offshore investments or savings that is brought back to the UK, generally referred to as the remittance basis.
What should clients do if they have bank accounts that have not been declared to HMRC?
Fleming: Clients should seek advice from a specialist investigation expert. Non-declarations are subject to potential penalties which can be up to 100 per cent of the tax lost in addition to the tax payable and interest. In cases where serious tax fraud is uncovered, there is the potential that HMRC will prosecute the offender, which could result in a jail sentence and a confiscation order. An early voluntary disclosure will reduce the chances of prosecution and mitigate the penalties, especially if HMRC have not yet uncovered the account.
Jago: It is important that clients disclose bank interest as soon as possible. This is because voluntary disclosure and subsequent co-opera-tion with HMRC will reduce any penalty charged. Advisers who become aware their clients may have undisclosed bank interest must also report their knowledge or suspicion of this to the NCIS, as tax evasion is a money-laundering offence in the UK.
Hull: Taxpayers cannot plead ignorance of the rules and should seek professional advice to help design a strategy for approaching HMRC. It is preferable that clients should disclose to HMRC rather than being discovered themselves. Clients should expect to pay any tax due plus interest and charges. The sooner you act, the more likely the impact will be mitigated.
Do all UK residents need to pay tax on offshore bank accounts on an annual basis? Does this include roll-up bank accounts?
Fleming: Anyone who is UK-resident and UK-domiciled for tax purposes and has sufficient income to be liable to UK tax must declare all taxable income on an annual basis, no matter where it is received. Interest from an offshore bank account needs to be disclosed on the tax year covering the year in which the interest arose.
Jago: This will depend on the terms and conditions of the account.
Hull: UK-domiciled residents need to disclose to HMRC all income earned anywhere in the world even if this income is not remitted back to the UK. This is different for a non-domiciled UK resident who needs only to declare income earned in the UK or brought back into the UK.
Individuals with offshore bank accounts who use a debit and credit card to withdraw money from their offshore account at a bank in the UK may find that this is treated as a remittance and subject to income tax.
With regard to gross roll-up bank accounts where interest is not paid annually but at a time chosen by the customer when the account is opened, income needs to be declared when earned.
Are there still advantages in UK residents using offshore bank accounts? Do they include tax advantages?
Fleming: There are still advantages to using offshore bank accounts, including preferable interest rates or terms and conditions that suit the needs of the individual or business better than other accounts. There are clear advantages to those who are not liable to UK tax or are non-UK-domiciled. Jago: There are reasons why UK-resident individuals may want to have non-UK bank accounts. People with rental or holiday properties abroad would be expected to require such accounts, for example. It is debatable whether the reasons for holding such accounts include tax reasons.
Where tax planning is required, holding bank deposits within offshore bonds should be considered. The account will be able to grow tax-free in the bond wrapper, allowing the investor to defer personal tax liabilities until a time that suits them, such as in retirement.
Hull: Tax advantages are now really only restricted to non-domicile residents who can invest their non-UK-sourced capital in an offshore bank and receive their interest. For UK-resident domiciles, advantages of deferring tax can be offered by some gross roll-up accounts that allow interest to accrue on the account only being paid when the customer chooses, generally when they move from paying higher-rate tax to being a standard-rate taxpayer, such as at retirement. A UK-resident domicile will receive any interest on their offshore account with the deduction of a withholding tax, currently 15 per cent. All interest must be disclosed on tax returns and while they will receive a credit for the withholding tax, a further tax may be payable depending on circumstances. This will result in the same amount of tax being paid as if the investment had been with a UK institution.
Offshore banks tend to be smaller operations than their UK parents and tend to offer a more personal service.