Modernising powers, deterrents and safeguards - working with tax agents: the next stage

Comments from ACCA to HM Revenue and Customs (HMRC), February 2010.

Executive summary

ACCA is pleased to comment on the above consultation. We welcome HMRC’s continued openness and dialogue in attempting to tackle the problem of those determined to evade payment of UK taxes by using offshore structures and bank accounts.

We consider it would be useful if HMRC put forward at least a handful of cases in the area of offshore tax evasion for prosecution. We have mentioned this at meetings and consider this would help reinforce the gravity of the offence to those who continue to evade tax. There is perception that HMRC are concentrating their efforts on the 'soft targets' of those who are trying to comply, while the determined evaders appear to be escaping any robust or concerted enforcement activities. HMRC need to ensure that not only are tax evaders targeted, but that the positive results of that action are given all appropriate publicity.

ACCA believes that the proposals contained within the Consultation Document are a good starting point for development of a robust and practical way for HMRC to keep offshore evasion to a minimum. However, while the subject matter of the document is welcomed, ACCA must express reservations over the language used, and the failure clearly to distinguish between tax evaders and those who merely fail to comply with HMRC’s standards. The constant tendency to blur the distinction between tax evasion, tax avoidance and tax non-compliance does nothing to reassure tax payers that HMRC is genuinely committed to using its strongest powers and deterrents to target only the most abusive of activities. The identification of evasion with non-compliance in this context raises the concern that the concept will be introduced into domestic affairs leading to increased uncertainty for taxpayers.

ACCA believes that HMRC has correctly identified the principles to underpin its approach, and would suggest that consideration might be given to including activities which purport to take the taxpayer, rather then his assets, offshore might be included within the scope of abuses targeted.

While the approach to identifying the types of account that HMRC view as high risk appears reasonable, ACCA has a number of suggestions to make the process of notification easier for taxpayers to understand, and the information gathered more useful for HMRC. The proposed two stage notification test is unnecessarily complicated, and could lead to gaps in HMRC’s information. ACCA would suggest instead blanket notification of all offshore accounts above a certain value. Accounts held jointly, or other than in an individual capacity, should be notified, but may need additional filters/information.

HMRC should also ensure that the list of accounts targeted is wide enough not to allow evaders to easily bypass the intended effects, for example by investing in asset holding structures. Any loophole in the regime will have a disproportionately large impact to reduce its effectiveness, but the administrative burden on the compliant would be unchanged.

A regime in which the notification was driven by the value of the account, rather than the specific jurisdiction in which it is located, would be far easier for taxpayers to understand. HMRC would still have the ability to filter the information by jurisdiction, and hence apply its own risk profiling. There would be no scope for misunderstandings where HMRC revise the risk profile of a jurisdiction so that it moves between Groups.

ACCA agree that the regime for disclosure of other offshore structures can usefully be revised. The existing requirements can be aligned and streamlined. There appear to be no policy reasons to exempt completely any class of professional advisers from the disclosure requirements, but industry specific factors may justify a reduced burden for some individuals.

The reporting of all transfers of value into offshore trusts by UK taxpayers is in principle a useful safeguard. The creation of a reporting framework for such transactions would need to be considered and designed carefully. Given the potentially ad hoc nature of such transfers and the difficulty of introducing reporting for existing trusts, careful consideration would be needed of the effectiveness of such a regime before attempting to implement it.

Specific questions

Chapter 2 design principles

1. Are these the right design principles for this work? In applying these principles, are there other matters that should be taken into account? 

The principles appear broadly sound. ACCA notes that HMRC considers 'supporting those who seek to comply' to be an important underlying principle of their work. ACCA fully supports this sentiment, but has identified elsewhere in this document areas where more can easily be done to provide support for the compliant, as well as those who, despite their best intentions, might otherwise become non-compliant.

2. Have we identified the correct principles? Do you think these principles will be effective and influence behaviour? 

In order to fully and effectively deal with the problem of international tax evasion HMRC needs to do more than simply find out where the money is at the moment. Moreover, the significant (in economic terms) minority of those who consider their abusive behaviour to be acceptable are unlikely to be unduly concerned by the requirement to tick a few boxes on a form.

Chapter 3 a robust penalty framework for offshore non-compliance

1. Is this a reasonable approach to defining offshore non-compliance, or are there other categories of behaviour that should be included in the definition?

The only other circumstance HMRC might like to consider as falling within its broad definition of offshore non-compliance would be that of an individual purporting to leave the UK for tax purposes so as to generate a short term tax advantage. Including this aspect of 'international tax planning' within the definition would reinforce the perception of HMRC’s determination to deal with such behaviour and attitudes robustly.

2. Do respondents agree that the penalty should apply to all taxes?

ACCA can see no major policy reason for excluding any tax from the penalty regime.

Chapter 4 A notification requirement for overseas bank accounts

1. Should accounts held in a non-individual capacity (e.g. as a nominee, trustee, treasurer etc) fall within the scope of what is proposed?

Yes, subject to taxpayer confidentiality safeguards. However, given the potential importance of these types of accounts to abusive offshore structures the availability of such safeguards would have to be tempered by the need for effective collection of information. 

HMRC need also to consider situations where individuals have an existing Power of Attorney, or an Enduring Power of Attorney which has not yet vested. In the latter case, the individual granted the (dormant) power may well not know whether the grantee has any offshore accounts, let alone whether they fall within the notification process.

2. If not, how should the tax risk associated by these accounts be addressed?

ACCA believes that the steps outlined above in respect of such accounts should be adequate to address the related tax risk.

3. How should joint accounts be treated?

HMRC needs to balance the need for information with the rights of those who are not UK taxpayers, or fall outside the proposed regime (eg those on the remittance basis). It seems reasonable that those individuals who are within the scheme should disclose all interests in offshore bank accounts, whether joint or sole interests. It may be desirable to allow joint reporting of accounts, eg for husband and wife, but this should not be mandatory, and extension of the capacity for joint reporting should be strictly limited so as to avoid undue complexity of the reporting regime. 

In order for HMRC to have a clear picture of an individual’s offshore assets, whether held alone or jointly, the system would need to facilitate clear identification of the individual. Use of the UTR is not appropriate, as the process would sit outside self assessment, so some other unique identifier should be required for each individual using the notification process; perhaps the National Insurance Number. 

4. Are there further safeguards that should be considered?

The role for procedural safeguards in an essentially administrative requirement is small. However, there is a need for structural safeguards in the process to ensure that it does not become a pointless burden.

HMRC need to set the scope of the regime carefully in order to ensure that its aims cannot too easily be sidestepped by those determined to evade taxes. It will be essential to the success of the process that the benefits it delivers to the compliant are greater than the burden it imposes on them, and if the system has too many holes then it will be nothing more than a pointless extra layer of form filling which is ignored or avoided by the evaders.

5. Are these the right criteria for classifying jurisdictions?

If proceeding on the assumption that tax risk is a function purely of the jurisdiction in which the account is held, then yes, the criteria are appropriate.

6. However, ACCA is concerned that by focussing too tightly on the perceived risk by jurisdiction and basing the entire machinery of the process on that perception, HMRC run the risk of over-complicating the regime for the compliant and diluting its impact on the non-compliant. ACCA would ask whether HMRC might do better to follow the approach taken in the US of requiring notification of all overseas accounts over a certain value. This has the benefits of:

  • certainty for taxpayers – there is no doubt over whether they need to report ie a portfolio of accounts held through a bank in an A class jurisdiction which includes assets in a B or C class jurisdiction;
  • completeness of information for HMRC - no need to update forms or processes if jurisdictions move from one risk category to another;
  • providing a second check for HMRC that the existing information exchange processes are functioning correctly.

In this scenario, HMRC would continue to focus only on information relating to B class jurisdictions, but would have further information where needed. In particular, if a jurisdiction were to move from Group A to Group B HMRC would not need to launch a publicity campaign to alert account holders to their new disclosure requirement.

7. Are there other criteria that could be introduced to help target the requirement on where there is the greatest tax risk?

HMRC will doubtless have its own further filters for refining the information received in order to most effectively target its efforts on the most remunerative targets. Where the initial filter has been set at location of the account, there is limited scope for further useful filtering other than by value of account.

If HMRC opted for disclosure of all accounts over a certain value, combined with some unique identifier for each taxpayer registering one or more accounts, then the data held could usefully be sorted in a number of other ways, for example to identify those individuals who have a large number of accounts in one or different jurisdictions, or to identify profiles of jurisdictions commonly used by known tax evaders to identify other taxpayers with similar profiles of holdings.

8. Should other types of account fall within the notification requirement?

ACCA believes that HMRC should consider extending the scope of disclosure to non-cash accounts holding assets such as eg gold bullion or platinum futures. ACCA have considered also the potential for abuse of alternative finance structures, and note that while these would typically use existing types of deposit or current account for the initial investment, there is scope for returns on the funds invested to be paid into a separate account, possibly in a different jurisdiction. Under the proposed regime, payments into a Group C jurisdiction would escape notification where the tax evader spent the funds quickly enough to keep the balance below £25,000. ACCA’s proposal would reduce the scope for such abuse, although total eradication would require a notification process for offshore alternative finance structures similar to that for trusts.

9. Is 60 days a reasonable period within which to expect an account holder to make a notification?

While it should be feasible for accounts to be notified within 60 days, we consider HMRC is missing the target of the tax evader by focusing too much on the bank account notification issue and the penalty which flows from the failure to notify. As mentioned during meetings with HMRC we are not keen to have a penalty regime associated with a notification requirement. It is the correct tax declaration which needs to be pursued, and any penalty should be related to loss of tax. We consider in fact a penalty may well act as a deterrent for the tax disclosure where someone suddenly realises they failed to notify a new bank account. 

10. Is this notification process the right response to the problem HMRC has identified?

A notification process is an important part of the overall response to the problem HMRC has identified. ACCA has identified a number of possible shortcomings to the particular process outlined by HMRC. In addition to the structural deficiencies outlined above, there are two main areas of concern.

It is not clear from the consultation document whether HMRC proposes to publicise the Groups into which jurisdictions fall. It is difficult to see how taxpayers could be expected to know whether they need to notify or not in the absence of this information. However, as a principle of the overall reforms package is that taxpayers should be able to know in advance whether their behaviour will attract a penalty, they must be given the information on which to base their decision whether to notify or not, and this information must be widely available. 

Secondly, even where the information is readily available, ACCA is concerned that the process is unduly complex tor taxpayers, as there may be one or two stages to the decision on whether to notify. For Group C accounts, the taxpayer will need to keep a constant watch on their aggregate level of account balances as translated into sterling at the prevailing exchange rates. 

11. Are there any unintentional or unduly onerous circumstances in which a notification could be triggered?

As mentioned above, the main issues which could trigger a notification requirement without the taxpayer being aware of the requirement are foreign exchange volatility, changes to the status of particular jurisdictions or changes to the accounts held by the grantee of an Enduring Power of Attorney between grant and vesting of the power.

12. Are there further safeguards that should be considered?

HMRC should ensure that the design of the notification process itself is as 'user friendly' as possible. For example, HMRC have indicated that they would wish to understand the source of the funds in a notifiable account. While this in itself appears reasonable, the onus should be on HMRC to provide a closed list of options for the taxpayer to choose from (ie income from overseas work, income from overseas assets, inheritance, transfer from UK etc) with only exceptional cases requiring substantive description by the taxpayer in the 'other' white space on the form/online submission process.

13. Is the proposed penalty model a proportionate response to the problem HMRC has identified?

See our response to 8 above. We do not consider a penalty simply for failure to notify is reasonable at all especially as those required to notify may not be with in the self-assessment system. We believe HMRC has accepted our concerns and will revisit the whole disclosure area. 

14. Would any further safeguards be appropriate for remittance basis users when implementing this policy?

Although no safeguards appear necessary for those within the remittance basis while the current proposals are in force, HMRC should consider introducing a protection for actions taken by those who move out of the remittance basis during the life of the scheme. If the scheme were to be extended to cover those within the remittance basis in the future then further safeguards would need to be considered as part of that process, in the light of the specific regime proposed.

Chapter 5 Information on other offshore financial structures

1. Is there scope for aligning the information requirements on offshore assets for IHT, CGT and income tax? 

ACCA believe it would helpful for taxpayers and their advisers if the information requirements for all taxes were aligned around a central set of principles. The existing framework is confusing for settlors and inconsistent for advisers.

2. Is there a case for extending existing information requirements on non-resident trusts? 

In order for the notification regime to have the desired effect of disclosing to HMRC all substantial offshore financial assets held by UK taxpayers, it is essential that all structures which are or could be useful to tax evaders are captured within the information requirement. Any holes in the regime will inevitably be exploited and render the whole exercise less useful.

3. Are there any further safeguards which should be considered?

Any given trust may have a large number of beneficiaries and settlors, not all of whom may be UK taxpayers, or who may be outside the scope of the proposed scheme. The design of any notification requirements which fall upon advisers must take account of the advisers’ duties to all their clients, and not impose requirements which cause them to breach client confidentiality. 

4. How practicable would a requirement be for UK resident settlors to notify HMRC of transfer values into non-resident trusts or subsidiary companies of such trusts?

In theory there should be no great difficulty for settlors to complete a return to HMRC in parallel with transferring values into trusts or their subsidiary companies. In practice, there are a number of issues to overcome. 

5. For the disclosure to be of any practical use, HMRC would need details of the beneficiaries of the trust structure. Where the trust has already been disclosed to HMRC this information should be available, but future transfers into trust which predate the new disclosure regime would require more detailed submissions to HMRC. There will also be concerns around a de minimis limit for notification, and HMRC would need to consider the definition of 'transfer of value', and ensure that safeguards to protect taxpayer confidentiality are in place.

Is there a case for removing the current exclusion of barristers from the information requirement which applies to professional advisors?

The current exclusion does appear anomalous, and to potentially offer scope for a weakness in the system for disclosure of trust formation (although where the settlor is required independently to notify the actual transfer of value into the trust, this should in any event capture the transaction). Any revision to the disclosure requirements falling upon barristers should be framed so as not to impose a disproportionate burden upon their particular practice model.