Lifting the lid

HMRC has successfully used its current powers to uncover a wealth of information about offshore bank accounts

16th April 2007 | Rob Kernohan

In the Journal, June 2006, 23 I explored how the EU Savings Directive might impact on lawyers and the potential difficulties for some clients. I linked this to the ongoing extension of HMRC’s information-gathering efforts. At the time we thought that the EUSD might have a substantial impact, but it has just been followed up by a major HMRC success before the special commissioners in respect of an information notice under s 20(8A) of the Taxes Management Act 1970.

Section 20(8A) allows HMRC to request documents from third parties in respect of a class of person whose individual identities are not known but which may contain persons who have failed or may fail to comply with any provision of the Taxes Acts in circumstances that are likely to lead or to have led to serious prejudice to the assessment or collection of tax. This has always been viewed as an exceptionally strong power whose use was only permitted once an independent special commissioner had been satisfied that such a notice was justified.

Sizeable class

In mid-2005 HMRC sought permission to issue such a notice to Barclays Bank in respect of persons with a UK address who had a credit or debit card connected to an offshore bank account. This notice was resisted strongly, but HMRC were able to satisfy the commissioner that there was a class of taxpayer and that their experience of persons with such circumstances showed that a significant proportion of these persons either did not make a tax return or, where a return was made, did not complete the foreign income pages.

Buoyed by this success, and under some pressure to be evenhanded in the financial services marketplace, HMRC pursued similar notices in respect of documents held by at least four other UK financial institutions. They also sought information in respect not only of credit card/debit card details but offshore accounts in certain jurisdictions held by persons with UK addresses.

Time up

In December 2006 authority to issue the notices was granted and the financial institutions given 90 days to provide the documents. The time ran out in mid-March. HMRC will find itself in possession of the details of tens of thousands of offshore accounts belonging to persons with UK addresses. The notice is not restricted to accounts which are still open.

The details demanded include:

Name of the account holder

Address of the account holder

Date of birth of the account holder (if a natural person)

Date of opening of the account

Date of closure of the account if no longer open

The balance on the account at 30 September in each year from 2000 to 2005.

While not specifically mentioned in the published report, it is probably fair to assume that the notice will also wish documents which indicate the amount of any interest credited to the account.

Treasure trove

PLCs, mutuals, churches, charities, trade associations and clubs are not included in the notice, but it would appear that private limited companies with a UK address are.

HMRC will be cock-a-hoop, having accessed what for years has been seen as some sort of tax inspector’s Shangri-la. HMRC estimate a tax yield of more than £150 million as a result of this information. That figure, we believe, is based on interest alone and does not take into account any tax liability that may have been due but unpaid on the money going into the accounts. HMRC believe that they will uncover significant amounts of undeclared taxable income from trading sources in the UK.

Many of these accounts will have been returned correctly. Many people will be UK resident taxpayers who are not UK domiciled, are taxed on the remittance basis on overseas income and are in the happy position of not needing to remit the income. Returning to the EUSD, any person who has authorised his bankers to disclose his details will not be included in the information being provided under these notices.

Double-edged sword

Senior staff in HMRC face a conundrum. They are not resourced to deal with this avalanche of information. If they do not use the information they will accused of unfairness by those whose information is used, future notices will be harder to come by and general levels of confidence in HMRC commitment to counter non-compliance will be undermined.

How this conundrum is solved and how HMRC turns this golden seam into usable gold for the Treasury remains to be seen. What is certain is that anyone with offshore accounts inadvertently missed off their tax returns, or whose returns hold no entries for wholly legitimate reasons, should be preparing for HMRC interest.

Rob Kernohan is a former senior tax inspector now working as a senior manager in Ernst & Young’s Tax Risk Management practice, based in Edinburgh.

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