A person who is UK domiciled and UK resident is liable to tax on his or her worldwide income, regardless of whether that income is remitted to the UK. This means that UK tax is due on money earned on bank accounts held overseas. In the case of an offshore bank account, provided that any interest is declared and any tax is paid, there is nothing to worry about. The problems start where such accounts are used to hide money away in the belief that HMRC will not find out about it.
Instead of using the new information to come down heavily on those with undeclared income from offshore accounts, HMRC have announced a voluntary disclosure facility. The disclosure facility is available for a limited period only. It provides offshore account holders with the opportunity to come clean and to be treated more leniently than those who fail to take advantage of the opportunity.
The offshore disclosure facility is open to those who hold or have held an offshore bank account that is either directly or indirectly connected to a loss of UK tax and/or duty. For example, this might be a failure to declare and pay tax on any interest earned on money held in the account.
For the purposes of the offshore disclosure facility, an offshore account is one that is held outside the UK. This means that accounts held in the Channel Islands, the Isle of Man and the Republic of Ireland are regarded as offshore accounts and are within the scope of the facility.
Under the terms of the offshore disclosure facility, taxpayers must notify HMRC of the intention to make a disclosure by 22 June 2007. Where a disclosure is made, HMRC will charge a fixed penalty of 10% of the tax and duties underpaid. However, no penalty will be levied if the untaxed amount is less than £2,500.
Where a disclosure is made, the unpaid tax, together with penalties and interest must be paid by 26 November 2007. HMRC will give a final decision as to whether or not the disclosure has been accepted by 30 April 2007.
In most cases, HMRC will accept disclosures that are made. However, in few instances such as those that are found to be materially incorrect or incomplete, those made by taxpayers whose affairs are under investigation or enquiry by HMRC, or those from people suspected of being involved in serious organised crime against HMRC, it will not be possible to conclude matters through the voluntary disclosure process.
The disclosure facility is designed to target those who have knowingly avoided tax rather than those who have underpaid tax as a result of an innocent error. Where the loss of tax has arisen solely because of an innocent error, the taxpayer should contact his or her tax office with evidence of the error. Where HMRC accept that the loss of tax is wholly attributable to an innocent error, they will not seek a penalty and will restrict recovery of tax and interest to maximum of the last six years.
Making a Disclosure
There are two time-limited stages to the disclosure process. The first is to notify HMRC of the intention to make a disclosure by 22 June 2007. The second is to make the disclosure by 26 November and to pay all tax, penalties and interest due by that date.
When making a disclosure it is advisable that professional advice is sought, particularly if large sums are involved.
At the notification stage, it is not necessary to provide details of that undeclared tax. This stage is simply to identify to HMRC those account holders who are making a disclosure. Notification can be done in various ways:
online at https://disclosures.hmrc.gov.uk;
by phone on 0845 302 1401; or
by post to HM Revenue and Customs, Section 10, Accounts Office, Bradford, BD98 1YY.
HMRC will acknowledge the disclosure and send a disclosure reference number. This should be received within three weeks. Taxpayers notifying of their intention to make a disclosure will also be sent a payslip and return envelope to use when making the actual disclosure.
The second stage of the process is the actual disclosure itself and involves calculating the amount due to HMRC, including interest and penalties. The calculation can be complicated and taxpayers may wish to seek professional advice. Calculations should be submitted in pounds sterling.
It is not necessary to disclose amounts going back more than 20 years. Full disclosure should be made for all years back to and including 2001—02. For earlier years, there is no need to provide information for a year in which the unpaid tax and duties were trivial. If records are incomplete, best estimates should be provided, although taxpayers should be aware that HMRC may require justification of any estimates used.
Once the amount of undeclared income, profits and gains has been determined, tax and National Insurance (if appropriate) should be applied at the appropriate rate of tax for each year. Interest is charged on tax paid late. The appropriate rates are on the HMRC website at www.hmrc.gov.uk/trates/index.htm. Penalties should be applied, where relevant.
The total amount due (undeclared income and gains, plus interest and penalties) must be paid to HMRC no later than 27 November 2007.
The disclosure can be made online or by post. Disclosure letters are available on the HMRC website (https://disclosures.hmrc.gov.uk). HMRC will acknowledge the disclosure within four weeks of receipt. They will let the taxpayer know whether the disclosure has been accepted by 30 April 2008 by means of a letter of acceptance. The letter of acceptance together with the offer letter, form a contract.
If the disclosure is not accepted, HMRC will open an enquiry before 30 April 2008.
Failure to Disclose
HMRC generally treat those who come forward and hold their hands up more favourably than those who refuse to co operate and this looks set to be the case in relation to offshore accounts.
Taxpayers with undeclared income from offshore accounts have until 22 June to notify their intention to disclosure. Once this period is up, HMRC will get to work and target those who failed to come forward.
They will use a variety of tools at their disposal and will compare the information that they have obtained with the taxpayer’s tax history, making enquiries if the two do not match. Where undeclared income is found, the culprit will be hit with harsh penalties in addition to a bill for the undeclared tax and income.
In cases of non-disclosure, the penalty can be up to 100% of the tax undeclared and HMRC have stated that it is unlikely to be less than 30%. This is compared to a penalty of 10 per cent for those who come forward voluntarily.
Having got the bone between their teeth, HMRC are no going to let go. They will continue to use their powers to obtain detailed information about offshore accounts held by UK residents. Offshore account holders have been warned. It is up to them whether they heed that warning, however, the failure to do so may prove very costly.