HMRC have published a consultation ‘Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures’ as part of their ongoing offshore tax evasion strategy.
The consultation proposes a new legal requirement for ‘enablers’ who create complex offshore financial arrangements that assist in tax evasion to inform HMRC of the planning.
It will target arrangements which:
- Fall outside DOTAS as they don’t have any tax impact if the taxpayer properly declares taxable income and gains.
- Can be used for tax evasion purposes by making it difficult to identify the taxpayer as the beneficial owner.
At a glance
- Intermediaries who create or promote arrangements which meet certain characteristics will have to notify HMRC of the details.
- Intermediaries will also have to provide HMRC with a list of clients who are using the scheme.
- HMRC will provide the intermediary with a notification number to be passed on to clients.
- Clients will have to include the notification number on their Tax Return or Personal Tax Account.
The proposal is intended to target offshore arrangements which are designed to assist the evasion of tax by making it difficult to identify the beneficial owner of income and gains.
Creator and promoter responsibilities
The creator of an arrangement will be responsible for identifying whether it has any of the characteristics specified by HMRC.
HMRC intend this to apply to creators within and outside the UK.
- Creators would notify:
- Details of entities involved in the arrangement.
- Which characteristic in the notification rules the arrangement has.
- The transactions involved and their nature, e.g. loans, share subscriptions etc.
- The purpose of the arrangement and how it achieves it.
- If the creator fails to notify HMRC, the responsibility passes to any promoter or marketer.
- If the promoter or marketer fails to notify HMRC, the responsibility passes to the client or end user.
- Failure to notify would result in sanctions such as penalties and public naming.
Characteristics
HMRC intend to carefully define characteristics or hallmarks to target only those arrangements which could easily be used for tax evasion purposes.
Suggested hallmarks included in the consultation are:
- Arrangements which have the effect of moving money outside of Common Reporting Standard (CRS) reporting, either through the use of different jurisdictions or non-reportable products and/or structures.
- Arrangements which have the effect of obscuring or distancing legal and beneficial ownership, for example through the use of a power of attorney or nominees
- Arrangements which, if defeated, would incur an increased penalty.
There will be a further consultation to determine what the hallmarks should be.
Examples
The consultation document includes some generic examples of the types of scheme that HMRC have identified and aim to capture.
Example 1
- Mr & Mrs B are the shareholders of a UK company.
- Both are resident and domiciled in the UK.
- The company provides services to a German company and invoices the German company for payment.
- Mr & Mrs B use a Jersey Company Service Provider to set up a British Virgin Islands (BVI) company with the same name as the UK company.
- Payments from the Germany company are diverted into the BVI company and not declared by the UK company.
Example 2
- Mr & Mrs X are directors of a UK company.
- Both are resident but not domiciled in the UK.
- They use an overseas agent and a UK accountant to set up a network of offshore companies to extract money from the UK:
- OSCO 1 – a company inserted into the supply chain to increase the cost of purchases
- OSCO 2 – a company that owns and rents the business premises to the UK company
- OSCO 3 – a company that provides financing via a Jersey bank for a loan obtained by the UK company.
- OSCO 4 & 5 – companies owning shares in OSCO 1, 2 and 3.
- Mr & Mrs X own the whole structure by way of trusts.
- The profits of the UK company are kept artificially low by virtue of high purchase costs, rents and interest payments made to the offshore companies.
Example 3
- A UK partnership receives investments from individuals, which the individuals partly fund by way of a loan from a Guernsey company.
- The partnership buys some film scripts and pays a Monaco company to provide the film development services:
- The Monaco company subcontracts the services to a Guernsey company.
- The Guernsey company doesn’t provide the services, but lends the money on to another Guernsey company.
- This second Guernsey company then lends the money back to the partnership to invest in more films.
- The partnership makes losses enabling the investors to receive tax repayments in excess of their initial investment.
Example 4
- Mr D is the shareholder of a UK company.
- He is resident and domiciled in the UK.
- He wants to hide his ownership of a company.
- He uses a bank in the Cayman Islands to appoint nominee shareholders and a nominee director.
- The nominee director provides Mr D with a bank card so that he can access the money in the company’s bank account.
- Mr D can keep his identity secret from the nominee director by using a courier to transport documents.
Example 5
- Mr E has money offshore that he wants to hide.
- He transfers the money to a BVI company with nominee shareholders in a second jurisdiction and nominee directors in a third.
- The BVI company invests the money in a bank account in a fourth country.
- Mr E has power of attorney over the bank account and a bank card to access the money.
- Mr E remains the beneficial owner of the money and interest earned but does not declare the interest on his UK tax returns.
The consultation closed on 27 February 2017 and the summary of responses was published on 1 December 2017. The Government has decided not to take this forward directly, as the OECD and EU have been working on similar multinational arrangements since the publication of this consultation, in which the UK will be involved.
Links
Consultation: Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures
Summary of responses: Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures – responses
Our guides:
Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures – responses
DOTAS: Disclosure of tax avoidance schemes
Penalties: offshore income and CGT
Requirement to correct: consultation on new sanctions from September 2018
Consultation questions
Q1: Should the proposal apply only to UK-based persons/businesses who create offshore arrangements, or should offshore persons/businesses also be in scope?
Q2: How should HMRC define the scope according to which both UK-based and non-UK-based persons/businesses would be liable to report?
Q3: Are there any key circumstances missing from the proposed concept and can you see any opportunities to improve on this basic concept?
Q4: Do respondents have any concerns about this approach?
Q5: Are there any other approaches we could consider?
Q6: Can you suggest any hallmarks to identify which arrangements would be subject to notification?
Q7: Do respondents have any concerns about the use of hallmarks to identify which arrangements would be subject to notification?
Q8: Are there any other approaches we could consider?
Q9: Should the requirement be limited to offshore?
Q10: Should the requirement be limited to individuals?
Q11: Are there any further opportunities to change the scope of the measure in order to maximise its effectiveness?
Q12: In your view, what impact will issues of Legal Professional Privilege have on the effectiveness of the requirement?
Q13: How might HMRC address the issue of Legal Professional Privilege?
Q14: In your view, what impact will this measure have on UK resident but non-domiciled individuals?
Q15: How might HMRC address the impact on UK resident but non-domiciled individuals?
Q16: Do you agree the measure should apply to existing arrangements and not just new ones?
Q17: In your view, are there any other considerations that HMRC should take into account when considering the feasibility and design of a requirement to notify HMRC of offshore structures?
