HMRC have for some time now been ramping up pressure on taxpayers who are using offshore accounts and structures to evade UK tax liability.  The strategy for tackling offshore tax evasion is detailed in HMRC’s “no safe havens” document, which states that HMRC will take tough action against tax evaders and those who help others evade tax. In this article, originally published in FT Adviser, Lisa Vanderheide explains HMRC’s plans and the consequences for clients of Euro Pacific Bank in particular.

HMRC’s strategy is largely being achieved through new legislation as allowing for higher levels of financial penalties, and cross border reporting regimes such as the Common Reporting Standard. HMRC have however also encouraged errant taxpayers to wipe the slate clean with disclosure facilities including the Worldwide Disclosure Facility and Liechtenstein Disclosure Facility. The latter in particular was a very successful project for HMRC, collecting billions in tax and interest and penalties. It was also relatively generous as the number of years included was limited and penalties were capped. The Worldwide Disclosure Facility is an ongoing facility by which individuals with undisclosed offshore tax liability can make a disclosure to HMRC.

What should anyone with potential liabilities do?

The consistent message from HMRC is that it is better to disclose offshore tax liability rather than have HMRC discover it. Not only does a voluntary disclosure significantly reduce penalties, it also provides peace of mind to those that might otherwise be continually looking over their shoulders.

HMRC are of the view that those with tax liability still to disclose are a “hard core” of errant individuals who are unlikely to make use of a disclosure facility because they do not expect to get caught. However, many of these individuals are likely to be concerned following some recent HMRC activity. In 2020 a global investigation known as “Operation Atlantis” into the Euro Pacific bank was carried out by the Joint Chiefs of Global Tax Enforcement (which includes HMRC), following suspicion of facilitation of client tax evasion and money laundering by the bank. As a result of the investigation, the bank was de-registered by the Puerto Rican authorities in June 2022.

The investigation is likely to have followed information sharing by various jurisdictions and uncovered a number of issues. Of particular interest to the investigators was the fact that some of the bank’s clients used the bank to facilitate a series of sophisticated structures and international financial institutions to obfuscate their tax position. A number of these clients are UK tax resident and therefore now subject to HMRC scrutiny. HMRC has publicly stated that it is working through the information obtained via the investigation to determine who the UK taxpayers are, the amount of tax evaded and how long the evasion has been going on for.

Nudge letters

HMRC is currently encouraging clients of Euro Pacific bank to come forward and make a disclosure of any tax irregularities, and will be sending “nudge” letters to most of the UK tax resident clients identified. Those in receipt of a nudge letter should take professional advice immediately. It is essential to act quickly and ensure any disclosure of tax liability is made to HMRC without delay. If collating information and calculating any liability is likely to be a time-consuming process, HMRC should be contacted at an early stage and advised that a disclosure will be made.

If someone has received a nudge letter but has no tax liability to report, they should contact HMRC to explain the position and determine why a nudge letter was issued – ignoring it is not an option. On the other hand, if someone with tax liability to disclose has not received a nudge letter, they should take professional advice and make contact with HMRC as soon as possible.

Individuals that need to make a disclosure to HMRC will be required to pay not only the tax evaded, but also interest and penalties. The interest is calculated from the date the tax should have been paid to the date it is actually paid.  Potentially significant penalties may also be due following the introduction of tougher financial penalties for “offshore evaders”.

Taxpayers who have evaded large amounts of tax, have been evading tax for a long period or are “high-profile” may be at risk of a criminal prosecution. If an individual thinks they may be at risk of a criminal prosecution for any of these reasons, they should take professional advice and consider seeking protection from prosecution by asking HMRC to accept the disclosure under the Contractual Disclosure Facility (also known as “Code of Practice 9” or “Civil Investigation of Fraud”). The Contractual Disclosure facility is a formal process via which a full disclosure of all tax irregularities is made to HMRC.

Targeted individuals

Crucially, HMRC has also confirmed that they have already identified individuals they consider liable for criminal prosecution and we understand HMRC are working towards taking action against these individuals in the autumn of 2022.

Anybody already subject to a potential criminal investigation is unlikely to receive a “nudge” letter and may instead find themselves (and any related implicated parties) subject to a “dawn raid”. This is where HMRC – sometimes accompanied by the police – search the homes and business premises of those suspected of tax fraud. The searches are carried out under warrants obtained beforehand and are as the name would suggest invariably commenced early in the morning.

An individual or business subject to a dawn raid – even if it is not their tax affairs under investigation – should contact a suitably qualified adviser as soon as HMRC arrive at the premises. HMRC are likely to want to remove documents and computer equipment and it is imperative that advisers are present to not only engage with HMRC, but to also ensure that only relevant information is removed.

HMRC’s involvement in Project Atlantis demonstrates its commitment to flushing out those who continue to evade their UK tax liability. HMRC are understandably keen to publicise their involvement to encourage voluntary disclosures and deter those that seek to dodge HMRC’s “no safe havens” policy.

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