The Gloves Come Off – HMRC Gets Tough With Offshore Tax Evaders

The Gloves Come Off – HMRC Gets Tough With Offshore Tax Evaders
For the last few years, HMRC has been trying to catch UK resident holders of offshore bank accounts who fail to declare the interest on those accounts. There have been several amnesties, the most recent of which, the ‘Lichtenstein Disclosure Facility’ (LDF), is still running.

All these amnesties offer special terms for those who come forward and admit their tax evasion, and the LDF is the most generous, offering a maximum penalty of 10% of the tax involved and a cut off point of 1999/2000 so that tax will not be pursued for earlier years.

Despite these efforts, and the more cavalier ones by Wikileaks who claim to have details of thousands of Swiss bank accounts, the response to these amnesties has been patchy, so HMRC has decided to up the ante for those who are caught before they come clean.

What is the Standard Procedure?

Normally, the penalties for being caught not declaring income liable to tax are on a sliding scale, depending on whether the non-declaration was ‘careless’ (10% to 30% of the tax), ‘deliberate’ (35% to 70% of the tax), or ‘deliberate and concealed’ (50% to 100% of the tax).

Given the publicity about offshore tax evasion, I would expect HMRC to argue that anyone now caught with undeclared offshore income had at best ‘deliberately’ failed to declare it.

What Has Changed?

The 2010 Finance Act, however, introduced powers for HMRC to increase these levels of penalty where offshore income is involved, and in February 2011 they announced that this would be applied to income for the 2011/12 tax year onwards.

The new rules work by increasing the penalty according to where the undeclared income arose. They divide the world up into three ‘Categories’, 1, 2 and 3, and the penalty varies according to the Category of the country where your offshore loot was stashed:

  • For Category 1 countries, the penalty is not increased at all
  • For Category 2 countries, the penalty is 150% of what it would normally be
  • For Category 3 countries, the penalty is doubled

The legislation lists ‘Category 1’ countries and ‘Category 3’ countries, and states that any country not on either of these two lists is a ‘Category 2’ country.

I can see the potential for quite an amusing parlour game here – take a globe or an atlas and select a country at random, and then players have to guess which ‘Category’ the country selected belongs to.


As a hint for those playing this game, and for those who have yet to declare their offshore income, ‘Category 1’ countries are those with the most ‘transparent’ tax regimes. They include, among 37 countries in total, Ireland, the Isle of Man, the USA, and curiously ‘Denmark, not including Faroe Islands and Greenland’.  Interestingly, the Cayman Islands, a popular tax haven, are also in ‘Category 1’.

‘Category 3’ countries, as you might expect, include well-known tax havens such as Andorra and Monaco as well as Iran and Iraq (those well known financial centres!) together with Cuba, El Salvador, and a number of other  jurisdictions. There are 57 in all.

Practical Tip

I have no sympathy whatsoever with those who deliberately fail to declare their income from offshore deposits, but I do offer them this advice – if you have not already done so, you must disclose your tax evasion to HMRC now, before these new penalties come into effect.

Do not simply approach HMRC – take professional advice on how to disclose. Even if you were invested in another country, it may be possible to transfer your assets to Lichtenstein to take advantage of the particularly lenient terms of the LDF described at the beginning of this article.

James Bailey