Introduction

Without a doubt, the UK authorities continue to focus on what they perceive to be ‘aggressive tax planning’ (see tax.point November 2011 feature article). This focus has prompted many clients to take a long hard look at their financial affairs. Comments from tax industry and financial professionals suggest the continued attack on tax planning (avoidance) has led many taxpayers to have their affairs structured in a more transparent manner.

This increasing pressure on tax avoidance is not isolated to the UK. Authorities around the world, particularly in Europe and the US, are taking progressively tough stances on the perceived tax avoider (as well as tax evaders) demanding more disclosures from financial institutions and tax friendly countries.

The US is pushing ahead with the Foreign Account Tax Compliance Act (“FATCA”) and has reached agreement with a number of European countries, including the UK, in relation to the exchange of information regarding US account holders. Some countries have also taken an aggressive and public approach in a campaign against perceived ‘wealthy’ individuals, with remarkable results. Italy, for example, raised a reported €6bn in a very short space of time.

Switzerland remains under pressure to relax its bank secrecy rules and provide client details to foreign governments in an attempt to catch tax evaders hiding their funds abroad. From 2013 they will deduct the historical tax levy and future withholding tax. In addition, the Liechtenstein Disclosure Facility has been extended.

Clients who fall into categories such as: high-net worth, resident/non-UK domicile, entrepreneurial, high earning and those participating in tax planning are at the top of the hit list. The Government, supported by the press, demand these individuals pay their ‘fair share’ of tax at a time when spending cuts continue to bite and we hear continuous talk of us slipping back into recession.

Of course HMRC targeting these areas is nothing new but the general consensus is that it is now doing so with more vigor, it also has cross-party political support and more importantly the support of ‘the man on the street’.

The effect of targeting tax planning in this way has led to individuals currently having less (or no) appetite for tax strategies and instead opting to keep their heads down to avoid HMRC's scrutiny. The result of this is fewer advisors willing to market ‘tax schemes’, which from HMRC's perspective is a success.

As an example, HMRC has specifically targeted film finance schemes on the basis that it believed they have been abused. Having been personally asked to review a number of film investments by external advisors I must admit I have some sympathy for HMRC's view. The recent victory for HMRC in the case Eclipse 35 LLP v HMRC [2012] UKFTT 270 against 200 wealthy investors (some well-known) only fuels the nervousness of other investors.

Government Backs HMRC

This approach by HMRC has been supported by the Government with the Chancellor announcing in the Budget that he regarded “tax evasion and aggressive tax avoidance as morally repugnant” and he followed this up with the announcement of consultation on the introduction of a General Anti-Abuse Rule next year. HMRC is no doubt hoping this will be the final nail in the coffin for ‘tax avoidance’!

In addition to increased legislation, HMRC has made massive advances in obtaining information regarding UK residents and this is not just sourced from within the UK. The net is closing in as HMRC gathers more information, obtains more power and approaches investigative work in a more risk-based and focused manner.

The UK has increasingly signed tax treaties with foreign jurisdictions. These treaties allow HMRC to scrutinise assets and business dealings that UK residents have abroad. Depending on the jurisdiction involved, exchanges of information can be extremely fast and extensive. Some information will have been requested by HMRC whilst other information will have been sent spontaneously by the treaty partner who considers the information relevant to the UK resident's tax affairs.

HMRC likewise has contra arrangements with their treaty partners and its risk profiling is not just focused on overseas. It has served notices on UK banks for information regarding individuals with UK addresses who hold or held bank accounts outside of the UK. A comparison has been carried out between electronic data and entries on Self-Assessment Tax Returns. As a result, a list of ‘high risk’ individuals has been compiled. This profiling has resulted in thousands of targeted tax investigations and this continues to grow. It is envisaged it will take HMRC a number of years to work through this data.

In addition to this readily available electronic information, HMRC has increased its own powers to obtain information from individuals and third parties, as long as the information is in their power or possession, and HMRC believes it will be relevant to a person's tax affairs.

The powers and information sources available to the modern day taxman are vast. Whilst staffing levels are being cut to the bone, resulting in poor service to the general public and accountancy profession alike, this should not be taken as an indication of HMRC's overall performance. The increased power and information available is there to facilitate the drive towards what is seen, rightly or wrongly, as HMRC's main function – getting tax into the Treasury.

Update on the Liechtenstein Disclosure Facility (LDF)

HMRC continue to pursue outstanding tax liabilities arising from offshore assets through the new Offshore Co-ordination Unit. The UK–Swiss tax agreement looms large in 2013, and there have been recent changes to the LDF.

Nonetheless, the LDF continues to be the most beneficial facility to deal with outstanding tax issues involving both offshore and onshore matters.

LDF statistics show that by 31 March 2011 the total number of cases registered was 1,351, with total payments of £140M. The corresponding figures at 31 March 2012 were 2,350 and £319M. This clear increase and success has prompted the deadline for participation in the LDF to be extended until 31 March 2016. The beneficial terms still only apply to the years 1999 to 2009 inclusive, but the later years are still resolved through the process.

In a procedural change (not of HMRC's making) the Liechtenstein financial community has increased the level of investment required to acquire a ‘relevant asset’ in Liechtenstein and cement the ‘meaningful relationship’ enabling participation in the LDF (see tax.point December 2010 feature article). Previously, investments as low as £10,000 were acceptable. At least £50,000 of funds or assets will now have to be invested in Liechtenstein. My advice – act sooner rather than later before this rises again.

As part of the review of ‘meaningful relationship’, a Certificate of Relevance must be obtained from the Liechtenstein intermediary prior to registration with HMRC. From a practical point of view this has slowed down the speed of LDF registration as it will only be issued by the intermediary once the funds and all paperwork have been received by the bank.

Interestingly, individuals can now self-certify that they are tax compliant in response to a request from a Liechtenstein intermediary regarding their tax affairs. Previously, this had to be certified by a UK tax practitioner or other similar professional person. In comparison, the Swiss–UK tax agreement will require professional certification. However, a word of caution - the supporting documentation behind the self-certification may be requested in the future and those individuals found to have incorrectly certified will be open to severe action from HMRC, if discovered.

These changes affect the LDF process but do not detract from its significantly beneficial terms for those non-compliant individuals who wish to put undisclosed matters right. The amount of tax payable under a LDF settlement should invariably be significantly less than would be the case under both the Swiss agreement and the normal HMRC enquiry process.

Contractual Disclosure Facility

The Contractual Disclosure Facility (CDF) came into force on 1 February 2012. HMRC have made a concerted effort to bolster the civil investigation of serious fraud which it was felt had been watered down over recent years and had become somewhat toothless. This new tax investigation arrangement will replace the Civil Investigation of Fraud (CIF) facilities (Code of Practice 9).

Listed below are some of the most important things you need to know about HMRC's new CDF procedure:

• From 1 February 2012 HMRC will no longer give an absolute guarantee, at the outset of an investigation, that a taxpayer will not be investigated criminally.
• HMRC has statutory powers enabling them to make a visit to a taxpayer's premises whilst it is reviewing their affairs as a potential CDF case and can also secure relevant books and records.
• Taxpayers offered entry into the CDF will have only 60 days to decide how they are to respond. They can:
1. fully co-operate and accept the offer to sign a contract; or
2. formally deny any irregularities; or
3. make no response at all
• If the CDF is accepted, the taxpayer has to complete an outline valid disclosure within the same 60 day period. This must contain a brief description of the tax frauds committed and a formal admission of deliberately bringing about a loss of tax through behaviour that HMRC may suspect to be fraudulent.
• The report detailing the frauds and the tax lost must be completed within 6 months and an extension will only be granted in very exceptional circumstances.
• If HMRC considers the outline disclosure omits something fraudulent, the case will be referred back to HMRC Criminal Investigations for further review.
• In denial cases, HMRC will require evidence in support of the denial and will expect the taxpayer to attend a meeting.
• If the taxpayer fails to respond to HMRC's offer of a contract, the case will then be referred back to Criminal Investigations.
• If a taxpayer wishes to request entry into the CDF then the individual must do so via the Voluntary Request section of HMRC's website.
• For the first time, HMRC recommends taxpayers use a specialist adviser.

It is also interesting to note that unlike CIF, (and previous versions of COP9), there is no de-minimis limit in relation to the selection of cases by HMRC. Included in the selection process will be the perceived behaviour of the individual. This is a significant change to the civil investigation of fraud procedures and a deliberate attempt by HMRC to reinforce their new approach. There are now more opportunities for HMRC to refer cases for Criminal Investigation, particularly in relation to cases involving a denial by the taxpayer, which need careful consideration.

HMRC have also put emphasis on the time frame within this new process. Advisors (and Inspectors) can no longer allow cases to drift away.

There are also strict deadlines for accepting the CDF contract and for providing the outline response (60 days), and the completion of the report (6 months). It will be interesting to see how both these aspects bed down, particularly when a Freedom of Information request tells us that the average length of time to complete the COP 9 enquiries that were settled in the years 2008/09, 2009/10 and 2010/11 was 846 days, 864 days and 935 days respectively.

Conclusion

In summary, HMRC wants to generate tax yield but also change taxpayers’ behaviours to reduce future tax compliance failures. Its new powers look to settle cases quickly and reward cooperation and disclosure, whilst heavily penalising those who are uncooperative.

A recent Public Accounts Committee report suggests the decision to reduce staff numbers within HMRC might have undermined the Government's crackdown on tax evasion and avoidance. However, it also notes that the targeted use of data has resulted in an increasing tax take. They are also pleased to announce the reinvestment of £917m of savings into resources to tackle evaded and unpaid taxes and are looking for HMRC to maximise the return on this investment!

The HMRC clampdown is not going away, suggesting there really is nowhere to hide.

Andrew Walker is a Partner with Smith & Williamson LLP

Telephone:

Manchester: +44 (0) 161 837 1878

Dungannon: +44 (0) 28 8744 7200

Email: andrew.walker@smith.williamson.co.uk

Website: www.smith.williamson.co.uk

Note to Editors

Smith & Williamson LLP is an independent professional and financial services group employing around 1,500 people. The group is a leading provider of investment management, financial advisory and accountancy services to private clients, professional practices and mid-to-large corporates. The group has eleven principal offices in the UK and Ireland; these are in London, Belfast, Birmingham, Bristol, Dublin, Dungannon, Glasgow, Guildford, Manchester, Salisbury, Southampton, and Worcester.