London,
22
March
2016
|
11:58
Europe/Amsterdam

Tax Investigations: The Common Reporting Standard and HMRC’s Requirement to Correct

In recent years, HMRC has been stepping up their efforts to tackle offshore tax evaders. Their paper entitled ‘No Safe Havens’ sets out their offshore tax evasion clampdown strategy. They are currently looking at ways to help implement their strategy ahead of the adoption of the Common Reporting Standard (“CRS”).

The CRS is a new global standard for automatic exchange of financial account information that will create obligations for financial institutions to share information, to include the identification of account holders and the reporting of information on them to HMRC.

It builds upon the enhanced automatic tax information exchange agreement between the UK and the US to implement the reporting required under US FATCA (the “US Foreign Account Tax Compliance Act”) legislation. It also builds on the tax information agreements with the Isle of Man, Jersey, Guernsey and Overseas Territories (Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands).

These initiatives involve governments obtaining information from their financial institutions and exchanging data automatically with other nations. Financial institutions (and other investment bodies) will be required to disclose details of their account holders which will include their financial interests, account balances and sales proceeds from financial assets.

HMRC will be hoping that the first CRS exchange of information will expose account holders who have failed to disclose their offshore interests. It is expected that there will be widespread adoption of CRS in 2018.

The government is currently looking at ways to encourage and entice taxpayers to declare their offshore interests to HMRC voluntarily before the implementation of CRS. They are looking to provide tax evaders one final chance to put their tax affairs in order before 2018.

They are considering new legislation which requires any person who has undeclared UK tax liabilities offshore, to correct this situation by declaring their interest and relevant information to HMRC (“requirement to correct”). This disclosure would take place through the form of a self-assessment of their tax up to and including 2015-16. It is suggested that the requirement to correct takes place between April 2017 and September 2018.

Under the current proposals, if a person is found to have “failed to correct” before the 2018 deadline, then sanctions will be in place to punish them. HMRC say that any penalties would be designed to be proportionate to the offence, but tougher on offshore compliance issues.

They will be hoping to deliver a clear and strong message that the government is getting much tougher on offshore non-compliance and this is a final chance to put things right before a tougher approach is introduced. Their view is that individuals have been given numerous opportunities to come forward and put their affairs in order.

HMRC will be hoping that the less carrot (requirement to correct), more stick (serious sanctions) approach will incentivise people to come forward in ways that previous strategies have failed in the past.

There are a few concerns with this strategy, however, and three key questions arose during the consultation on the requirement to correct, namely:

  1. What is the likelihood of tax evaders being caught?
     
  2. What will be the punishment for failing to correct and will it be worth the risk?
     
  3. Could a person still be subject to a criminal investigation even if they abide by the requirement to correct?

HMRC will hope to convey a robust message that if you do not cooperate, you will be caught. Only time will tell how effective their strategy will be.There is little doubt, however, that there will be some who will take their chances.

It also seems clear that the penalties that will be implemented for failure to correct will be far greater than the penalties incurred should one declare their offshore interests before September 2018. HMRC will no doubt work extremely hard to ensure that this message comes across to anyone who is involved in offshore tax evasion. The advice will undoubtedly be “get a financial health check and seek expert advice now before it is too late”.

The last question is one which will play on the mind of all who are caught by the legislation and it is a question of particular interest to criminal defence solicitors. It seems that even if you abide by the requirement to correct, you could still be subject to a criminal investigation. This may be the biggest deterrent which ultimately discourages people from coming forward and declaring their offshore interests.

It was suggested that perhaps the greatest incentive to ensure high levels of compliance with the requirement to correct would be to offer immunity from criminal prosecution to those who adhere; more carrot, less stick. But it seems the government are steadfast against any such proposals.

The current law on tax evasion is strict, although arguably inconsistently implemented. Here’s a snapshot of the maximum penalties under the current legislation:

Offence Maximum Penalty
Fraudulent evasion of VAT 7 Years’ imprisonment
Fraudulent evasion of duty 7 Years’ imprisonment
Fraudulent evasion of income tax 7 Years’ imprisonment
False accounting 7 Years’ imprisonment
Conspiracy to defraud 8 years’ imprisonment
Cheating public revenue Life imprisonment

It will be interesting to see how the new legislation compares.

Common aggravating factors (circumstances which would result in a higher sentence) include a failure to respond to warnings about behaviour and attempts to conceal. It follows, therefore, that a failure to comply with the requirement to correct will likely provoke strict penalties.

It seems clear that the situation will be: if you abide by the requirement to correct you will be penalised, but at the customary rate. If you fail to correct and are later caught by HMRC, you will face much greater penalties. But either way, you could face criminal prosecution.

If you would like to find out more about the Common Reporting Standard or HMRC's Requirement to Correct, please contact Business Crime Associate Kyle Phillips.

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