Aquick glance through the news is all that's needed to see that there is no abatement in the political drive for a clampdown on the perceived leakage of tax. My article ‘There is no avoiding the tax clampdown’ (see tax.point June 2012) highlighted the increasing pressure being applied by the UK Government and HM Revenue & Customs (HMRC) on areas where they believe insufficient tax is hitting the depleted coffers, either through tax avoidance or through criminal evasion.

The message from HMRC over the last year has got stronger and louder. Whether it is through increased negotiations with offshore jurisdictions, or well-publicised hearings of the Public Accounts Committee, the pressure and focus is clearly on!

The recent UK Budget statement provided further insight into HMRC's continuing campaign to address the tax gap and increase its compliance activity, with specific emphasis on combatting tax avoidance and offshore tax evasion.

Tax Gap

For 2010/11 HMRC estimates the tax gap was approximately £32 billion, with approximately £14 billion (43.8%) due to ‘tax evasion, hidden economy and criminal attack’, £5 billion (15.6%) due to ‘avoidance’ and £4 billion (12.5%) due to ‘non-payment’.

From these numbers, HMRC clearly feels obligated to vigorously pursue avoidance and evasion.

Spending and Resource

In 2010 the Government reinvested £917 million into HMRC to tackle tax avoidance, evasion and debt. In the Autumn Statement 2012 it was announced that a further £77 million would be allocated to HMRC to be used in the same way. Part of this sum will be dedicated to increasing the number of specialist staff, as well as increasing HMRC's technological capabilities.

This further investment also included £6 million over two years to set up a new offshore evasion strategy team. That team will liaise with the Offshore Coordination Unit (which oversees the Liechtenstein Disclosure Facility UK/Swiss tax agreement and offshore tax evasion enquiries generally) as well as the Criminal and Specialist Civil investigation teams within HMRC.

The data sources now being obtained by HMRC are vast and should not be underestimated. To enable HMRC to be able to turn this data into valuable and useable information it has invested in ‘Connect’. This is a cutting-edge, award-winning data analysis and processing tool which allows HMRC to risk assess data quickly and efficiently and gives more up-to-date cross-matched statistics. HMRC suggests the use of this software alone has assisted in generating around £2 billion in additional yield.

Liechtenstein Disclosure Facility (LDF)

We are now approximately halfway through the LDF period, which continues through until April 2016. The number of registrations continues to rise; the latest figures suggest 4,177 registrations by February 2013, resulting in additional tax revenues of £567 million.

If this momentum is maintained HMRC may well hit the initial target of £1 billion, although it appears to be falling well short of the amended target of £3 billion.

The LDF remains a very beneficial facility for taxpayers with previously undisclosed liabilities and it is worth always considering it as an option when evaluating how matters should be taken forward, even when other facilities exist (see below).

UK-Swiss Tax Agreement

On 1 January 2013, the Government's agreement with Switzerland to recover previously unpaid UK tax on money hidden in Switzerland came into force. This agreement is specific to Swiss assets only and must be considered carefully to determine whether it is the best solution to any historic tax issue. However, that decision needs to be considered and taken prior to 31 May 2013. The tax levy to account for the historic tax position will be deducted from all relevant bank accounts by the banks on 1 June 2013 and paid anonymously to HMRC via the Swiss Authority.

On 29 January 2013, HMRC announced that it had received the first instalment of £342 million from the UK-Swiss agreement. The agreement is forecast to bring in more than £5 billion over the next six years.

Anybody with a relevant Swiss asset and a connection to the UK should review their position and take action now!

UK Budget Gives The Go-Ahead for HMRC to Focus on Offshore Tax Evasion

The UK Government made it quite clear in its 2013 Budget statement and associated documentation that it will be increasing its focus on offshore tax evasion. The Budget documents include ‘No safe havens – HMRC's offshore evasion strategy’ which highlights HMRC's plans to investigate offshore tax evasion over the next three years. The offshore evasion strategy document is a clear statement of HMRC's intent to engage with and, as necessary, penalise those who have undisclosed tax liabilities. Some of the stated objectives are:

• There will be no jurisdictions where UK taxpayers feel safe to hide income and assets from HMRC
• Those that do not come forward will be detected and face vigorously enforced sanctions
• There will be no place for facilitators of offshore evasion.

HMRC intends to strengthen the severity of punishment for non-disclosing evaders, with tough penalties, the possibility of criminal investigation and publishing the names of the most serious evaders.

A key strategy will be to develop relationships with overseas partners, and share data and financial intelligence to identify and investigate offshore tax evasion. HMRC will explore the further use of third-party data to detect offshore evasion, by using data from financial institutions and others to identify individuals who don't keep HMRC fully informed of their offshore affairs.

Significantly, the document includes a statement on HMRC's focus on firms and professional advisers who assist in offshore matters. It will be a priority area of HMRC's developing strategy to identify and tackle those who facilitate offshore evasion.

HMRC specifically states that it recognises that some professional advisers facilitate structures and steps that support tax evasion. Initially it intends to run a pilot study to identify, understand and tackle offshore risks associated with trust and company service providers, and challenge those most likely to facilitate tax evasion.

HMRC will proactively publicise offshore campaigns and successful criminal prosecutions involving offshore tax evasion, to make clear what the consequences are for evaders. This also includes publicising the names of those who are deliberately defaulting on their tax offshore via the ‘naming and shaming’ legislation.

The offshore world is coming under greater and more detailed scrutiny from HMRC and it is cooperating with an increasing number of countries around the world, including some unexpected jurisdictions as evidenced by the unique UK/Swiss tax agreement. Information exchange will increasingly expose hidden offshore accounts and business to HMRC's scrutiny. HMRC is also offering beneficial disclosure facilities to encourage anybody with an offshore tax problem to take the opportunity to resolve it voluntarily before HMRC closes in.

UK Crown Dependencies and Overseas Territories—FATCA, Information Exchange and Disclosure Facilities

The Foreign Account Tax Compliance Act (FATCA) seeks to limit US tax evasion by placing reporting requirements on foreign financial institutions.

The FATCA regulations are wide-reaching in respect of automatic exchange of information, and significant interest has been shown by the OECD and the EU in the wider application of the principles behind the arrangements. As a result, the UK approached the Crown dependencies and the overseas territories with a view to applying the principles to an exchange of information with the UK. The UK Government was concerned that Crown dependencies and overseas territories would be providing more information to the US than to the UK in the fight against tax evasion.

As per the Budget announcements significant discussion has led to the UK recently finalising tax agreements with the Isle of Man, Guernsey and Jersey.

Under the enhanced information exchange agreement, the UK and overseas authority will automatically exchange a wide range of information on tax residents, on a reciprocal basis.

In relation to these agreements Exchequer Secretary to the Treasury, David Gauke, said:

• “[These] agreements will significantly boost the UK's ability to tackle cross-border tax evasion. Automatic information exchange is an important tool in boosting HMRC's ability to clamp down on those who seek to hide their money overseas. Our ground breaking agreement with the US sets a new standard in international tax transparency and [these] agreements move to much greater levels of automatic exchange is the next step in this process. For years people said this couldn't be done, so I welcome the progress we have made so far... We are looking to reach similar agreements with other jurisdictions about enhanced information exchange as part of our common commitment to combat tax evasion.”

In addition to agreeing to the exchange of information, the Isle of Man, Guernsey and Jersey have agreed to specific disclosure facilities for each jurisdiction. The tax facilities will allow those with undisclosed offshore tax matters linked to the islands to rectify their situation with beneficial terms, ahead of the enhanced information exchange agreement as noted above. The new facilities commenced in April 2013 and will run through until 2016. The information exchange will occur in 2016, following which HMRC will embark on a compliance programme to chase up those who have still not disclosed their offshore interests.

The trend for increased transparency has also spread further afield. On 15 March 2013 the Cayman Islands announced that it would adopt an intergovernmental agreement in response to FATCA. Included with the announcement was the decision to apply a similar arrangement for the automatic exchange of certain information with the UK.

The final negotiations on the mechanisms for exchange between the US and the UK are expected to conclude shortly. By the beginning of May 2013 further overseas territories of Anguilla, Bermuda, the British Virgin Islands, Montserrat and the Turks and Caicos Islands had also agreed to share information automatically with the UK.

In relation to this announcement George Osborne said:

• “This represents a significant step forward in tackling illicit finance and sets the global standard in the fight against tax evasion.”

He urged other governments to follow suit and remove

• “the hiding places for those who seek to evade tax and hide their assets.”

These are strong words but support the stance and strategy being adopted by HMRC. The global taxation landscape is changing at an unprecedented pace and it is clear the pressure mounted on these offshore jurisdictions has forced co-operation in the exchange of information and disclosure. These jurisdictions clearly want to ensure that they can continue to do business effectively with their global counterparts and maintain a positive reputation regarding openness and transparency. It is increasingly likely that all UK Crown dependencies and overseas territories will follow suit in the coming year.

HMRC has stated it expects to recover £1 billion in unpaid taxes via the Isle of Man, Guernsey and Jersey facilities. It will expect to recover much more from the overseas territories as a whole.

Additional Tools Being Used By HMRC

Contractual Disclosure Facility (CDF—Code of Practice 9)

Although the CDF has replaced the long established COP9 process it is relatively new in this re-engineered format, the intention of which was to give HMRC fraud investigators more bite.

At present the jury is still out as to whether that has actually happened in practice. However, CDF is HMRC's most serious form of civil investigation, so it is important to understand some key elements:

1. This involves cases of suspected tax fraud. It is not appropriate for people who only want to disclose careless errors, mistakes, or avoidance arrangements.
2. In exchange for taking up the invite, HMRC agrees that it will not pursue a criminal investigation into the tax frauds disclosed.
3. There are two stages to the agreed undertaking: an ‘outline disclosure’ to be made within 60 days of HMRC's invite; and a ‘formal disclosure’ including a certified statement that a full, complete and accurate disclosure of all tax irregularities has been made. An incomplete disclosure can lead to a criminal investigation.
4. HMRC can recover unpaid tax, interest and penalties for up to 20 years previously.
5. Full cooperation will ensure the penalties charged are closer to the minimum level.
6. The initial letter from HMRC should be treated very seriously and with upmost priority as this is when the strategy for the forthcoming investigation will be determined.
7. If HMRC is not satisfied by the disclosure or cooperation then it can undertake a criminal investigation despite its original offer of a civil approach.
8. The time allowed for preparing a full disclosure report will depend on the complexity of the issues and will need to be agreed with the relevant tax officer. For the first time, HMRC is actually recommending that individuals seek the help and advice of a specialist adviser.

The number of cases currently worked through the new CDF is limited, but it is expected that this form of investigation will be stepped up over the coming year.

Managing Serious Defaulters Programme

Those who do not make a full voluntary disclosure and are subsequently investigated and penalised for deliberate non-compliance will be subject to greater scrutiny from HMRC under the Managing Serious Defaulters programme. This involves annually providing HMRC with additional material alongside the usual tax return for up to five years. More information is available on page 16.

Increase in Criminal Investigations

HMRC has significantly increased the number of staff within its criminal investigation teams.

HMRC will use information from other jurisdictions and disclosure facilities to catch tax evaders and uncover criminal offshore arrangements. HMRC has already significantly increased the number of criminal investigations and prosecutions of tax cheats, and will increase the number of investigations that are specifically into offshore evasion.

High Net Worth Unit

HMRC will also focus on very wealthy individuals. Its High Net Worth Unit (HNW Unit) was established in 2009 to deal with the personal tax affairs of 5,600 of the UK's wealthiest residents—typically those worth at least £20 million. These individuals usually have very complex affairs, with large amounts of tax at stake. They need a high degree of oversight and scrutiny to ensure that they get their tax affairs right and HMRC takes an even-handed approach that helps the HNWs to comply voluntarily, as well as deterring and tackling avoidance.

Since 2010, the HNW Unit has delivered more than £500 million in additional tax revenues from its compliance work, significantly more than it had previously brought in from this group. The HNW Unit is regarded as an example of good practice by the OECD in dealing with tax compliance among very wealthy individuals.

Other new teams have been set up to focus on a population of 500,000 “affluent” individuals—the next tier down from those dealt with by the HNW Unit—and HMRC is strengthening these teams with an extra 100 people. It is not uncommon for such wealthy individuals to have offshore investments, businesses and trust structures, and given the HMRC strategy referred to above they need to ensure they are compliant and up-to-date with their tax affairs, however complex they may be.

Those caught out by the HNW Unit will, at the least, face an intrusive tax enquiry, a significant financial settlement and close HMRC monitoring lasting several years. There is a possibility they could also be publicly ‘named and shamed’ as a tax evader.

Settlement Opportunity for Participants in Tax Avoidance Schemes

HMRC's pursuit of tax avoidance has led to a significant backlog of Tribunal cases. In addition, one of HMRC's priorities is to bring in more cash. So in tandem with the focus on avoidance and evasion, HMRC announced a settlement opportunity for participants in tax avoidance schemes.

In a 3^rd December 2012 document headed ‘Tackling Tax Avoidance and Evasion’ the UK Government announced new rules and additional investment into HMRC to clamp down on tax avoidance and evasion. As part of this announcement, HMRC set out a settlement opportunity for participants in certain tax avoidance schemes to settle their tax liabilities by agreement, without the need for litigation.

This is an opportunity for both clients and HMRC to resolve these disputes now. HMRC has said that anyone who declines the settlement opportunity will see an increased pace in long-running investigations and acceleration into litigation.

Those who are eligible for the offer should have been contacted by the end of January 2013 and the settlement opportunity is available for specific schemes set out by HMRC. These offers should be considered very carefully, and a full realisation of the true cost taken on board.

Many clients see this opportunity as a refreshing approach to ongoing investigations that have stalled with little hope of settlement in the near future. However, others have found the offer cost-restrictive and are therefore more inclined to take their chances through litigation.

Conclusion

The world really is becoming a smaller place. In times of austerity and spending cuts, HMRC is a shrinking department which has to collect higher tax yields. Its strategy is to refocus its resources and pursue marketed avoidance, high net worth individuals, large corporates, offshore evasion and undeclared bank accounts.

However, it is not only tax avoiders and tax evaders who should be wary. To quote HMRC in its offshore strategy document: “We recognise that some professional advisers help facilitate structures and steps that support tax evasion”. HMRC will be looking at these professional advisers as well as their clients.

If a tax problem exists then the days of clients (and advisers) ignoring it and hoping it will go away are long gone. The pressure is on and HMRC has a politically-driven strategy to plug the tax gap, which means more targeted investigations and higher yielding civil settlements.

At worst, this could mean a criminal investigation and the possibly of spending time serving at Her Majesty's pleasure along with confiscation of the proceeds.

Andrew Walker is a Tax Investigations Partner at Smith & Williamson.

Tele: Manchester: +44 (0)161 871 6614

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

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