Tax Disclosure Protocols used in Prevention of an HMRC Investigation
Swiss, Luxembourg, Liechtenstein, Isle of Man, Jersey...and now the People’s Republic of China and their tax authorities are cooperating together with the UK in the “Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital Gains”.
Each of the Contracting States are/will be notifying the UK tax authorities (HM Revenue & Customs - "HMRC") and vice versa, through diplomatic channels and written procedures required by law for the bringing into force of these protocols.
Clearly, these types of agreements between the cooperating tax authorities are mutually beneficial and designed to bring all forms of unpaid taxes to the surface. Through diplomatic communications and withholding taxes being paid over, the treasuries will be swelling to some extent. But, it is also a busy time for HMRC civil fraud and criminal fraud investigators and their Overseas Co-Ordination Units managed by Special Investigations.
Each of these protocols have different voluntary disclosure arrangements, but broadly a pre-emptive strike and full disclosure will in a lot of cases mean the taxpayer will be able to sleep under his/her own roof.
The tax advice surrounding the disclosure to HMRC needs to be robust. Take for example the critical point about the Isle of Man (“IOM” or nick-named “Manx or MDF”) disclosure opportunity - unlike the more favourable terms in the Liechtenstein Disclosure Facility (“LDF”), very broadly, there is no immunity from criminal prosecution within the IOM/MDF Disclosure. Consequently, careful consideration to HMRC’s Code of Practice 9 (CoP9 and the Contractual Disclosure Facility in seeking immunity from prosecution) is therefore really important. The new CoP9/CDF route, however, involves far more emphasis on the initial Outline Disclosure "acceptance test" with HMRC Local Compliance Fraud Unit, and this is an exceptionally important stage to pass.
Using the IOM/MDF Protocol as an illustrative example, this includes its own Disclosure Facility (Schedule 2, paragraph 3 et seq) which is available from after 5th April 2013 to before 30th September 2016 (same year as the LDF closes!), but only if the disclosure is full, unprompted, and the taxpayer is not already under investigation. The taxpayer must pay the outstanding tax (together with interest) due since 6 April 1999 (14 years instead of 20). In return, HMRC will cap the penalties on the tax due (rather than up to 100% penalties), and will not seek tax and interest relating to tax years before 6th April 1999.
If IOM/MDF disclosure is used the tax calculations need to be done and completed at the time of registration with HMRC so the tax is paid in advance of the disclosure report. Whether HMRC will accept extenuating circumstances for delay and a payment on account remains untested.
Those exposed and who decide to co-operate unprompted by HMRC, will need not only to consider which type of disclosure route to use, but also the fact that HMRC will probably be receiving an indepentant report from the IOM source anyway so the disclosure needs to be robust.
Tax Networks Ltd would be happy to assist in obtaining HMRC’s agreement not to prosecute and with these new forms of tax disclosures.
