Surviving the HMRC clampdown
- HMRC initiatives to increase the tax-take from tax evaders
- How to cope if you discover you are not tax compliant
- The impact of penalties
Fiona Fernie takes a look at HMRC’s plans to target tax evaders and how to cope if you or your clients are found in the firing line.
There is no doubt that the recession and financial crisis suffered by a large proportion of the “first world” was the catalyst for targeting tax fraud in the UK. The deficit in the government’s finances made it essential to collect more tax, but increasing the level of tax paid by the honest taxpayer has never been popular politically. This, combined with the global pressure on countries to implement Article 26 of the OECD Model Treaty regarding information exchange, and the international focus on tax havens (as demonstrated by its profile at the G20 talks in April 2009), has led to HMRC launching a number of initiatives to clamp down on tax evaders.
The primary focus is on encouraging people to voluntarily regulate their tax affairs by providing taxpayers with an incentive to do so. However, for those who do not take the opportunities the threat of harsher treatment simply increases. If HMRC later discovers irregularities in their tax affairs, they risk severe penalties.
Although there have been several of these initiatives, including one which specifically targeted medical professionals, the Liechtenstein Disclosure Facility (LDF) looks set to be the most successful yet; not least because it is the only one to date which represents a genuine, (if partial), amnesty. The scheme, which runs until 31 March 2015, also provides a guaranteed immunity from prosecution. It is anticipated that the tax-take from the LDF will easily outstrip the yield from previous disclosure initiatives.
Incentives to come forward aren’t the only way HMRC is targeting tax evaders. Last August it also obtained leave from the Tax Tribunal to serve information notices on all banks with a UK presence. The notices required the banks to provide information in their “power or possession” in relation to UK residents with offshore accounts. This provides HMRC with sufficient information to enable it to mount an investigation into anybody whose name appeared on the lists provided by the banks but in respect of whom HMRC had no knowledge of an offshore account.
If an individual does have irregularities in their tax affairs, the best way to protect themselves from prosecution and secure a civil settlement with HMRC is to disclose all the irregularities and assist the Revenue in quantifying the amount of the tax liability. If that is not possible because HMRC has already opened an investigation, the key to a successful outcome is cooperation. Under no circumstances should an individual – or their representative - lie to the Revenue. At the least such behaviour would mean that the civil settlement was considerably more expensive than it might otherwise have been; at worst it could result in the prosecution of the taxpayer.
Many people are fixated by the need to minimise the penalty percentage when arriving at a civil settlement. Whilst this is important (and indeed a low penalty percentage is one of the incentives encouraging participation in the LDF), taxpayers and their advisers should be aware that since the level of penalty is tax geared, the first requirement is to minimise the level of the tax liability. Often this makes far more difference to the settlement than reducing the penalty loading by a few percentage points. Nonetheless, the penalty is an important aspect of any settlement and it is worth registering that the new penalty regime is governed by the behaviours of taxpayers. It is therefore worthwhile for any taxpayer to demonstrate that problems with their tax affairs have not arisen as a result of a deliberate attempt to evade tax. Ideally the taxpayer needs to demonstrate that he took reasonable care to ensure full tax compliance.
Fiona Fernie is a tax investigations partner at BDO LLP.
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