How coming clean to the taxman has lost its carrot

Forget (for now) about whether to use them or not, the live issue with the taxman’s offshore disclosure facilities is the declining amount of ‘carrot’ they contain and the increasing length of ‘stick,’ writes Liz Coleman, head of disputes and forensics at Opus Business Services.

Once upon time, such facilities to sort your overseas tax affairs with HMRC had incentives; reduced penalties or waivers from criminal prosecution. How that’s all changed.

Now, all facilities such as the Liechtenstein Disclosures Facility and Crown Dependencies Disclosure Facility that offered preferential treatment have closed (even though LDF was meant to go on until April 2016), and there’s just one in their place -- the WDF -- which opened last month. Oh, and it offers absolutely NO special terms; no soft spots.

In fact, use the Worldwide Disclosure Facility (WDF), which is open to anyone with an unresolved UK tax liability relating wholly or partly to an offshore issue, and the tax will have to be paid in full -- with interest -- plus a minimum penalty of 30%.

Before you run to the hills to set up your very own tax haven (tip: first check it’s not located in one of the more than 100 countries already feeding HMRC with data), consider that things might be about to get a lot worse. Indeed, we actually regard the WDF as the last chance to strike a peace deal with a taxman who’s increasingly on the warpath.

The evidence? Well, whereas the WDF’s terms are draconian to say the least, the Revenue is actually consulting on charging evaders it catches in its net as much as three times the tax owed. Throw in the ‘naming and shaming’ of individuals, which could have all sorts of consequences in those individuals’ professional lives, and we start to regard the WDF quite favourably.

It should also be taken into consideration that HMRC is now receiving vast amounts of information from all around the world -- including so-called tax havens -- under the US Foreign Account Tax Compliance Act (FATCA) provisions. Then there is the implementation under the Common Reporting Standards when 47 countries will provide information to HMRC from 2017, with a further wave of countries from 2018. And just last week, the details of hundreds of thousands of offshore accounts were handed to the tax authority, thanks to a tie-up with officialdom in Jersey, Guernsey and the Cayman Islands, set to net HMRC a reported £300million.

So Hector will have more information than ever before to investigate people who do not take advantage of his voluntary WDF. This is partly how he justifies those 300% penalties he’s looking at, in particular: “While they [the newly proposed penalties] are high in comparison [to today’s standard penalties], it is worth noting that these penalties are being charged after a taxpayer has failed to correct,” HMRC says.

It adds: “Taxpayers in this situation will have committed an original offence, they will have failed to come forward under any previous disclosure facility and will now also have failed to correct under the new legal obligation. This is a significant failure on the taxpayer's’ part”.

As if all of this was not enough, the tax office has also advised that the length of time taken by a taxpayer to put their affairs in order will impact on the already increased penalties. The deadline for using the WDF is extremely tight, with a 90-day deadline to make full disclosure. Each disclosure must include detailed tax calculations, which may have to look back up to 20 years. Even ‘just-come-to-us-and-nobody-else’-HMRC is recommending that taxpayers should now take professional advice.

And to determine whether to use the WDF or not, we’d echo getting that independent, expert opinion. Bear in mind, in some cases, particularly if professionals are involved, there have been previous investigations or the client is high-profile, it may be preferable to approach the disclosure through the Code of Practice 9 route via the Contractual Disclosure Facility. Appropriate and professional guidance tailored to your circumstances is an early stage ‘must.’

For contractors too if they’ve got unresolved offshore tax issues, squaring up to them at the earliest opportunity is universally accepted as the best course of action, regardless of the path you choose. If that’s you deliberating, we do believe the WDF is probably your best bet, as at least the declining ‘carrot’ and ‘increasing’ stick HMRC is wielding here is measurable and fixed, unlike the penalty proposals. That said, we do agree with WDF’s critics; it is akin to the taxman yelling ‘hands up or else.’ What’s undisputable though is that doing nothing in the face of this sort of stick-up isn’t an option.