HMRC are now relentlessly focusing on tax evasion. The latest HMRC weapon involves targeting known defaulters by using all available powers and resources until they become fully paid-up members of the UK taxpaying club. It looks very much like a ‘naughty step’ for evaders to make them change their behaviours. This ties in possible penalties for offshore evasion of twice the amount of tax, and HMRC’s efforts to finally crack the problem of UK monies hidden in Switzerland. HMRC have also revealed a new amnesty: the Plumbers Tax Safe Plan.
Managing Deliberate Defaulters
At the end of February, HMRC announced a regime to target people and businesses with a track record of evading tax. Managing Deliberate Defaulters (MDD) is a new programme designed to closely monitor the future compliance of known tax evaders through requiring them to provide additional information with their returns, follow-up compliance checks and by withdrawing some VAT return concessions otherwise available.
Who does it apply to?
There is a current population of approximately 900 taxpayers from investigation cases in the past 22 months who HMRC believe will fall within MDD from its inception and they should shortly be receiving letters from HMRC.
The MDD regime may include anyone, corporate or individual, who since 6 April 2009 has been subject to a penalty for Deliberate Understatement or Deliberate Understatement with Concealment under FA 2007 Sch 24 or FA 2008 Sch 41. If the defaulting taxpayer is a partnership or company, but the officers or partners are considered to be actively involved in the tax offence, then HMRC may well also monitor their individual affairs and those of connected business entities that the individuals have an interest in.
So individuals and companies that have been the subject of Civil Investigation of Fraud procedures and have settled additional liability subject to a penalty will be included. So, more obviously, will individuals who have been convicted for criminal offences that include tax evasion.
Another category will be people who have disclosed under specific HMRC disclosure campaigns such as the New Disclosure Opportunity (NDO) and the Offshore Disclosure Facility (ODF) where they have admitted deliberately evading tax.
However, like ‘Naming and Shaming’, taxpayers may avoid falling into the programme if they make a full up-front disclosure to HMRC.
What will it mean?
For those brought into MDD, the level of monitoring and the timeframe for this oversight will be determined by the seriousness of their offence and conduct. Taxpayers could be in the regime for anything between two and five years depending on their behaviour, and particularly whether they have demonstrated a change in attitude towards their tax obligations.
A central team will perform the risk assessment of each taxpayer brought within the scheme. The risk assessment will determine the level of HMRC scrutiny, which could include some or all of the following:
In addition, anyone within MDD will no longer be entitled to use the three-line account facility or the use of the ‘Short’ pages, instead completing a full statement of account and balance sheet on SA return, full versions of self-employment and partnership pages, and detailed accounts for any property income.
It is intended that through a separate statutory mechanism, those who are charged a ‘deliberate’ penalty in relation to tax in excess of £5,000 are subjected to new record-keeping requirements including more detailed business accounting information for submission with their annual returns. It is clear from the interaction of these kinds of increased obligations that HMRC intend to substantially increase the compliance burden for those who deliberately evade tax.
HMRC’s strategic aim
The clear message from HMRC is that being caught within MDD is going to mean increasingly intrusive interventions if taxpayer behaviour does not demonstrably change. Keen to close all of the possible escape routes, HMRC are also introducing new monitoring procedures to make sure that deliberate defaulters do not simply start up a new business under a new name or identity to escape scrutiny or disguise their activity through the use of nominees or family members.
For advisers there is undoubtedly an important role in helping clients who have the full weight of these measures directed towards them. There is no statutory right of appeal against being put into the MDD programme. But HMRC are simply trying to use all their existing powers against a small population of errant taxpayers, their own resources seeming to be the only limiting factor. It is likely that it is only by demonstrating a clear behavioural shift that a client will escape MDD early, and that is where the adviser will surely be able to play an important role.
It also shows that when negotiating with HMRC to settle an existing enquiry, even greater efforts will need to be made to arrive at an appropriate penalty as the future consequences may be more than purely financial.
HMRC are using MDD to focus resources to both drive a change in behaviour through increasingly intrusive intervention and also monitor those they see as more likely to be non-compliant in the future. Alongside other developments such as 'Naming and Shaming' and the new penalty regime, HMRC intend MDD to act as a serious deterrent to those considering future evasion while targeting past defaulters to check that they are complying with their obligations.
HMRC should be applauded for concentrating on known deliberate tax defaulters, because this must mean they accept at least in part that enquiries across the whole spectrum of UK taxpayers are unlikely to be fruitful as most people are honestly doing their best to deliver accurate tax returns within complex rules. It also marks another move away from the obsession with tax avoidance, and so a re-balancing of the Department’s investigations efforts.
New penalties for offshore offences
Finance Act 2010 introduced a new penalty regime specifically intended to help HMRC address the tax risks associated with offshore transactions and structures. As is well known HMRC seem to be finding themselves in possession, by one means or another, of a great deal offshore bank account information. It has launched three separate initiatives to target the loss of tax through overseas accounts or assets – ODF, NDO and LDF (Liechtenstein Disclosure Facility).
The new penalties have an effective commencement date of 6 April 2011, meaning that the first SA returns affected will be 2011/12. The new rules introduce a series of penalty bands applicable to careless or deliberate inaccuracies relating to offshore income or capital gains in a three-tiered system of foreign territories. These penalties are much higher than those charged for domestic errors or failures and tie in with HMRC’s efforts to discourage non-compliance and facilitate greater international transparency.
The new legislation defines an offshore matter as a potential loss of revenue in relation to:
Territories are categorised in three tiers by reference to the nature of the UK’s exchange of information agreement with that jurisdiction and are now available on HMRC’s website, with Category 1 jurisdictions being those that the UK has a greater of information exchange with and Category 3 being towards the traditional tax haven end of the scale. Penalties range from 30%–100% for Category 1, 45%–150% for Category 2 and 60%–200% for Category 3.
For example, Guernsey falls within Category 1 so the maximum penalty stays at 100%, ie, the same for domestic UK evasion whereas Monaco falls in Category 3 and so carries double the potential penalty. Category 2 countries are those not listed in either other category.
For taxpayers conducting business in Category 2 and 3 territories, they now need to consider how they demonstrate that they have taken ‘reasonable care’ in the event of any inaccuracies as potential penalties for failure to reasonable care and deliberate understatement are far more punitive.
This leaves the prospect that normal business offshore transactions now carry a higher risk than before purely because of a risk of an error seen to be falling within this new legislation. This penalty regime therefore might have an impact in some very unexpected areas.
Swiss tax deals
There has been much speculation over the UK government’s negotiations with Switzerland about how an agreement may be reached so that the UK gets a share of the tax take which has been lost to the UK through UK residents using Swiss banks to evade their taxes.
The Liechtenstein Memorandum of Understanding which led to the LDF was itself a controversial measure, but any deal which results in the UK forgiving a large part of potential tax from Swiss bank accounts may be a political time-bomb. It remains to be seen if the UK authorities can get comfortable with preserving Swiss banking secrecy in return for a slice of a withholding tax, or whether nothing short of a full list of UK residents will suffice. Perhaps an announcement around Budget time would suit the UK’s needs?
PTSP: another leak fixed?
At the start of March 2011, HMRC revealed a new amnesty – The Plumbers Tax Safe Plan (PTSP). Despite its title, importantly this initiative is potentially open to any taxpayer with a disclosure to make, not just plumbers. With registration open until 31 May 2011, this amnesty is primarily an opportunity for those in the plumbing, heating or gas installation trades to declare previously untaxed earnings and pay the arising tax, interest and penalties.
In return for stepping forward voluntarily, HMRC are offering lower penalties – 10% in most cases, with a ceiling of 20% and in addition, are expecting the majority of people to go back a maximum of five closed tax years, unless it is clear that they have deliberately failed to declare all of their income or not declared any trading income at all in the past. In these cases, 20-year limits could potentially apply.
As part of the preparation for PTSP, HMRC have been gathering third party information from the plumbing industry to use in pursuit of those who do not come forward by the end of May. While it is not known what form this is in, possibilities include appliance fitting records from the Gas Safe Register – the official gas registration body that replaced CORGI in 2009.
In practical terms, the timescale for disclosure is short as registration closes on 31 May 2011 and participants must submit and pay by 31 August 2011. Given previous difficulties in gathering and analysing historical records for similar amnesties, this is likely to be a stretching timescale.
Interestingly, HMRC have responded to previous criticism of discrimination in relation to the Tax Health Plan which was restricted to medical professionals.
They have specifically announced that for those who are not in the plumbing trade but are voluntarily coming forward to put right their tax affairs, similar terms and penalties can be expected.
This is under the proviso that no previous amnesties have been appropriate for such a disclosure and that the related trade is made clear in forms submitted.
HMRC are promising a ‘fresh start’ to what they see as a large non-compliant part of the taxpaying population as well as a more general open door for everyone else.
However, as each amnesty passes without the fruition of promised resulting prosecutions for non-compliance, HMRC seem to be increasing the tastiness of the carrot without demonstrably using the stick.
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Richard Clarke, Director, PricewaterhouseCoopers LLP
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