"Landmark" victory for HMRC v Barclays
Finance Confidential last visited the subject of offshore bank accounts in September 2005.
Margaret Cash warned then that the Revenue was upping the ante against a hit list of 500 suspected tax evaders. This is part of a broader drive to plug tax revenue leaks and raise more cash for stretched Treasury finances.
This week Gordon Brown must have allowed himself a wee smile of satisfaction as the Revenue notched up its biggest victory yet in their longrunning campaign. It is a battle to reclaim tax on interest income from UK holders of non-disclosed offshore bank accounts.
On the receiving end was none other than British banking blue chip, Barclays Bank. Barclays has been forced to disclose client details on thousands of customers with offshore accounts in the Channel Islands and other low-tax offshore jurisdictions.
Reported as a "landmark" decision, the Revenue are cock-a-hoop with the result and believe they could raise up to £1.5bn in unpaid tax. With such a major scalp under its belt they are now expected to extend their pursuit of the 36 other banks which have both UK and international operations in what is seen by financial institutions as an industry-wide issue.
This victory for the Revenue follows another favourable decision earlier this year when they won the right to demand customer credit card details from financial institutions. This has helped them source undeclared offshore accounts as they are often linked to credit cards.
Why offshore centres are a Revenue target
Of course, the Revenue wouldn’t be so doggedly determined in this area if they weren’t fully aware that the ultimate pay-off would more than reward their efforts. The deposits in offshore accounts tend to be significantly higher on average than their equivalents onshore, with solicitor Jeanette Harwood of Walker Morris telling the FT that the majority averaged balances of between £250,000 and £1m.
It is no surprise then that accounts held by Barclays alone could yield as much as £1.5bn in reclaimed tax. On top of that, they are then in possession of information leading back perhaps to UK residents and business owners which may reap further reward.
On a global basis, recognised offshore tax havens reportedly account for 1.2% of the world’s population but 26% of its wealth. According to the Merrill Lynch Cap Gemini report in 2000, one third of the wealth of the world’s high net worth individuals is held offshore. This amounts to some $6trn of which $3trn is in bank deposits and the balance held within offshore companies and trusts.
Of course, it is not just the pursuit of tax evaders either. The whiff of criminal activity has long tainted offshore centres. The International Monetary Fund has estimated between 2%-5% of world economic output is laundered annually through offshore tax advantaged jurisdictions. But, given today’s climate of heightened international tensions, the noose is getting tighter around the offshore centres, as international pressure, particularly from the US and EU, continues to increase.
What to do if you haven’t declared
If you have an offshore account held personally and haven’t declared it to HMRC, the first question to answer is — do you need to?
The key test here is your domicile. Those of us born and living here are considered UK domiciled and resident. As such we are liable to tax on worldwide income. So the answer here is yes you need to.
Those born here but perhaps living overseas for work or lifestyle choice reasons may be considered non-resident. i.e. out of the country for more than half the tax year. Non-residents can find an offshore account a useful and legitimate service which makes better financial sense than repatriating income into the UK. While non-resident they may not need to declare to HMRC though need to be mindful of the tax regulations applying in their country of residence.
Those born overseas are usually treated as nondomiciled individuals and taxed only on UK-source income and income brought into the country i.e. offshore bank interest that stays offshore is excluded from HMRC’s reporting requirement.
Very long stay overseas residents — those in the UK for 17 of the last 20 tax years — need beware lest they eventually be deemed UK domiciled. If your status is at all unclear be sure to seek out professional advice.
If you establish that you should have declared offshore interest income and haven’t, what’s the best course of action?
Margaret Cash quotes independent financial adviser, Anna Bowes, who suggests simply coming clean, a view echoed by KPMG’s head of tax investigations, Reg Day. Explain your position and be prepared to pay up. It may hurt now but could be more painful later on if the Revenue come knocking.
The penalty for non-declaration can be as much as the tax due plus interest plus a penalty which can be as much as 100% of the tax due. However, full cooperation and disclosure can bring substantial reductions in these penalty levels through negotiation with HMRC.
In time, the entire UK banking industry will no doubt be forced to break client confidentiality and open its records to the Revenue’s scrutiny and, after the Barclays decision, that day may not be too far off.
Rob Mackrill is Managing Editor of Finance Confidential
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