Offshore evasion: the Common Reporting Standard (“CRS”), the Requirement to Correct and HMRC

offshore evasion

OFFSHORE EVASION: The Common Reporting Standard

Our many readers who work in the offshore financial services sector will be all too aware of the attack on offshore evasion that lies behind the Common Reporting Standard (“CRS”). The CRS is a global initiative originating from the Organisation for Economic Co-operation and Development (“OECD”), which provides for the automatic reporting of information regarding financial accounts held by residents of one jurisdiction in another jurisdiction. It can be viewed as a global offshoot from the United States’ Foreign Account Tax Compliance Act (“FATCA”).

The early adopters of the Common Reporting Standard, who will be making their first reports this year, are:

Anguilla, Argentina, Barbados, Belgium, Bermuda, British Virgin Islands, Bulgaria, Cayman Islands, Colombia, Croatia, Curaçao, Cyprus, Czech Republic, Denmark, Estonia, Faroe Islands, Finland, France, Germany, Gibraltar, Greece, Greenland, Guernsey, Hungary, Iceland, India, Ireland, Isle of Man, Italy, Jersey, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Montserrat, Netherlands, Niue, Norway, Poland, Portugal, Romania, San Marino, Seychelles, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Trinidad and Tobago, Turks and Caicos Islands, and the United Kingdom.

The jurisdictions that will begin reporting from 2018 are:

Albania, Andorra, Antigua and Barbuda, Aruba, Australia, Austria, The Bahamas, Bahrain, Belize, Brazil, Brunei Darussalam, Canada, Chile, China, Cook Islands, Costa Rica, Dominica, Ghana, Grenada, Hong Kong (China), Indonesia, Israel, Japan, Kuwait, Lebanon, Marshall Islands, Macao (China), Malaysia, Mauritius, Monaco, Nauru, New Zealand, Panama, Qatar, Russia, Saint Kitts and Nevis, Samoa, Saint Lucia, Saint Vincent and the Grenadines, Saudi Arabia, Singapore, Sint Maarten, Switzerland, Turkey, United Arab Emirates, Uruguay and Vanuatu.

Financial institutions in the Crown Dependencies and Offshore Territories will already have provided information to the UK authorities under the UK Crown Dependencies and Overseas Territories Regulations (“CDOT”) (sometimes also referred to as UK FATCA).

One consequence of all of these exchanges of information is that HMRC will receive a vast amount of data concerning UK residents who have non-UK financial accounts. Readers may be aware that HMRC already has a “snooper” computer network called Connect that it uses to cross-reference tax records with other databases available to it in order to uncover tax evasion activity. The information HMRC receives because of the CRS and other information exchanges will be “fed” more or less directly into the Connect system and thereafter, HMRC claims, they will be able to “identify evasion at the touch of a button”. Despite the availability of various widely used HMRC disclosure facilities over the last few years, it is inevitable that there will be numerous irregularities that have not been disclosed or, at the very best, anomalies that will require explanation. This will inevitably lead to a very substantial increase in HMRC enquiries regarding offshore accounts and, where appropriate, the issue of information notices.

It is also expected that there will be many more criminal prosecutions for offshore evasion. The House of Commons Public Accounts Committee has severely criticised HMRC in the past for its unimpressive record in prosecuting wealthy tax evaders, and an increase in criminal prosecutions is clearly very much on the agenda. It is notable that HMRC’s Worldwide Disclosure Facility does not offer the immunity from criminal prosecution that was a feature of previous disclosure facilities.

OFFSHORE EVASION: The Requirement to Correct (“RTC”)

HMRC consulted on the proposed requirement to correct historic offshore tax evasion or non-compliance in August 2016. The legislation which would have enacted the RTC provisions was originally included in the last draft Finance Bill but was shelved, along with a whole host of other proposed legislation, because of the snap General Election. It seems extremely unlikely, however, that we have heard the last of it.

HMRC’s position as set out in the August 2016 consultation document was as follows:

“HMRC believes there remain many UK taxpayers who still have to put their offshore tax affairs in order. Increased media attention on offshore tax evasion has raised awareness of these issues and the risk of tax evasion being exposed is likely to drive tax evaders to consider putting their affairs in order.

Yet our research into previous disclosure facilities suggests that many taxpayers with offshore compliance issues did not identify with “evasion” even where they knew they were not paying the right UK tax. Others may not yet realise they are not paying the right amount of tax. The RTC is intended to motivate such taxpayers to act (including seeking advice where appropriate), and to help agents explain the consequences of non-compliance.”

Clearly, the Common Reporting Standard enables HMRC to dispense with the carrots of relatively benign disclosure facilities and instead apply the sticks of the threat of criminal prosecution and positively draconian penalties for failure to correct historic offshore evassion.

The RTC period was originally intended to run from 6 April 2017 until 30 September 2018. The RTC, if (although one should probably realistically say when) it is eventually enacted, would place an obligation on taxpayers to make a full disclosure of all relevant facts which would enable HMRC to calculate the tax and penalty position. The proposed penalties for failure to correct offshore evasion are eye-watering, and include:

  • a standard penalty of between 100% and 200% of the tax that has not been corrected;
  • a 10% asset-based penalty (in serious cases where tax underpaid in any tax year is greater than £25,000);
  • an enhanced penalty of 50% of the standard penalty amount if HMRC could show that assets or funds had been moved to attempt to avoid RTC – making the maximum penalty excluding any asset-based penalty a staggering 300% of the tax; and
  • the naming and shaming of taxpayers ‘in the most serious cases’ (i.e. total tax lost more than £25,000).

Assuming that the RTC will become law (and there is no reason to suppose that any of the major political parties would not enact it) it should become abundantly clear that there is very little time left to prevaricate on the need for disclosure of offshore evasion. Put simply, the war on offshore evasion is reaching a peak; the landscape is changing inexorably and irretrievably and there is no getting away from that fact.

If you have any queries regarding the Common Reporting Standard, Offshore evasion, or any other matters, then please get in touch.

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