Tax Collectors Intensify Scrutiny Of Offshore Accounts

by Robert Lee, Tax-News.com, London

12 August 2008

Business and financial adviser Grant Thornton says increased cooperation between worldwide tax authorities and an aggressive drive by the UK's HM Revenue and Customs (HMRC) to gain access to offshore accounts for the purpose of clamping down on perceived tax evasion is likely to be a concern for individuals with offshore accounts.

Recently the purchase of confidential details of wealthy Liechtenstein bank account holders by UK and German tax authorities has raised interest in the use of offshore accounts and the measures authorities are taking to prevent misuse. In addition, HMRC is understood to be launching a new probe into offshore account holders by sending out disclosure requests to 25 foreign banks to provide details of UK account holders.

Other measures in the drive to clamp down on perceived tax evasion that will have individuals thinking twice about sending money offshore include a recent tax treaty between Germany, Britain's EU partner, and Switzerland to enable a ‘back-door’ route into Swiss bank accounts and last year's offshore disclosure initiative which netted GBP400mn.

Commenting on the developments, Gary Ashford, a tax investigations director at Grant Thornton stated: "The Treasury has been progressively tightening the net on offshore accounts for some time and it is now getting to a point that those with money held offshore, whether acting rightly or wrongly, are likely to feel some heat from HMRC in the near future."

He continued: "HMRC is using any means possible to get hold of information on offshore accounts. Whether it be paying for information, pressuring private banks to hand over details or teaming up with other tax authorities and information sharing, HMRC is determined to gain access to these accounts. It is looking increasingly likely that HMRC will consider introducing another facility for those holding untaxed offshore assets, particularly in offshore bank accounts, to disclose these to HMRC and pay any tax owed."

According to Ashford, HMRC is continuing to development its approach of selecting taxpayers for investigation on a "risk score" basis and it is important to appreciate how any offshore arrangements impact on an individual's overall risk score.

He added: "HMRC clearly see anything involving offshore arrangements as increasing your risk score. However, if an individual is aware of this they can then set about ensuring any offshore arrangements are fully tax compliant. If problems are identified in the robustness of any arrangements they should be disclosed to HMRC at the earliest opportunity as HMRC has stated it will look to prosecute cases that have not been disclosed."

Chris Mills, a director in Grant Thornton's Private client team, believes that while HMRC is justified in its pursuit of tax evaders, its push into offshore jurisdictions has the potential to strip offshore banking facilities of their ability to operate on a level playing field in respect of legitimate account holders.

"To be clear, it is perfectly legitimate for a UK taxpayer to have a bank account outside of the UK. At its most basic a UK domiciled and resident citizen may for example have an offshore account simply to facilitate the paying of expenses of a holiday home abroad. Those individuals should have the same tax liability on interest from money held in a UK as in a foreign bank account and that then should not influence an individual's choice in whether to use an offshore account or not," he explained.

With non UK domiciled but resident individuals Grant Thornton says that the legitimate benefits of banking offshore are more marked and that has not changed despite the recent modifications to the taxation of non UK domiciled individuals (non-doms).

However, Mills warns that the agreements between various tax authorities and the constant changes to the rules governing offshore funds, and more recently those affecting non-doms, means that, "the waters are being muddied as to what remains legal and it can be perceived that 'offshore' automatically means 'tax evasion'."

Mills added: "As has been the case in the past, the stampede to catch tax evaders is invariably going to catch legitimate account holders in the cross fire. Having to deal with an HMRC enquiry costs time and money and can be daunting when you are on the receiving end and when you believe you have done nothing wrong. Hopefully HMRC will keep balancing the need for safeguards for those who are not tax evaders as it pursues missing tax revenues."

Mills says bank accounts aside, there are other offshore investment vehicles, which are legitimate for both UK domiciled, non-doms and high net worth investors to use in their global investment plans. These include:

- Offshore Investment Funds

Offshore investment funds are for the most part structured in much the same way as their onshore equivalent. The key difference, however, is that the offshore funds are usually tax resident in tax neutral jurisdictions and hence the funds themselves do not pay tax. This sounds like an attractive proposition initially as one might think that returns can be rolled up in an investment offshore without paying UK tax until the investment is sold. However the tax rules can be complex and this need not be the case. It is therefore important that an investor is aware of the tax implications. An investor cannot for example assume that they will get the benefit of capital gains tax (CGT) treatment (eg the annual CGT exemption).

- Hedge Funds

A hedge fund generally pursues far more active strategies to achieve an absolute return. Most hedge funds do not seek distributor status and therefore an investor will not get capital gains tax treatment on disposal. They will be subject to income tax and not get the benefit of the CGT annual exemption. The reason why hedge funds do not seek distributor status is that the UK tax authorities regard them as trading funds and therefore argue that the capital gains made by the fund itself should be treated as income for UK tax purposes. To be certified as a distributing fund the UK tax authorities would expect the hedge fund to distribute not only 85% of its income every year but also 85% of its gains.

- Offshore Life Policies/Bonds

Offshore life assurance bonds are popular for their tax benefits as tax is usually only due when the funds are withdrawn. These funds have the advantage of being exempt from the European Union Savings Tax Directive. The reason being that the assets in the bonds are technically held by the life company running the fund and that the EU directive was targeted at reporting the savings income of individuals rather than corporates.

However, as with any offshore investment, Grant Thornton suggests that investors should consider taking tax and legal advice, to avoid any complications.

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