Whilst it has never been acceptable to evade tax, the UK has been allowing people to regularise their affairs with favourable amnesty terms. That toleration is about to change. As has been observed: a ticking time bomb now exists under tax dispensations.
The most generous of these reprieves, the Liechtenstein Disclosure Facility (LDF), ends in December, marking the start of a much tougher regime from Her Majesty’s Revenue & Customs (HMRC).
The LDF has been a valued way for non-compliant individuals to regularise their financial affairs. It is ending several months earlier than originally announced, a sign itself of Government impatience with what is deemed unacceptable avoidance.
It has been a particularly useful device, not least for the Treasury which has recouped more than £1 billion from nearly 6,000 disclosures since it began in 2009.
But the LDF has also been good for individuals looking to get their financial house in order, even generous. Anyone making a disclosure under its terms is only liable for back taxes to 1999, as opposed to the usual 20 years.
The scheme sets a composite rate of 40 per cent for the tax years up to and including 2008/9, with 50 per cent generally applicable thereafter.
The penalty is also relatively low, at 10 per cent of money owed up to an including the tax year 2008/9, with a higher rate for liabilities in subsequent years.
Under the LDF, only a portion of assets need to be held in the Principality of Liechtenstein for those held elsewhere also to be disclosed. There is no risk of prosecution either, unless a crime is evident or a fraud investigation has begun.
Although it will be replaced, no details have been given yet. But nobody is expecting anything as generous.
The Taxman Cometh
Chancellor George Osborne, has made tackling tax avoidance a signature issue throughout his tenure at the Treasury. The political climate also suggests something harsher, with a crack down on offshore tax avoidance a valuable buttress to continuing domestic austerity.
Almost all Osborne Budgets have added something to make ‘aggressive’ avoidance harder, with one HMRC official noting that the first purely Conservative Budget in a generation this summer was no exception, unleashing what he described as a ‘tsunami’ of proposals, including new powers for HMRC.
As if to underline his determination, Mr Osborne, unfettered by coalition politics, also gave the revenue service a further £750 million to spend tackling evasion. The money will be used to triple the number of people who can be investigated, and target offshore trusts.
Against this backdrop, experts believe the penalty rate for what replaces the LDF will be punishing, perhaps as high as 30 per cent; and that the 10 year limit on liability may also disappear. Crucially, there will be no guarantee against prosecution.
The terms of entry are also likely to narrow. For example, it may no longer be possible to use the replacement as a funnel through which to declare a wider portfolio.
If that were not enough incentive for individuals to bring their financial affairs into order, there is more on the horizon.
Further pressure will come from growing co-operation between 94 tax authorities around the developed world. These will share information about people from 2017, making it much harder to find shadows in which to hide assets.
The Accidental Evader
But in fact the process of shining light on hidden wealth begins faster sooner: Data collaboration will begin in earnest with Guernsey, Jersey and the Isle of Man from next year.
The Government has also made clear its intention to make the non-disclosure of overseas assets a criminal offence. There will be no exceptional circumstances allowed.
This raises the risk for some, perhaps beneficiaries of trusts established abroad, that they could be unwitting evaders, unaware that liability always fall on the beneficiary, not the settlor, as far as HMRC is concerned
There are also people who have historic liabilities, but of which they are utterly unaware.
Issues arise when money from offshore trusts filters down through the generations, with understanding of the original trust by those benefiting from it dimmed over time.
It is not just the very rich who face being caught out either. Many offshore trusts were created in the 1970s and 1980s involving relatively modest sums removed abroad to avoid Capital Gains liabilities, perhaps the equivalent to £250,000 today.
Experience also suggests that individuals benefiting from offshore trusts are often unaware of their strict liability to declare, even when they do know about them. Some believe, incorrectly, that a capital distribution, for example, does not incur a tax liability.
They also assume that trustees will have alerted them to any tax issue. But there is no obligation on them to do so, and frequently no expertise on tax matters anyway.
What is often forgotten is that trusts can be highly complex in their structure and require considerable expertise to understand, particularly in relation to tax owed.
No Ifs, No Buts
A further discomforting threat that HMRC has made to encourage people forward with irregularities now is, under the new regime, ‘naming and shaming’ those it investigates and finds in breach.
Furthermore, it intends to be unforgiving about ignorance. Tax advisers will soon be subject to much tougher rules, essentially requiring them to make their clients aware of opportunities to disclose irregularities, and the penalties for failing to do so. The intention is to ensure that nobody can say they were not warned.
When all these steps and undercurrents are taken together it is clear that something quite fundamental is changing if not altogether clearly. Tax avoidance was once understood and applied as the legal counter to tax evasion. That distinction has now blurred.
What began as a moral crusade against ‘aggressive tax avoidance’ after the financial crisis of 2007/8 has become, certainly for those with UK reporting liabilities, an increasingly legal one.
The prospect of greater collaboration between tax authorities worldwide signals that the UK is not alone in its tougher approach. The window of opportunity to deal with difficulties favourably is shutting very fast.
Kay Aylott is Director of Private Client and Trusts at accountancy firm Kreston Reeves