Governments of the world are out to supplement tax revenues with amnesties - politely known as "disclosure programs." Recently the US government waged a campaign against overseas banks (especially UBS in Switzerland) and offered a voluntary disclosure program that terminated on October 15. The Italian government has a disclosure program that expires on December 15. This article deals with the new disclosure program now offered by Her Majesty's Revenue and Customs (HMRC) in Britain.
Due to the vast number of people who were suspected to be involved in illegal tax evasion, and the difficulty for HMRC in obtaining reliable information from countries where the assets were hidden, HMRC in 2007 gave UK tax payers an opportunity to voluntarily disclose details of assets held in offshore bank accounts. HMRC said it was expecting hundreds of thousands of people to come forward, which would raise Â£1.5 billion in unpaid taxes. To HMRC's regret, only some 40,000 people came forward in 2007, raising Â£400 million, far short of its initial expectations.
However, we should not discount the success of this scheme altogether. Firstly, there was no amnesty. An amnesty suggests a pardon or a relief from punishment. In the Offshore Disclosure Facility (ODF), as the 2007 scheme was known, there was no such pardon; all of the tax and interest had to be paid, and there was a penalty that was fixed at 10 percent.
Secondly, using the resources that HMRC currently has at its disposal to investigate all of the 40,000 people who came forward would take approximately 30 years. The ODF, which ran for seven months in 2007-2008, was a considerably cheaper and quicker way of achieving a similar result.
But if the "amnesty" still required taxpayers to settle their tax, interest and penalties in full, in what way was it an amnesty and why did 40,000 people decide to disclose under the scheme? HMRC marketed the scheme with the "incentive" of a 10% penalty. In regular investigation cases, penalties can be imposed of up to 100% of the tax evaded, and although the maximum rate would rarely be imposed, 10% would be much cheaper than the penalty payable under most HMRC investigations.
However, there were other benefits of coming forward that were not so widely publicized. First, the professional fees incurred in appointing a tax investigation specialist to make a disclosure on your behalf could be 50%-75% cheaper under the amnesty route compared to the full investigation route. This is because under the amnesty, practitioners would have very little, if any, contact with HMRC and no detailed disclosure report would be required. These are two time-consuming areas that add significantly to the cost of carrying out an enquiry.
Another benefit of taking advantage of the amnesty was that persons making the disclosure would be extremely unlikely to have to meet or be quizzed by a tax inspector. They would not be subjected to verbal or written accusations about how they have conducted their lifestyle and avoided paying taxes. This contact with HMRC is particularly unpleasant and stressful for most individuals and can extend over a period of several years, causing, among other things, health issues, relationship difficulties and an inability to sleep.
The amnesty allowed 40,000 people to pour out their hearts to HMRC on a few pieces of paper, and in a matter of months they brought closure to issues that had played on their mind for many years.
A WIN-WIN SITUATION
The 2007 amnesty was therefore a "win-win" situation. HMRC raised a significant amount of tax with relatively few resources, and taxpayers received closure for less money and peace of mind. HMRC felt that the scheme was so attractive that had it publicized the scheme more widely in 2007, many more people would have come forward.
Taking this limited success on board, HMRC in the UK has decided to give one more opportunity to disclose details of undeclared income under a new amnesty, which has been called the New Disclosure Opportunity (NDO). Again, the incentives to come forward are a 10% penalty rate and reduced reporting, which means a faster, cheaper, less-intrusive process.
Registration for the scheme must be completed by November 30, 2009, and full disclosures must be submitted before March 12, 2010, including details of all undisclosed UK income and tax payable.
There is also a similar scheme running simultaneously, known as the Liechtenstein Disclosure Facility (LDF), which arose out of a recent agreement between HMRC and the Liechtenstein authorities. Individuals who hold bank accounts or assets in Liechtenstein are allowed to pay tax on only the last 10 years of income, rather than 20 years, which is payable under the NDO.
When facilities such as the NDO and the LDF arise, people have many questions and do not even know if they can ask them. Do not bury your head in the sand. It is a fact of the 21st century that information exchanges between taxation authorities and advances in technology mean that more information than ever is available to HMRC. If the information below does not answer your questions, then speak an accountant or lawyer with knowledge of the UK system and take the necessary action.
I know that UK accountants are under an obligation to report suspicions of tax evasion. How can I talk to anyone about my offshore problems?
Tax investigation specialists and some accountants can have a "privileged" meeting with individuals, in the same way that lawyers can discuss such matters openly with clients. It is a serious breach of confidentiality for an accountant to file a report of matters discussed in a privileged meeting.
Will my disclosure be accepted by HMRC?
The vast majority of disclosures will be accepted without question. If HMRC does not accept the disclosure, then it may either seek clarification as to the basis of the disclosure or it may open a more extensive investigation.
What happens if I choose not to disclose at this time?
HMRC has stated that this is the final opportunity that will be given to UK tax payers to disclose in this way. While Ireland has had several "final" opportunities, HMRC likely will enforce considerably higher penalties of up to 100% of the tax unpaid and may even consider prosecution.
If I choose to disclose under the NDO or the LDF, am I guaranteed immunity from prosecution?
There is no guarantee being offered by HMRC under the NDO. However, providing you make a full disclosure and are not involved in wider organized crime, then prosecution is unlikely. There have been no prosecution cases arising from the 40,000 disclosures made under the previous facility. Disclosures made under the LDF are virtually immune from prosecution, provided there is no serious crime involved apart from tax evasion.
I am not sure that I can get all the records going back 20 years. Where do I start?
HMRC accepts that some documents will not be available, particularly within the short time scale that is being offered for the NDO. Speak to your adviser who can advise how best to proceed.
HMRC normally calculate the tax due on my tax return. Will they calculate any tax due under the NDO?
No. HMRC will not assist you with determining how much tax to pay. Full details of how to prepare the disclosure are available at https://ndo.hmrc.gov.uk, or speak to an accountant who can assist with the preparation of the relevant forms.
And if you are still thinking that you need to have millions of pounds stashed away before it is worthwhile coming forward, you could note that the average disclosure under the 2007 scheme was just Â£9,000. In fact, the amnesty is actually most suited to those with a small problem that is causing a lot of stress.
What about Israel?
If you are a UK citizen residing in Israel, HMRC can make inquiries using the information-exchange provisions in the UK-Israel Tax Treaty. The Israel Tax Authority has said it will not entertain general "fishing expeditions" under at tax treaty; any foreign inquiry must be specific about someone.
As for Israel, tax officials oppose a general amnesty as giving a prize to tax evaders, without regard to the tax revenues that may be generated. There is currently an amnesty of sorts for pre-2006 irrevocable trusts, enabling trustees to pay tax of 4%-10% of the value of trust assets at the end of 2005, calculated in one of several ways. But it is arguable whether any tax was due in many of those cases.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
Geoffrey Hollander is head of tax investigations at Cameron Baum, Chartered Accountants. He would be happy to answer further questions.
Leon Harris is an international tax specialist at Harris Consulting & Tax Ltd., in association with Lion Orlitzky & Co. (Moore Stephens Israel).