As has been recently reported in WealthBriefing, HM Revenue & Customs have enjoyed a startling run of successes before the Special Commissi...

As has been recently reported in WealthBriefing, HM Revenue & Customs have enjoyed a startling run of successes before the Special Commissioners in recent months. As a result, it appears likely that the UK tax authorities will be able to acquire the confidential offshore bank documents of many thousands of UK residents. This article looks at these decisions, what led to them, and what the immediate implications may be for those in the UK who have banked offshore.

The SpC have now issued four decisions (all of which were anonymised) supporting HMRC’s issue of “un-named party notices”. The four decisions can be split into two – firstly, two concern customers of what is understood to be a large High Street Bank, and secondly, two decisions concerning City Share Traders.

The first, and ground-breaking, decision came in December 2005 when the Special Commissioners authorised the issue of a notice to an un-named financial institution (now understood to be a High Street bank) requiring it to provide HMRC with documents detailing UK customers who held credit cards associated with offshore bank accounts. At the hearing held prior to the issue of the notice, HMRC estimated that the notice would affect 75,000 of the bank’s customers, approximately 15,000 of whom would be subject to tax investigations. As well as demonstrating the UK tax authorities successfully adapting techniques first used by the US IRS, this case was the first in which HMRC demonstrated the method of:

· Collating examples of past investigations, and evidencing that there was a known number of cases of tax evasion involving persons who had used a particular mechanism (here, UK customers operating an offshore credit card)
· Being able to demonstrate reasonable grounds for the view that there were other unknown cases where persons who had used the same method had evaded tax
· Demonstrating that information which would identify the “unknown cases” was in the ‘power or possession’ of the financial institution, and that it would not be too onerous for the institution to supply this information.

Earlier this month, as a follow up to the credit card decision, the SpC approved the issue of three notices to the same High Street bank and its private banking and trust subsidiaries. The notices seek copy bank statements and certain other documents containing details of the bank’s customers’ offshore bank accounts. The SpC held that as the UK bank held information from its offshore subsidiaries on computer systems in the UK, the information requested was in the UK bank’s “possession or power”.

Importantly, the SpC considered that the bank’s duty of confidentiality to its customers did not alter its duty under the law to provide documents it possessed when requested under a notice. Given that HMRC estimated that the notice would give them access to information which would lead to tax investigations yielding a total of £1.5 billion, the notice will clearly affect many thousands of the bank’s customers.

While it is impossible to know just how accurate HMRC’s estimate are likely to be, the sheer scale of the estimated tax loss from one bank’s customers makes it inevitable that HMRC will pursue this initiative across the financial sector. As there was nothing in either of the two decisions to indicate that the profile of this particular bank’s customers, or the approach of the bank itself, was different from that of other banks, it is likely that other financial institutions will now be the subject of similar notices.

Alongside the two bank decisions, HMRC have used the same method to counteract tax evasion via “offshore” share-trades. April saw two separate SpC decisions where HMRC obtained notices in relation to the UK clients of two investment banks.

The HMRC investigation originated in a disclosure of tax evasion made to the old Inland Revenue Special Compliance Office (now HMRC ‘SCI’) by a group of City of London share traders. The traders had made profits, which were taxable in the UK, on shares traded through a British Virgin Islands company, but had failed to make a full return of these profits to the Inland Revenue. The British Virgin Islands company’s share trades had been settled through one UK investment bank (which was acting as prime broker) with the deals being conducted through the other UK investment bank.

Both investment banks had, as part of their “Know-Your-Customer” procedures, kept a record of the UK individuals who were authorised to act on behalf of the British Virgin Islands company. HMRC had, through their investigations, established that, by obtaining these details, they could identify and therefore investigate those who had evaded UK taxation in this way.

Given that the statutory provision that HMRC is using has existed since 1988, it is worth pausing to consider the changes that lead to HMRC making its breakthrough. Both the UK and offshore financial sectors have had to adapt to the challenges posed by regulatory and information technology changes in recent years.

There can be a variety of drivers, and changes can have unforeseen implications. For example, initiatives aimed at streamlining IT processes or outsourcing may have implications for customer service and information security as well as the bank’s bottom line.

It is now standard, for example, for a bank’s internet banking customers to allow the bank, and its offshore subsidiaries, to access, store, or outsource data management to either the UK or overseas.

Similarly, regulatory changes, such as the Anti Money Laundering directives have changed processes concerning information held by banks. HMRC live in the same world as the rest of us, and have acted upon the realisation that more information is held, and is accessible in the UK, than ever before.

Tony Cohen, leader of Deloitte’s Private Client Services practice commented:

“Given the scale of these notices it must be hoped that those who have taken good care of their tax affairs are not un-necessarily swept up in HMRC’s net. However, no one can be under any doubts as to HMRC’s commitment to the investigation of tax evasion. While those who have undertaken properly advised and implemented tax planning have nothing to fear, those who may have relied only upon secrecy should clearly take advice so as to put things right”.

Earlier this month we saw what may be the first signs of HMRC’s follow up action. In an announcement re “Offshore Assets” on its website on 10 May HMRC stated:

“Following recent media publicity it is apparent that some customers or their representatives wish to contact HMRC to make disclosures in respect of assets held offshore, where there may be unpaid duties. HMRC is anxious to facilitate such approaches, and have set up a single point of contact to handle your queries.”

Given the level of publicity it is understandable that HMRC made an early announcement and it may be that a fuller statement will be made in due course. It is anticipated that HMRC will shortly announce the re-structuring of its investigation offices, in part to deal with the volume of cases it will be undertaking as a result of these notices.

While HMRC are expected to settle the vast majority of these cases civilly, recovering the tax, interest, and penalties, the fact remains that some cases may be investigated with a view to criminal prosecution. In the meantime, those who have concerns as a result of these cases would do well to take appropriate professional advice before contacting HMRC directly.