PRACTICAL UK TAX CONSEQUENCES OF THE CRS, DATA LEAKS AND OTHER RECENT DEVELOPMENTS

Andrew Park9 May 2016

Copyright © 2 May 2023 BDO LLP. All rights reserved.

A BRAVE NEW WORLD

A NEW ERA OF GLOBAL TRANSPARENCY

• The Common Reporting Standard “CRS”• Mass data leaks or hacks from banks, law firms and trust companies.• Agreements between the UK and the Crown Dependencies and Overseas

Territories to share beneficial ownership information• FATCA and “UK FATCA”• UK register of People with Significant Influence or Control over UK registered

LLPs and companies – start April 2016• Agreement with the UK’s Crown dependencies (except Guernsey) and

overseas territories (except Anguilla) for disclosure of information on company beneficial ownership to UK law enforcement and tax agencies – announced 11 April 2016

• Co-operation and automatic information sharing between the UK, France, Germany, Spain and Italy on to establish the beneficial ownership of ‘complex shell companies and overseas trusts’ - announced 14 April 2016, expected start date: January 2017

• Expectations of transparent UK property register

REGIMES & DATES

Common Reporting Standard (CRS) • Information from 1 January 2016 for 56 early adopters• First exchange in September 2017• 98 countries committed to exchange by September 2018

Inter Governmental Agreements (IGAs) “UK FATCA” / “UK CDOT” • Crown Dependencies & Overseas Territories • Financial information from 1 July 2014• First exchange in September 2016

FATCA• US residents holding assets outside the US• Financial information from 1 July 2014• Various reporting dates – started 31 March 2015

.

PARTICIPATION EXCHANGE JURISDICTIONS

THE INFORMATION DISCLOSED UNDER CRS• The name, address, jurisdiction of residence, taxpayer ID number and date

and place of birth• The account number• The name of the Reporting Financial Institution• The account balance• Interest, dividends and any other income• Gross sales proceeds derived from the sale of financial assets• Equity Interest

OTHER POTENTIAL INFORMATION CIRCULATING LEAKS AND HACKS

• Email correspondence between trustees, corporate directors, professional advisors and beneficial owners

• Scanned copies of letters, contracts and planning advice• File notes of meetings and telephone conversations• International structure diagrams• Trust deeds and letters of wishes etc• Memos documenting original intentions• Trust and overseas company accounts• Scanned KYC documentation

A MORE AGGRESSIVE APPROACH IN THE UK

NO AMNESTIES, NO PREFERENTIAL TERMS

• The era of tax amnesties and special favourable terms is over – indefinitely

• Public, HMRC and legislators are in punitive mood

• HMRC is under new leadership

• HMRC’s concern now is how to process and risk assess a vast avalanche of overseas data

• No need to further incentivise voluntary disclosures and no political capital left to do so

• A raft of new anti-evasion measures are timed to come in just before the CRS

NEW UK DOMESTIC MEASURES PRE CRSCIVIL AND CRIMINAL

FINANCE BILL 2016

In November 2015 HMRC stepped up publicity on its efforts to tackle offshore evasion, timed to coincide with number of new powers being announced in the Autumn Statement

“Hiding money in another country at the expense of honest UK taxpayers is not acceptable and we have made it clear we will put a stop to it”

“Under our new regime the small minority who evade tax offshore, facilitate or turn a blind eye to offshore tax evasion will face tougher sanctions”

“With over 90 jurisdictions now agreeing to automatic exchanges of information, the net is closing in on offshore tax evaders”

David Gauke, Financial Secretary to the Treasury - November 2015

WIDELY TRAILED CHANGES…

NEW OFFSHORE RELATED CHANGES FOR TAXPAYERS

Civil measures• Increased tax geared penalties• Additional asset based penalty regime• “Naming and shaming” unless unprompted• “Naming and shaming” to look through structures

Criminal measures• Strict liability criminal offence

INCREASING CIVIL PENALTIES FOR OFFSHORE EVADERS

A higher minimum penalty for inaccuracies involving deliberate “offshore matter” or an “offshore transfer” i.e. increase the minimum penalty by 10%

FA 2016 SECTION 151 AND SCHEDULE 21 EFFECTIVE DATE TBA UPON ISSUE OF STATUTORY INSTRUMENT

Country category

Behaviour Max %

Min % (prompted)

Min % (voluntary)

1 Careless 30 15 02 Careless 45 22.5 03 Careless 60 30 01 Deliberate 70 45 - was 35 30 - was 202 Deliberate 105 62.5 - was 52.5 40 was 303 Deliberate 140 80 - was 70 50 - was 401 D & Concealed 100 60 - was 50 40 - was 302 D & Concealed 150 85 - was 75 55 - was 453 D & Concealed 200 110 - was 100 70 - was 60

NEW ASSET BASED PENALTY FOR EVADERS

• Applies if there is a deliberate error/failure where the potential offshore tax loss > £25,000 for a tax year

• Applies to deliberate irregularities for offshore matters and offshore transfers• Only one asset based penalty is charged for each ‘investigation period’• The penalty is charged by reference to the tax year with the highest offshore

potential loss

Asset penalty is the lower of:• 10% of the value of the asset; and• Offshore potential loss x 10• Scope to mitigate but awaiting statutory instrument for details (and a start

date)

FA 2016 Section 153 and Schedule 22

PUBLISHING THE DETAILS OF DELIBERATE DEFAULTERSWhere the person made a deliberate offshore error or failure to notify and obtained maximum penalty reduction protection will only be available in future if the disclosure is unprompted

New “look through rules” where a partnership, body corporate or trustee incurs a penalty• Which relates to a deliberate error/failure; and• Involves an offshore matter or offshore transfer

HMRC will be able to publish details of any individual• Who controls the body corporate or partnership or is a trustee AND• Who obtained a tax advantage as a result of the inaccuracy/failure

Commencement date: TBC (a Statutory Instrument will be issued)

INDIVIDUALS

NEW STRICT LIABILITY CRIMINAL OFFENCE

• Relates to tax chargeable on or by reference to offshore income, assets or activities

• No requirement to prove intent • Applies to IT and CGT• Loss of tax must exceed an annual threshold set by Statutory Instrument (which

must not be less than £25,000 per year)• Does not apply to trustees or executors/administrators of deceased estates• Treasury can issue a statutory instrument to add further

conditions/circumstances under which a person would not be guilty of an offence

• Defence: taxpayer had a reasonable excuse• Start date: TBC

Sanctions • England & Wales – Fine & possible imprisonment up to 51 weeks• Scotland & NI – Fine & possible imprisonment up to 6 months

S154 FB, INSERTING s106B – TMA 1970

NEW OFFSHORE RELATED CHANGES FOR PROFESSIONAL “ENABLERS”

Civil measures• Penalties based on loss of tax• “Naming and shaming”

Criminal measures• Corporate offence of failing to prevent facilitation of tax evasion

CIVIL SANCTIONS: ENABLERS OF OFFSHORE EVASIONPenalty charged if enabled another person to carry out offshore tax evasion or non-compliance

Penalty is the higher of:• £3,000 or • 100% of the potential loss (or 50% if it’s re an offshore asset transfer

penalty)

Awaiting Royal Assent at publication

FA 2016 S150 & Schedule 20 F(No 2)

Enabling :encouraging, assisting or otherwise facilitating conduct that constitutes offshore tax evasion or non-compliance.

CIVIL SANCTIONS: ENABLERS OF OFFSHORE EVASION

The Enabler can be named where:• One or more penalties are charged and the loss of tax exceeds £25,000, or• Five or more penalties are assessed in any 5 year period

• No naming if the maximum penalty reduction is given or where the penalties are reduced to nil (or stayed) due to special circumstances

• HMRC must inform a person that their details may be published and give the person an opportunity to make representations about whether it should be published

• The information may be published ‘in any manner that HMRC considers appropriate’ for up to one year

Awaiting Royal Assent as at publication

NAMING PROVISIONS - S150 & PART 3 OF SCHEDULE 20 F(No 2) BILL 2016:

THE LATEST CRIMINAL MEASURES

• Current consultation round closing for comments on 10 July 2016• Deliberately aiding and abetting someone to commit tax evasion is already an

offence but requires the “involvement of the directing mind and the will of the corporation”

• The new offence does not ask corporations to police their clients’ tax liability• Will require both the taxpayer and the representative involved to be mens rea

To cover all taxes and to apply to:• UK based corporations’ failure re UK tax losses• Non-UK based corporations’ failure re UK tax losses• UK based corporations’ failure re overseas tax losses illegal there

A NEW CORPORATE OFFENCE OF FAILURE TO PREVENT THE FACILITATION OF EVASION

BAD PLANNING AND FAILED AVOIDANCE

FAILED OR OUTDATED PLANNING

HMRC expect an increasing yield not from detected evasion but from structures with UK resident beneficial owners and / or UK assets which:

Come to HMRC’s attention through information exchanges, leaks or hacks

And are caught by new legislation post implementationOr never properly took into account existing UK legislation or case lawOr did not anticipate that beneficiaries or settlors would become UK resident at a later dateOr were inadvertently not properly implemented or administeredOr are open to alternative interpretations for UK tax purposes

SCENARIO 1

• Non-UK discretionary trust settled by non-UK resident prior to becoming UK resident

• Trust holds a UK company• The settlor remains non-UK domiciled after

coming to the UK and pays the “RBC”• The settlor excludes himself from benefit but

does not exclude his wife• No distributions are made to the UK• However, the UK company pays up a

dividend to the trust

Consequences• The dividend is potentially taxable on the

settlor under S720 ITA 2007 in the tax year it was made

TRANSFER OF ASSETS ISSUES

OFFSHORE TRUST

UK COMPANY

UK ASSETS

Dividends

Income

1

2

Overseas Assets

Move to the UK

SCENARIO 2

• The settlor lives in the UK for over 30 years - UK resident non-UK domiciled

• A year after permanently leaving the UK the settlor settles a non-UK discretionary trust

Consequences• The settlor is still deemed domiciled in

the UK for IHT (17 of 20 rule)• IHT was payable on the value of the

settled assets

INHERITANCE TAX ON SETTLING TRUST OVERSEAS TRUST

OVERSEAS COMPANY

OVERSEAS ASSETS

2

1

Overseas Assets

Leaves the UK

After leaving the UK

UK

SCENARIO 3

• Big Group is a group of overseas companies investing in UK property

• Many key strategic decisions were taken by the controlling director – himself based in Germany - at monthly meetings with the professional advisors whilst in London

Consequences• The companies are potentially UK

resident for Corporation Tax purposes by virtue of being centrally managed and controlled in the UK

MANAGEMENT AND CONTROL

GERMAN HOME

UK advisers

UK MEETINGS

OVERSEAS HOLDING COMPANY

OVERSEAS PROPCO 1

OVERSEAS PROPCO 2

UK PROPERT

Y 2

UK PROPERT

Y 1

Overseas

UK

SCENARIO 4

• The deceased established a Central American foundation in his sole name

• He was UK resident but his domicile was not fully explored

• The foundation held non-UK securities in a Central European bank

• None of the income or gains were disclosed in the UK

• The UK resident children inherit the interest

Consequences• The characterisation of the foundation for

UK tax purposes is uncertain pending agreement with HMRC

• The income and gains were and are potentially taxable in the UK

STRUCTURE OF DECEASED PARENT

OVERSEAS FOUNDATION

OVERSEAS ACCOUNT

OverseasUK

Deceased ‘Founder’Children

CONCLUSIONS• The mass exchange of global financial data is unstoppable• The CRS is huge but is only a part of it• The era of tax amnesties and special favourable terms to disclose is over in

the UK• Punitive new UK legislation is on its way in anticipation of the CRS aimed at

professional advisors as well as UK taxpayers• HMRC expect a huge yield from failed avoidance and badly implemented

structures – review all client structures and arrangements carefully

• Seek specialist UK tax advice

ANY QUESTIONS?

OUR NETWORK

Andrew Parkandrew.park@bdo.co.uk +44 (0)20 7893 3609www.bdo.co.uk/taxdisputeresolution

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO Member Firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. © April 2016 BDO LLP. All rights reserved.