UK-Swiss Tax Cooperation Treaty

Transcription

1 Tax Investigations Update November 2012 UK-Swiss Tax Cooperation Treaty investments Going forward from 2013, a withholding tax would be levied on income and capital gains received from the account at the following rates :UK interest/other income Dividends Capital Gains Are your clients fully prepared? On 31 May 2013, any person who has a Swiss bank account and has not provided information to the bank that they are up to date with their UK tax reporting requirements, or agreed for the bank to disclose information on their account(s) to the UK, will be levied with a one-off tax charge which will be deducted from their account by the Swiss bank. The payment will then be passed to the UK government in recognition of unpaid taxes of any description on that account which should have been paid in the UK, had that account been declared. The owner of the account will remain anonymous as the payment will be handed to the UK simply as a one-off payment from the bank, which would include charges deducted from other people s accounts. How much will the one-off charge cost the taxpayer? The method of calculating the charge can be very complex, depending on the circumstances of each account, but will fall between a tax rate of 21% - 41% of the bankable assets held in the account. The rate will be determined on the capital/ income gains, length of time held and balance increase of each account. The calculation will also not necessarily allow for fluctuations in the balance of the account if funds have been withdrawn, and this can give a false position of the income and gains generated from the account. This could potentially leave a large shortfall in the amount of tax charged and the actual amount that should otherwise have been payable if the income and gains had been declared. However, in any case it should be noted that the payment does not discharge the account holder from declaring the income and gains of the account in the UK. The payment is simply treated as a payment on account of taxes due. Therefore, if HMRC instigated an enquiry into the taxpayer, they would still be able to calculate all taxes, penalties and late payment interest due from the account for a period of up to 20 years. When combined with late payment interest and a penalty rate of up to 150% of the tax liability for each year, the benefits of utilising the Liechtenstein Disclosure Facility cannot be underestimated. Withholding tax on 48% 40% 27% In this case, the amounts deducted are treated as being in full and final settlement of the income or gains in that tax year. A certificate of tax paid would be provided to the client, but the tax paid over to the UK authorities would remain anonymous. However, the withholding taxes are not levied on any account where the holder has agreed for the bank to disclose details of the account to the UK authorities. Who needs to consider these implications? The following persons who either own accounts, or are the beneficial owners of accounts on behalf of another entity, are required to either confirm to the bank that their affairs are up to date, or provide authorisation that the bank can disclose the accounts details to the UK authorities : Individuals Offshore companies Trusts where beneficiary is known Foundations Insurance wrappers Any other entities not trading or carrying on a commercial activity.

2 Take action now! It is advisable that any person who still holds an account in Switzerland, in any capacity, which has not been declared to the UK authorities, considers making use of the Liechtenstein Disclosure Facility (LDF) to protect themselves from an enquiry by HMRC and also limit the disclosure period to the period from 6 April They would also benefit from a penalty rate as low as 10% on the majority of tax owed (20% for periods after 6 April 2009). We have seen resistance from many taxpayers concerned about using the LDF, usually citing costs of setting up the accounts and the requirement by Liechtenstein banks for a certain level of assets to be transferred to Liechtenstein and to be held there for 2 years, as detailed in our September 2012 Tax Investigations Update. The use of the LDF is extremely cost effective, in most cases, where clients have assets held in Switzerland which have not yet been declared in the UK. This is especially so where they have been held prior to 6 April 1999, or where the sums involved are substantial. Taxpayers should contact their banks immediately for advice about the deadline for notifying them that their affairs are up to date. By now, most banks will have written to their clients to advise of the potential charge. Generally a notification to the bank is required by 31 December 2012, though this does vary between different organisations. LDF v HMRC Enquiry The following table compares the position of a tax payer who has held a Swiss bank account for 20 years, whereby they either opt for disclosure under the LDF, or they make no disclosure and HMRC issue and enquiry into their offshore account :The table assumes interest received of 15,000 per tax year up to 5 April 2011 and the taxpayer pays at a marginal rate of 40%. LDF Gross interest declarable Total tax payable Maximum penalty rate Minimum penalty rate Max penalty Min penalty Interest on late payment of tax (est.) Cost to open LDF account (est.) Total payable (max) Total payable (min) 180,000 HMRC Prompted Enquiry 300,000 72, ,000 10% pre 06/04/09 20% from 06/04/09 As above 8,400 24, % pre 05/04/11 150% from 06/04/11 30% (expected) Up to 100% 120,000 36,000 40,500 3, , , , ,500 8,400 The minimum penalty rates for a prompted enquiry by HMRC are determined by their perception of the behaviour of the taxpayer in avoiding the payment of tax. The minimum penalty of 30% is based on a prompted disclosure where HMRC takes the view that the behaviour was deliberate but not concealed and there is full mitigation in all other aspects of determining the penalty. In the majority of circumstances it is unlikely HMRC would agree that there was not deliberate behaviour. Impact from HMRC s initial mailshot Through using data obtained from HSBC in Geneva, via a stolen disk handed to them by a HSBC employee, HMRC issued letters to UK taxpayers who held some 6000 accounts with HSBC to request if their tax affairs were up to date. 97% of taxpayers contacted responded to the HMRC letter, with 30% advising that they either were making a disclosure or would do so. All other responses received by HMRC were that the taxpayers were fully compliant with their obligations. It is expected that HMRC will cross-check all the information they received from the HSBC disk to ensure the responses were correct, and to review the tax position of the 3% who did not respond.

3 36% of business had some issues with their record keeping HMRC re-launch Business Records Checks After suspending the first incarnation of the unloved Business Record Checks in February 2012, HMRC are re-launching the initiative from 26 November 2012 after a review of procedures and the aims of the initiative. The results from the initial checks showed that 36% of business had some issues with their record keeping and in 10% of cases HMRC adjudged there were failings of a serious enough nature to warrant follow-up visits. Against a wave of criticism from agents and commentators alike that HMRC would simply use these checks as fishing expeditions to invoke an enquiry into a business, HMRC withdrew the checks. They have now reviewed the position of what the initiative was intended to achieve and have announced the new programme is aimed to be more streamlined, targeted and better focused on education for the businesses they contact. The procedures for the new checks are as follows: HMRC will contact businesses selected for a business records check and telephone them to discuss their record keeping. They will then assess whether a further meeting with the client is required to discuss any potential issues that had been identified from the call. HMRC will advise the client in writing whether they wish for such a meeting to take place, or whether they are satisfied that no further checks are required. If they deem a visit is required, an appointment will be made to visit the client. This is in reality little different from how the system worked previously whereby a traffic light style system of green, amber and red was used to identify the risk status of each business contacted. HMRC are still risk assessing each business and deciding on any follow-up action as they see fit. HMRC insist the programme is designed to assist businesses in ensuring their record keeping is adequate so the right amount of tax will be paid by them on time. They also report that of those businesses identified as having inadequate record keeping on an initial visit, by the time of the follow-up visit the record keeping had improved, thus determining that the visits had the desired effect. Any business contacted by HMRC for such a check, should still contact their advisor to discuss the protocol and consider how they will respond to HMRC s questions i.e. any failings in their records can be identified prior to speaking with HMRC and rectified before it takes place. Our very firm advice would be for clients not to agree to such a meeting without their advisor being present. Tax fee protection insurance policy details should also be checked to ensure the provider covers the professional fees incurred for advising clients when a business records check is undertaken. HMRC make further criminal convictions HMRC s tough stance against tradesmen who do not make use of the disclosure facilities on offer and assist HMRC with their enquiries continues with the sentencing of a plumber and a builder in October In the first case, the plumber was identified as not declaring his earnings to HMRC over a 27 year period for work carried out in the Lincolnshire and Humberside areas. The total tax and national insurance evaded which HMRC were able to assess totalled 65,000. He was sentenced to 14 months in jail, with an additional 2 years and 3 months if he fails to pay the outstanding tax, interest and penalties within 6 months. In the second case, a Canterbury builder was jailed for 2½ years for claiming 812,250 in VAT repayments for works purported to have been carried out on zero-rated projects by his own companies. Some of the proceeds had been used to purchase an apartment in Russia. HMRC s enquiries uncovered falsified documents, VAT claims on unpaid bills and for works carried out on renovations at his private home for a period between 2006 and Confiscation proceedings are in place to reclaim the monies due.

4 Direct Selling The Direct Selling campaign was launched on 26 September 2012 and is running until 28 February It is available for anyone involved in direct selling and marketing to come forward and make disclosures of unpaid taxes. Direct Selling includes people who work as agents, consultants, reps, distributors or work from home. This includes door-to-door selling and parties where products from suppliers such as Avon, Jamie Oliver cookware, Ann Summers etc. are marketed to an invited group of people. confirmed that unlike some previous campaigns, the Direct Selling campaign is not available for everyone to use. Those people who wish to make a disclosure and are not involved in direct selling would have to make a voluntary disclosure under the normal procedures. It is aimed at people who do this for a living, but would also include those who arrange events for friends but still have the potential to earn commissions from any sales as a way of increasing their normal income. Any person wishing to make a disclosure under the campaign needs to do so before 28 February 2013 as well as make payment of the tax, interest and penalties due as a result of the disclosure by this date. HMRC have set up a specialist department to deal with enquiries relating to the campaign. They have The forthcoming campaign which HMRC are now calling the Home Improvements Sweep Up Campaign has not yet been given an official start date. This will be the third campaign aimed at trades people following on from the earlier campaigns aimed at Plumbers and Electricians. HMRC have advised that any person who believes that the new campaign would apply to them can make a disclosure in advance of the campaign launch.

5 Lessons in Tax Avoidance David Harmer, a consultant for CIS TaxAdvice Ltd, provides some commentary on the recent expose by BBC Radio 5 Live on the use of offshore umbrella companies. BBC Radio 5 Live recently conducted an investigation into the use of offshore umbrella companies for supply teachers and published their findings of the abuse of expenses legislation. Umbrella companies have been around for years and operate predominantly as a go between, between individuals and agencies. By employing the individuals they provide the individual with employee status allowing them to claim, among other things, employee travel and subsistence expenses (free from tax and NI) for travel to temporary client sites (expenses they would be unable to claim if engaged directly by the agency). The income received by the umbrella company is paid out to the employee (after the umbrella has taken its margin) partly as salary and partly as tax free expenses meaning the employee receives a higher take home pay as they have effectively offset part of their earnings against their tax free expenses. The use of umbrella companies also has great appeal to agencies, as by utilising an umbrella company the agency saves the cost of Employer s National Insurance. I find myself, uncharacteristically, feeling some sympathy for HMRC as there can be no simple quick fix solution If operated correctly an umbrella company is a fully effective and fully compliant contracting solution, however as those in the business already know (and as BBC Radio 5 Live publicised) there is an increasing trend for umbrella companies to encourage individuals to claim spurious expenses. This is partly born out of making their particular umbrella more attractive to individuals and partly born out of trying to fit the umbrella model to specific industry sectors (which may otherwise be unsuitable). In addition many providers have chosen to set up offshore in an attempt to place their business outside the jurisdiction of HMRC (though this is not to say all offshore providers have this intent!). For the majority BBC Radio 5 Live s expose comes as no great surprise. Whether offshore or not, public or private sector, tax advisers and umbrella companies who strive for compliance have seen a frustrating increase in the number of umbrella providers encouraging individuals to push through expense claims where expenses haven t been incurred, and in some cases simply outright applying certain levels of expense payments without an employee claim. HMRC have known of this for years and have consistently doubled their efforts year on year to police compliance. The public attention this investigation has attracted may put pressure on HMRC to further increase their resources, however it may also have a detrimental knock on effect. At best it may see legitimate umbrella companies subject to HMRC scrutiny and lengthy enquiries, at worst it may see this issue tackled in completely the wrong way with a focus on offshore umbrellas and additional legislation allowing the transfer of debts (similar to managed service company legislation) to agencies/end-client. I find myself, uncharacteristically, feeling some sympathy for HMRC as there can be no simple quick fix solution here and the public attention may cause more problems than it solves. The advice to umbrella companies is clear though, HMRC s gaze will be firmly on umbrella companies with renewed vigour and now is the time to review your systems and procedures across the board as they will leave no stone unturned. David Harmer is a consultant with CIS Tax Advice Ltd, a specialist company offering technical advice and support across a range of subjects concerning the Construction Industry Scheme, IR35, Umbrella Companies and other employment status issues. David spent ten years working at Accountax Consulting where, before leaving his position as Operations Director, he completed his law degree specialising in employment law and spent many years defending taxpayers against HRMC challenge in a number of areas including IR35, Agency Regs challenges, self employed status and CIS up to and including tax tribunal representation (his victories include the Sherburn Aero Club status case). He also provided training and seminars nationally on numerous contentious issues. David spent a brief spell running his own Self-employed Contracting and Umbrella Company, before returning to the world of tax with Francis Clark and CIS Tax Advice Ltd. David Specialises in Selfemployed status, CIS, IR35 and Umbrella companies. david@cistaxadvice.com

6 Tax Fee Protection Insurance The cost of a tax investigation can be very expensive and thus the advantage of being adequately covered for this is more important than ever. Francis Clark has worked with a fee protection provider for many years to provide insurance against the cost of an HMRC investigation. Cover starts for as little as 60 per year and insures against the cost of professional fees for dealing with HMRC. The cover does not allow for payment of fees where HMRC conduct a civil or criminal investigation where there is suspected fraud or other activity that may give rise to a prosecution. With the increase in activity from HMRC, the chances of being selected for enquiry by HMRC are increasing significantly. We can obtain a special rate for your firm should you wish to set up a scheme, or indeed change from your current provider. Please do not hesitate to contact Dave Williams or Chris Watts for further information. Francis Clark Tax Consultancy - Investigation Support At Francis Clark Tax Consultancy Limited (FCTC) we have a team experienced in tax investigations on hand to assist with any aspect of tax enquiry work. From liaising with HMRC in respect of small local compliance enquiries to preparing Code of Practice 9 disclosure reports and CDF work, we have the expertise to assist. Our involvement with you can be tailored to your requirements and expectations. There is no need for us to meet your client if you prefer that we don t and we are happy to advise you so that you can respond direct to HMRC. With the knowledge and experience of several ex-hmrc Inspectors, including an ex-group Leader from Special Investigations division, you can be sure of receiving quality and robust advice and support to ensure that the task of dealing with an investigation is as stress free as possible. We can also arrange to complete the necessary documentation to register and complete the LDF process and through our contact with a Liechtenstein bank ensure that all requirements of the LDF are met. Should you have any questions or concerns regarding tax investigations or if you wish to discuss making use of any of HMRC s initiatives then please initially contact Dave Williams or Chris Watts. Meet the Team Dave Williams Dave.Williams@francisclark.co.uk Dave specialises in tax investigations and contentious issues of all types with HM Revenue & Customs. He is also a status specialist involved in the preparation of IR35/self employed contracts and defending clients against Revenue attack on status issues. His specialisms also include the preparation of reports for Special Compliance Office, S660A issues and capital allowances planning. Dave worked in the Inland Revenue for 14 years, and after specialising in investigating medium sized businesses and companies joined a firm of accountants in Central London as a corporation tax manager and investigations specialist. After 2 years he moved to the West Country and spent 7 years as a tax manager with a local firm before joining Francis Clark in Chris Watts Chris.Watts@francisclark.co.uk Chris joined the tax compliance team at Francis Clark s Torquay office in January 1996 and moved over to Tax Consultancy in Chris specialises in tax investigations, working alongside Dave Williams to assist with both investigations at local compliance level and producing reports for Civil Investigation of Fraud and the Special Investigation branches of HMRC. Chris is a Chartered Tax Advisor and a member of the Society of Trust and Estate Practitioners. Richard Clutterbuck Richard.Clutterbuck@francisclark.co.uk Richard supports Francis Clark s team of taxation specialists to provide clients with health checks on employment compliance systems, HMRC PAYE enquiries and correspondence and providing advice in the areas of PAYE and employer compliance, expenses and benefits. Richard began his career in the public sector nearly 30 years ago. His last post before joining Francis Clark in 2006 was as Employer Compliance Team Manager working in HMRC Newton Abbot where he was responsible for a team of 16 members of staff covering all aspects of compliance work, the settlement of cases, the negotiation of penalties and commissioners hearings. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at www. francisclark.co.uk. The term Partner is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualification. This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice whould be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy. Please visit for our contact details.