The hedge fund industry has recently been under fairly intense scrutiny by HMRC and many will view this latest move by HMRC as merely an extension of that process. Managers whose personal and/or business affairs are linked to offshore structures, or who have accounts offshore, need to be aware that the investigative landscape has changed considerably. Many so-called tax havens have signed or are about to sign Tax Information Exchange Agreements with the UK. The Isle of Man has said that from 1st July 2010 it will automatically exchange bank information with EU member states. And HMRC are in the process of serving information notices on several hundred UK banks which have an offshore presence. It is highly likely therefore that in a relatively short time HMRC investigators will have available to them a substantial amount of information for use in current and future investigations.
In terms of the NDO, the scope and rules governing the application of this are very similar to those associated with the ODF.
• The NDO began on 1st September 2009 and ends on 12th March 2010, in time for the yield there from to be included in the results for the current fiscal year.
• Those who wish to make a disclosure under the NDO must notify HMRC – by telephone or in writing – of their intention to do so between 1st September and 30th November 2009. Failure to make such a notification within this fairly narrow time-frame means that they cannot then take advantage of the favourable terms of the NDO.
• For the month of September, notifications can only be made by telephone or in writing on a form which can be downloaded from the internet.
• From 1st October to 30th November, notifications can be made on-line.
• Disclosures can be made on paper from 1st September to 31st January 2010 and on-line from 1st October. But from 1st February 2010, only on-line disclosures will be accepted.
• Agents authorised by their clients will be able to make notifications and disclosures on their clients’ behalf.
• The NDO is open to those with tax irregularities associated with an offshore account, complex structure or investment. Disclosures under the NDO must include all unpaid liabilities not just those associated with the offshore investment.
• HMRC has stated that wholly domestic disclosures with no offshore element will be dealt with under a different process and will not attract the same favourable penalties. However, they note that in practice, unprompted, full disclosures are likely to result in a reduced penalty anyway, of between 10% to 20% due to additional abatements, unless they are in relation to very serious cases of fraud. HMRC’s policy on domestic disclosures will be difficult to defend and should be challenged strenuously by anyone who has a domestic disclosure to make during the NDO period.
• The penalty payable under the NDO will be 10% of the tax underpaid unless the taxpayer had been made aware of the ODF in which case the penalty will be 20%. Similarly, if the taxpayer had notified an intention to make a disclosure under the ODF but failed to do so, the penalty will be 20%.
• Where the tax underpaid is less than £1000, there will be no penalty payable.
• HMRC will give no undertakings as regards the possibility of those coming forward voluntarily being subject to criminal investigation. However, they have made it plain that prosecutions arising out of the NDO are likely to be extremely rare.
• Within four months from the end of the NDO period HMRC will issue letters of acceptance in most ‘low risk’ cases. Those categorised as ‘high risk’ may have to wait many months before finding out whether their disclosure has been accepted.
How should taxpayers react to this opportunity to rectify any irregularities in their tax affairs which is being offered by HMRC? At first sight the fact that disclosure by 12th March 2010 has to be accompanied by payment of the tax, interest and a fixed penalty – generally of 10% – might not seem particularly attractive. However, taxpayers should not rush to this conclusion. The fact that disclosure can be made very simply on a few foolscap pages thus obviating the substantial professional costs of a major, time consuming in-depth HMRC investigation ought to make the NDO an option worthy of serious consideration.
Taxpayers who believe that they may have a disclosure to make cannot make that disclosure until 1st September. However, they should make full use of the time between now and then to begin to gather the documentation from which their disclosure can be quantified. This will likely involve writing to banks and financial institutions here and offshore with requests for documentation. Taxpayers and their advisors should also review any business structures and tax-planning arrangements which may have been implemented in the past, particularly where these arrangements involved structures in tax havens, to ensure that the planning has been properly implemented and operated and that no tax has been inadvertently underpaid. Any taxpayer who believes he has a disclosure to make should keep written notes of any discussions with his professional advisers about his intentions for use in the unfortunate event that his affairs are challenged.
In order to obtain information against which to test the completeness of NDO disclosures, HMRC have already begun to serve information notices on several hundred UK banks which also have a presence offshore. It may take some considerable time for these notices to be complied with and for HMRC to evaluate the information so although the NDO officially ends on 12th March 2010, its after-effects could still be with us for years to come.
Since announcing the NDO, HMRC have signed a landmark disclosure deal with Liechtenstein – the Liechtenstein Disclosure Facility (LDF) – which began on 1st September 2009 and runs to 31st March 2015. Under the arrangement, financial intermediaries in Liechtenstein will be obliged to identify customers whom they believe to be resident in the UK. The customers will then have 18 months in which to prove that they are not so resident or that they are or have become totally UK tax compliant. A striking feature of the deal is that HMRC will only seek to collect tax unpaid for 10 years – not 20 as under the NDO. And most importantly, taxpayers will be able to transfer into a financial institution in Lichtenstein undisclosed accounts which are currently outside the UK and Liechtenstein and which were not opened via a UK branch or agency, and take advantage of the favourable terms of the LDF.
Andrew Watt is a Managing Director of Tax Risk & Disputes at Alvarez & Marsal Taxand. He has more than 20 years of experience in assisting clients in resolving disputes with HMRC.