What does the future hold for offshore banking?

The Chancellor announced a new offshore disclosure initiative in his 2009 Budget. Who will this affect and how will it be applied?

How have we got to the current situation?

Obtaining information on UK residents operating offshore bank accounts and structures has been a high priority for HM Revenue and Customs (HMRC) for a number of years.

During 2007, HMRC launched an Offshore Disclosure Facility (ODF). This provided taxpayers with a process under which they could disclose the existence of untaxed offshore income and gains to HMRC. Under the ODF if the taxpayer made good the tax which should have been paid, plus any associated interest, the penalty attaching to the disclosure was limited to 10% of the tax due. In the vast majority of cases, HMRC accepted the disclosure and made no further enquiries.

What are the next steps for HMRC?

There was a significant gap between the number of people who registered an intention to make a disclosure in 2007, and those who went on to make a disclosure. Therefore, ever since the ODF closed, HMRC has sifted through the data provided to them by major financial institutions to identify taxpayers who did not come forward under the ODF. HMRC has recently started writing to people who they suspect should have disclosed the existence of offshore bank accounts during the ODF.

HMRC is now seeking to obtain further information from financial institutions and it has recently been successful in obtaining the first batch of new production orders A successful order provides a legal obligation for the production of details of UK residents who hold/operate overseas bank accounts.

What is the New Disclosure Opportunity (NDO)?

HMRC has announced that 'one final chance' will be offered to UK taxpayers to regularise their tax affairs and to disclose the existence of offshore bank accounts and structures.

The detailed terms of the NDO have not yet been announced, for example we do not know what the level of the penalty will be, nor the exact dates during which the NDO will operate. What we do know is that it will run for a limited period from Autumn 2009.

In addition HMRC has also announced a number of Tax Information Exchange Agreements with various offshore jurisdictions. In terms of jurisdictions who have recently signed up to information exchange agreements, these include:-

• Guernsey
• Jersey
• Isle of Man
• the British Virgin Islands and
• Bermuda.

The terms of these exchange agreements allow HMRC to request information relating to the ownership of offshore companies and partnerships, together with details relating to offshore settlements, including trusts and foundations, held by banks and other financial institutions.

HMRC has to satisfy a number of conditions in order for the exchange agreement to have merit. These include:

• Stating the name of the person under enquiry and the reasons why the request is relevant
• Stating the name(s) of the people believed to hold the information they are requesting
• Stating the period for which the information is required and the tax reason for the request
• Demonstrating that HMRC has tried all others means to obtain the information/documents requested.

Frank Strachan, Senior Tax Investigations Manager at Grant Thornton says: "The global approach to dealing with tax avoidance is changing. For those people who miss this NDO, the ramifications, according to HMRC, will be harsh - at best, a significant uplift in the penalty will be applied but in the worst cases, prosecution looms. Almost all of the disclosures that Grant Thornton prepared in the 2007 ODF were accepted without amendment or further questioning and those which were picked for further questioning were soon closed with no further adjustments required.

If you are considering whether an NDO is appropriate for you it is vital that any review of structures or test issues such as your domicile are done as soon as possible so that you know in advance whether you have a disclosure to make. Waiting for the NDO to commence in Autumn 2009 may not give you enough time to give the matter full consideration."

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