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Why HMRC’s new regime under CRS is bad news for HNWs

The 'unprecedented' amount of data the Revenue will receive from CRS-jurisdictions puts them in a stronger position of power, writes Camilla Wallace.

As from October 2017, H.M. Revenue and Customs (HMRC) will start to receive unprecedented amounts of data on the offshore accounts of UK resident individuals under the Organisation for Economic Cooperation and Development’s (OECD) Common Reporting Standard (CRS). The recent imposition of harsher penalties for offshore tax evasion demonstrates the tougher stance the Government is taking on the issue, and affected individuals are encouraged to make use of HMRC's recently launched disclosure opportunities to ensure that they get the data to HMRC, before HMRC 'gets' to them.

The CRS was developed by the G20 nations to implement a global standard of automatic tax information exchange. The UK is a signatory and has incorporated the standard into UK law. The legislation imposes obligations on the UK’s financial sector (which includes trusts with financial assets) to review and collect details of accounts held by individuals who are tax resident in a jurisdiction that has signed up to the CRS (a CRS-jurisdiction) and report this to HMRC for onwards transmission to the relevant foreign tax authority. In return, CRS-jurisdictions will supply HMRC with information on UK residents with accounts in their territories.

As of 5 September 2016, over 100 jurisdictions had signed up to the CRS including all the major financial centres. For the time being, the U.S. is the only exception.

HNWs will be affected by the CRS if they are resident in the UK with financial assets in one of the CRS-jurisdictions. 'Financial assets' could be a bank account, share portfolio or other financial investment, and can include an interest in a trust where 50 per cent or more of the trust's income comes from financial assets. UK resident settlors, beneficiaries and protectors of offshore trusts may therefore find that information on their interest will be reported to HMRC, possibly for the first time.  Likewise, HNWs who are not tax resident in the UK but have financial accounts here will have information on their accounts reported by HMRC to the tax authorities in the individual's jurisdiction of tax residence. Information on beneficiaries of discretionary trusts will only be reported if the beneficiary has received a payment or benefit from the trust in the year concerned.

The relevant financial institution (or the trustees, in the case of trusts) must send information on reportable accounts to HMRC by 31 May 2017. HMRC will exchange the information with its partner jurisdictions on or before 30 September 2017. HNWs who have not already received a request from the financial institutions or trusts with which they hold accounts or have interests, will shortly do so, asking them to self-certify their jurisdiction of tax residence and confirm their name, address and taxpayer identification number. If the financial institution is obliged to report in respect of that individual, they will pass on these details together with the balance of the individual's account or value of their trust interest.

The data HMRC receives from its partner CRS-jurisdictions is unlikely to give them the full picture but it will provide them with enough information to start asking questions if there are discrepancies between the individual's offshore assets as disclosed under the CRS, and their declared income. In particular, HMRC are likely to look at offshore structures with which the individual is associated and investigate whether distributions the individual has received have triggered a UK tax liability, or whether the management and control of the structure is genuinely offshore.

To encourage individuals with offshore accounts to come forward before the information flows through from the CRS, HMRC launched on 24 August 2016 a consultation proposing the introduction of a statutory 'requirement to correct', which needs taxpayers to disclose and pay any outstanding UK tax liabilities relating to offshore interests by 30 September 2018. On 5 September 2016, HMRC also launched a 'worldwide disclosure facility' which affected individuals can use to disclose their offshore interests.

Unlike previous disclosure facilities, the WDF does not offer favourable terms or immunity from prosecution – mainly because HMRC are in a far stronger position than in previous years as they will be receiving the relevant data as from October 2017 in any event – but the penalty models can take into account the taxpayer's level of co-operation and if they have come forward with the data without HMRC needing to get it via CRS-channels, this is likely to be taken into account.

Penalties for deliberate evasion are strict and wide-ranging, with new civil sanctions introduced in Finance Act 2016 for tax evaders and those who deliberately enable tax evasion, and a new criminal 'strict liability' offence in certain circumstances (where intent does not need to be proved); meaning affected individuals could face financial penalties or even prison. The maximum proposed penalty under the 'requirement to correct' regime is 200 per cent of the undisclosed tax. The government has made clear that the penalties are deliberately harsh to reflect 'the wider harm' caused by tax evasion and to act as a deterrent to others.

Of course, in many instances, tax evasion is not deliberate and can be a case of the individual not fully understanding their UK tax liabilities and reporting requirements. But now is the time to seek advice and check the position – the days of safe havens for tax evaders, deliberate or not, are numbered.

Camilla Wallace is a partner in the Private Client team at Wedlake Bell LLP.