STEP response to the consultation: Tackling offshore tax evasion: a requirement to notify HMRC of offshore structures, published 5 December 2016

Transcription

1 STEP response to the consultation: Tackling offshore tax evasion: a requirement to notify HMRC of offshore structures, published 5 December 2016 STEP is the global professional association for practitioners who specialise in family inheritance and succession planning. We work to improve public understanding of the issues families face in this area and promote education and high professional standards among our members. We welcome the opportunity to comment on HMRC's consultation paper: Tackling offshore evasion: a requirement to notify HMRC of offshore structures. 1. General comments 1.1 Tax evasion is a crime and a whole raft of domestic provisions and also international measures are now in place focused on tackling this problem. STEP supports the fight against tax evasion and appreciates that recent moves towards increased transparency of tax arrangements will greatly assist in preventing evasion. The increased risk of detection is likely to change the behaviour of potential tax evaders. 1.2 Nevertheless, it should be stressed that the vast majority of UK legal and tax advisors are not involved in advising on structures or strategies that involve tax evasion. In the UK, advisors are already subject to money laundering regulations, which mean that they need to consider the possibility that tax evasion may have occurred even before taking on a client. 1.3 Given that those tax advisors who are prepared to help clients evade tax are unlikely to comply with any new regulations, the only circumstances in which the proposed new regulations will help uncover tax evasion is where an honest advisor helps a client evade tax where the advisor does not know or suspect that he is doing so. Given the recent focus on tax evasion/avoidance/noncompliance and the increased civil and criminal sanctions both for taxpayers and advisors (as potential enablers), we think that the situations in which these circumstances arise will be very rare indeed, as advisors will be alert to the possibility of tax evasion and will either refuse to act or make the appropriate reports if they have any suspicions. 1.4 Despite recent media coverage, the use of offshore structures does not, of itself, give rise to tax evasion or non-compliance and nor does tax evasion only occur when offshore structures are used. In light of the various international developments regarding money laundering, transparency and existing reporting such as FATCA and CRS, those established in many jurisdictions outside the UK are heavily regulated and subject to compliance requirements equivalent to those in the UK.

2 1.5 The legal and tax advisory services sector in the UK makes a significant contribution to the economy. Many clients instruct UK advisors when considering whether to set up structures, even where they have little or no UK connection, because of the expertise that is available in the UK. 1.6 Paragraph 4.19 of the consultation document states that 'the hallmarks will be carefully targeted in order to avoid imposing an unreasonable compliance burden on intermediaries and taxpayers'. However, we are very concerned that the introduction of further compliance burdens on UK advisors may impact on the international competitiveness of this sector. 1.7 Although the consultation paper indicates that the new rules could apply to non- UK resident advisors, it is difficult to see how this could be enforced. The result may be that instead of coming to the UK and obtaining advice from regulated and qualified advisors with the relevant expertise, clients may seek advice from advisors outside of the UK. 1.8 Serious consideration also needs to be given to the rationale for the proposed reporting requirement. Where information will already be available through disclosures under the CRS (or the existing reporting requirements in relation to offshore trusts, e.g. under Schedule 5A TCGA 1992 and s218 IHTA 1984), we agree that, as mentioned in paragraph 4.20 of the consultation document, no new requirements should be introduced that could require the same information to be disclosed again. 1.9 If it is thought that there are gaps in the information flow under the CRS, then this should be dealt with at an international level so as to avoid distortions in the international legal and tax services market We also have concerns about the allocation of a reporting number once a report is made, which would then have to be reported on the individual's tax return. For many clients there is a certain stigma attached to having to disclose such a number on their tax return. This may be because of the association of such numbers with DOTAS, which could give the impression that the advice given in relation to the arrangement may not be correct or that what has been done is aggressive tax planning or in some way illegal. This may have the effect of deterring clients from taking professional advice or at least from taking it in the UK Many clients will also be concerned that the inclusion of such a reporting number on a tax return will increase the likelihood of a tax enquiry. Most clients, even those with fully compliant tax arrangements, would rather avoid an enquiry because of the time, cost and stress involved. Clients are often faced with having to deal with large numbers of questions relating to their affairs, not all of

3 which seem to be relevant to the issue at hand. The financial burden of dealing with enquiries can be significant, particularly where structures are complex or indeed, for less wealthy individuals, where the amounts involved are relatively small It is difficult to see how it would be possible to target only arrangements that 'could easily be used for tax evasion purposes' because even the most vigilant of advisors is unlikely to know how a structure will be operated or could be used in future unless they have an ongoing in-depth involvement with it Although we appreciate that the focus is now shifting from individual taxpayers to their tax advisors and other enablers, we are not convinced that the introduction of a requirement to notify the creation of offshore structures to HMRC will catch those few advisors who may be involved in tax evasion. Indeed, we feel that such advisors are unlikely to comply properly with any new reporting requirement If, despite what we have said above, the Government decide to introduce a requirement to notify, then we suggest that this should only be done in respect of arrangements that satisfy certain clear and specifically targeted hallmarks, rather than all arrangements that 'could be used or misused for tax evasion purposes'. Advisors need to be able to identify easily the types of structures the rules apply to Although we do not agree that this requirement should be introduced, we feel that it will be vital to have detailed discussions with members of the legal and tax advisory professions regarding the identification of suitable hallmarks if the decision is taken to go ahead Suitable hallmarks could include the movement of assets from CRS jurisdictions to other jurisdictions, or investment in assets that are not currently covered by the CRS requirements. HMRC may also wish to consider the types of structures about which information has been received under the Liechtenstein Disclosure Facility whilst trying to identify appropriate hallmarks In relation to the question of whether the requirement should apply to structures that advisors have advised on prior to the introduction of these rules, we consider that to require this would be exceedingly onerous and expensive for advisors to comply with as it would require them to identify and review all relevant advice given. Problems are also likely to arise where the advisor is no longer instructed by the client concerned. Identifying such structures and then reviewing advice given, perhaps years ago, in order to make the reporting would be very time consuming and expensive for the advisors involved and their clients.

4 1.18 We consider that, if the requirement is to be introduced, it should not apply to advice previously given or structures set up prior to enactment In light of these general comments, our responses to the questions in the consultation document are set out below. Q1: Should the proposal apply only to UK-based persons/businesses who create offshore arrangements, or should offshore persons/businesses also be in scope? Q2: How should HMRC define the scope according to which both UK-based and non-uk-based persons/businesses would be liable to report? If the requirement is to apply at all, we feel that it should also apply to offshore persons and businesses so as not to distort the legal and tax advisory market. However, it is difficult to see how HMRC could enforce any obligations against offshore persons or businesses that do not have a UK presence, where there is no UK tax liability or consequence. Q3: Are there any key circumstances missing from the proposed concept and can you see any opportunities to improve on this basic concept? The consultation document is not clear about who would need to comply with this requirement; in places the document refers to creators of arrangements (section 4) and in other places to creators and promoters (paragraph 3.7). It would need to be made clear who has to carry out the reporting. Q4: Do respondents have any concerns about this approach? We are concerned that this approach will make the UK an unattractive place to come for legal and structuring advice, particularly for international families who may have few or no UK connections. Q5: Are there any other approaches we could consider? If it is thought that further reporting is required in relation to offshore structures, we suggest that this should be introduced at an international level by extending the CRS. Q6: Can you suggest any hallmarks to identify which arrangements would be subject to notification? Q7: Do respondents have any concerns about the use of hallmarks to identify which arrangements would be subject to notification? Any hallmarks would need to be carefully targeted to cover situations that HMRC considers to be most likely to give rise to tax evasion. They should not be so wide that

5 they could potentially cover all offshore structures. The only hallmark that we can see any real justification for is arrangements that are structured (or restructured) in a way that is designed to avoid information being reported to the UK under CRS. Q8: Are there any other approaches we could consider? Q9: Should the requirement be limited to offshore? Tax evasion is not limited to situations where there are offshore structures, but it is likely to be easier for HMRC to become aware of, and investigate, UK-based structures and so extra reporting is not likely to be required for UK structures. Q10: Should the requirement be limited to individuals? If this requirement is introduced in relation to companies and other entities of a commercial nature, extreme care will need to be taken to ensure that it does not hamper the carrying out of business on a commercial basis in the UK. In the current economic climate, it is important that the UK remains an attractive place to do business. Q11: Are there any further opportunities to change the scope of the measure in order to maximise its effectiveness? Q12: In your view, what impact will issues of Legal Professional Privilege have on the effectiveness of the requirement? It is very important that Legal Professional Privilege is not compromised by the introduction of any new reporting requirement. Q13: How might HMRC address the issue of Legal Professional Privilege? Q14: In your view, what impact will this measure have on UK resident but nondomiciled individuals? Q15: How might HMRC address the impact on UK resident but non-domiciled individuals? One possible impact could be that such individuals would not seek advice regarding their offshore structures from advisors in the UK and this could impact not only the UK tax and legal services market, but also mean (where suitable professional advice is not obtained regarding the UK tax consequences of offshore structures) that they are not suitable and give rise to unexpected UK tax consequences.

6 Q16: Do you agree the measure should apply to existing arrangements and not just new ones? No, we do not agree that this requirement should be extended to advice given before the rules are enacted. Q17: In your view, are there any other considerations that HMRC should take into account when considering the feasibility and design of a requirement to notify HMRC of offshore structures? See above. Submitted by STEP UK Technical Committee 27 February 2017