New UK Offshore Disclosure Facility Announced

by Jason Gorringe, Tax-News.com, London

23 April 2009

A new offshore tax amnesty was among a number of compliance measures announced by Chancellor of the Exchequer Alistair Darling in the 2009 budget designed to raise an additional GBP1bn in tax revenues over the next two years.

The amnesty scheme, named by the government as the ‘New Disclosure Opportunity’ or NDO for short, will run from the autumn 2009 for a limited period to give the offshore account holders that are UK residents and have unpaid tax connected to an offshore account “one final opportunity” to disclose, and put their affairs in order. Those choosing to avail themselves of the scheme will be expected to pay the duties they owe, interest and a penalty. However, the precise details of this carrot and stick approach will not be publicised by the government until later in the year.

John Cassidy, Tax Investigations Partner at PKF accountants & business advisers, has welcomed the government’s long overdue announcement of its second offshore disclosure scheme, but bemoaned the “serious lack of detail.”

“As well as adding to the Treasury’s funds, this will enable holders of these accounts to properly square matters with HM Revenue & Customs (HMRC) and get their affairs back in order,” Cassidy said.

“However, what is disappointing is that the announcement of this facility was made in last year’s Pre Budget Report on 24 November. Now, some 5 months later, the same announcement is being made again with the only addition being that it will run from Autumn 2009 until March 2010. Despite being long awaited, there are no details of the workings of the disclosure facility – such as the level of penalty to be applied – whatsoever,” he added.

Cassidy said that HMRC is still gathering data concerning offshore account holders by seeking to issue notices to offshore financial institutions, forcing them to provide various data about their customers. “No doubt this will be used against those who do not take advantage of the new disclosure facility,” he warned.

Some 60,000 individuals were said to have come forward under the government’s previous offshore amnesty scheme in 2007, known as the Offshore Disclosure Facility. Undisclosed tax liabilities declared to the ODF were subject to a maximum penalty of 10% of the outstanding tax (in addition to paying the total tax and interest due). Normally, penalties of at least 30% and possibly as much as 100% can be imposed.

The government also announced a battery of other measures designed to extract as much revenue out of the tax system as possible over the coming years. These include:

• Publication of names of serious tax defaulters: The government is legislating for the publication by HM Revenue and Customs (HMRC) of the names of both corporate and individual taxpayers who incur a penalty because they have deliberately understated over GBP25,000 of tax.
• New reporting requirements for tax defaulters: Those who have incurred a penalty for the deliberate understatement of tax of at least GBP5,000 will be required to provide more information on their tax affairs for up to five years to ensure they have proper systems to be able to make a correct tax return and allow HMRC to monitor future compliance.
• Accountability of senior accounting officers: The government has proposed a statutory requirement for senior accounting officers of major corporates to certify personally that adequate controls to prepare accurate tax computations are in place.
• Developing the disclosure of avoidance schemes regime: Disclosure of Tax Avoidance Schemes (DOTAS) will give HMRC early warning of avoidance schemes. HMRC will begin discussions with interested parties with a view to extending the 'hallmarks' used to identify avoidance schemes, to ensure they continue to bear down on avoidance, and revising the penalty regime to introduce tougher sanctions for the non compliant.
• Tacking avoidance of tax on disguised interest and transfers of income streams: Following consultation the government has announced the introduction of principles-based legislation to counter avoidance in two areas involving financial products, in response to "continued attempts at abuse." Specifically, the legislation will prevent schemes designed to avoid tax on interest received and schemes seeking to side-step existing anti-avoidance legislation on the sale of income streams.
• Proposals to counter avoidance using financial products: The government announced a measure to counter avoidance schemes involving the use of convertible securities within a group to create accounting asymmetries and the creation of artificial losses on loans and derivatives.
• Foreign exchange targeted anti-avoidance rule: The government has announced a targeted anti-avoidance rule to stop the use of tax avoidance schemes that seek to exploit the foreign exchange tax matching rules. Exchange gains or losses on borrowings or currency derivatives will only be disregarded for tax purposes if they do not arise from tax avoidance arrangements.
• Exploitation of the double tax relief and manufactured overseas dividend rules: The government has announced measures to clarify the rules that provide relief for UK tax against foreign tax payable on foreign income (double taxation relief); and the rules dealing with manufactured overseas dividends. These changes, effective from April 22, will: prevent a deduction for foreign tax on the receipt of a Manufactured Overseas Dividend by a company, where the economic cost of the foreign tax has not been borne by the company; and ensure that banks always take a reasonable proportion of their funding costs into account in the calculation of double taxation relief.
• Countering abuse in the corporate intangible fixed asset regime: The government has announced a measure to clarify the intangible fixed assets regime rules by confirming that goodwill is treated as intended. Effective from April 22, the legislation will confirm that for the purposes of the corporate intangible regime, goodwill includes internally-generated goodwill. It also confirms that all goodwill is created in the course of carrying on the business in question and is subject to rules determining whether goodwill is treated as created on or after April 1, 2002.
• Ensuring tax and National Insurance paid on lease premiums: The government has announced a measure to prevent tax avoidance where an employee or director of a company is provided with living accommodation through the payment of a lease premium rather than a full market rent for the use of the property. From April 22, those who take out new leases using a lease premium will pay tax and national insurance contributions as if the full market rent had been paid.
• North Sea Fiscal Regime: Preventing Accelerated Decommissioning Relief: The government has announced a measure that changes the North Sea fiscal regime to ensure companies cannot access tax relief for decommissioning oil and gas infrastructure years in advance of the decommissioning activity actually being carried out. As originally intended, tax relief for this expenditure will only be incurred when decommissioning work is actually carried out.
• Spotlight on selected avoidance schemes: The government has announced that HMRC will shortly publish a 'Spotlight' giving notice of selected avoidance schemes that are thought to be ineffective to discourage potential users. HMRC will challenge these schemes when encountered.
• Structured foreign exchange arrangements: The government has announced the publication of a technical note in the summer that will set out the issues and potential approaches to certain structured financial arrangements (often described as overhedging or underhedging) that, although not undertaken for tax avoidance, seek to pass on to the Exchequer, through tax relief, commercial risk that would otherwise be borne by groups on such transactions. The government believes that the economic risks should be shared between the Exchequer and business as Parliament intended.

Given the dire economic and fiscal circumstances, it was to be expected that the government would use the budget to ramp up its enforcement efforts to rake in as much tax as possible. However, this has destroyed any claim that the government has simplified tax legislation during its 12-year rein.

“It is inevitable that the Treasury will seek to clamp down on complex, and arguably artificial, tax planning arrangements where the tax result is out of line with the underlying economic situation," commented Stephen Herring, Senior Tax Partner, at BDO Stoy Hayward. "However, this approach contrasts with the often hardline approach of HMRC in cases where they seek to apply an excessively narrow interpretation of tax legislation to impose an additional burden on taxpayers carrying out purely commercial transactions. We would welcome a fairer and more balanced approach seeking to bring tax in line with economic substance and to reduce the distortions within the current tax system that drive perceived anti-avoidance," he added.

Herring argued that a "broader, flatter tax system" would reduce the need for intricate anti-avoidance measures such as those announced in the 2009 budget, which has pushed UK tax legislation beyond 10,000 pages.

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