200% penalty for offshore tax evasion

Thursday, April 22, 2010 | Posted by: Dave Jennings
Categories: Personal, Protecting your wealth | Tags: tax, tax planning, HMRC, offshore, Dave Jennings, investigation, penalties, Liechtenstein Disclosure Facility, Liechtenstein, OECD, amnesty, LDF, tax haven, 200%

Tax, or National Insurance, was bound to be in the headlines during the Budget and Election but very little beats the threat of a 200% penalty for attention. Combined with a 50% rate of tax the maximum tax and penalty would more than wipe out the offshore income. Is the devil in the detail? And what are your options if you have undeclared offshore funds?

A sledgehammer to crack a nut?
HM Revenue & Customs (HMRC) is obviously fed up with offshore account, or asset, holders who haven’t come forward during the previous tax amnesties. Anyone with undeclared offshore income received from 1 April 2011 could face a settlement with HMRC exceeding the actual income received.

We know that Governments around the world have been clamping down on so called ‘tax havens’, and some were fighting back, but this looks like a determined effort to encourage compliance sooner rather than later.

How your tax penalty will be calculated
The actual penalty charged will depend in which territory the income arises, assets are held or situated, or where an activity is carried out. Although the detail is quite complex, generally penalties will be split into three territorial categories to be decided by HM Treasury.

Currently it is expected that Category 3 territories will be those on the OECD blacklist; Category 2 territories could include countries that only exchange information with the UK on request, will be charged a penalty of up to 150% and Category 1 territories being those that freely exchange tax information with the UK and staying with the current maximum penalty of 100%.

The penalty will also depend on whether or not the previously undisclosed tax liability is voluntarily disclosed to HMRC before HMRC opens a tax investigation. For instance, a voluntary disclosure could reduce the minimum penalty from 100% down to 60% for a Category 3 territory.

Comparison effect on income

In addition, interest could also be charged. The table above demonstrates that after April 2011 a tax investigation settlement with HMRC could wipe out the undeclared income and even reduce the capital.

Five options for those with undeclared offshore funds
1. Do nothing. That is always an option but is very risky as HMRC’s tentacles spread further around the globe and if caught not only could you end up with a large tax penalty you could also face unwanted publicity.

2. Make a voluntary disclosure to HMRC. This would certainly reduce the penalty and therefore help to protect any funds still held.

3. Use the Liechtenstein Disclosure Facility (LDF). This will remain open until 2015 for qualifying income or assets but this won’t stop HMRC opening a tax investigation if registration for the LDF is delayed.

4. Wait for another ‘tax amnesty’ to come along. It is possible that HMRC will negotiate similar terms to those for Liechtenstein with other territories, but who knows how long that may take and in the meantime the danger of a tax investigation remains.

5. Seek specialist advice. Anyone facing these difficult decisions should seek expert advice as soon as possible.

Image: © Mel Silvers, 2008

Read more posts on how to protect your wealth by Grant Thornton’s Tax Investigations Senior Manager Dave Jennings