HMRC demands notification of ‘complex’ offshore financial arrangements

HMRC has announced plans to toughen its stance on businesses, agents, advisers or others who enable tax avoidance schemes, and is to consult on a proposed new legal requirement that intermediaries notify HMRC of the creation of certain complex offshore financial arrangements and provide a list of clients using them

The consultation aims to establish the high level design principles for the measure, which HMRC says is targeting those arrangements which could easily be used for tax evasion purposes.

Businesses would be provided with a notification number which they will in turn provide to their clients. Clients would be expected to include this number on their self-assessment tax return or on their personal tax account in order to notify their involvement. Those who fail to comply with these requirements would incur civil sanctions. HMRC says that should the creator/promoter fail to notify, responsibility would lie with the client.

In its overview to the consultation, HMRC says work undertaken by its risk intelligence service, and in partnership with other countries through the OECD has identified ‘a significant number’ of instances where complex offshore arrangements are used to evade UK tax.

It says these arrangements can frequently be classified under broad typologies, and the consultation provides several generic examples. HMRC says these are designed to facilitate discussion on how the proposal might work in practice. Should the decision be taken to proceed with this proposal, further consultation will be invited on specific characteristics which should be targeted.

HMRC states: ‘We recognise that in some instances these examples may be captured under international information exchange initiatives. However, in some cases these arrangements would not be captured, or it would be difficult to see and understand the arrangement in its entirety.’

In the first instance, the requirement to notify would sit with the person/business who created a specified arrangement (identified as ‘the creator’). HMRC will specify in legislation the defining characteristics by which arrangements that are in scope of the measure will be identified. The creator would be responsible for establishing whether the arrangement they have created has any of these characteristics.

HMRC says it envisages that this would apply to creators both within and outside the UK, as to exclude offshore creators would significantly reduce the impact of the proposal, however it welcomes views on whether offshore creators should be in scope.

Unlike the present DOTAS regime, this proposal is not predicated on the identification of arrangements that seek a UK tax advantage, which means an alternative scope would be needed. Options could include identifying the types of arrangements or clients who are in scope then setting out the characteristics that arrangements must demonstrate to be notifiable. HMRC is also proposing to include UK resident but nondomiciled individuals in the scope.

Creators and promoters/marketers who failed to comply with the requirement would face civil sanctions such as a penalty, as well as other options including public naming.

While the question of how the hallmarks for the new proposal will be defined will be the subject of a later consultation, HMRC suggests that they might include arrangements which have the effect of moving money outside of common reporting standard (CRS) reporting, either through the use of different jurisdictions or nonreportable products and/or structures. Other hallmarks might include arrangements which have the effect of obscuring or distancing legal and beneficial ownership (for example through the use of a power of attorney or nominees), and those which, if defeated, would incur an increased penalty.

HMRC also says it thinks the new policy, in order to be effective, should also apply to existing arrangements. Under the CRS, jurisdictions will start to collect data from 1 January 2017 at the latest so that data for the calendar year 2017 can be exchanged with other jurisdictions by the end of September 2018.

HMRC argues that tax evaders who have hidden their assets outside the UK to avoid detection may well take steps to try and evade CRS reporting. Where a taxpayer enters into an arrangement to avoid CRS reporting they will have to do this before 31 December 2016 at the latest, so their data is not collected.

If the proposal in this consultation goes ahead, it would not be in force at 31 December 2016, with the result that if it only applies to new arrangements after it comes into force, any arrangements entered into in order to avoid CRS reporting would not be caught.

Generic examples

The consultation provides detailed examples of the type of scheme which HMRC is seeking to address. One is A&B Robotics, whose shareholders and directors, Ms A and Mr B, are UK resident and domiciled in the UK. A&B Robotics had business with companies in the UK and a company in Germany. Ms A and Mr B used a Jersey company service provider to set up a British Virgin Islands (BVI) company with a name indistinguishable from that of the UK Company. A&B Robotics Ltd issued invoices to the German customer but Ms A and Mr B then diverted payments into the offshore bank account of the BVI company. A&B Robotics Limited (UK) did not declare the income from the German contracts which were diverted to the BVI company.

A second example is Lucky Chance Films, promoters within the film industry, who were representative partners in a scheme they devised and promoted to wealthy individuals. The individuals invested in the partnership. The partnership acquired rights to film scripts, paying around £50,000 per film. It entered into an agreement with a Monaco company for it to provide film development services at approximately £1m per film. The balance of the money for each film between the investors’ money and that sent to Monaco was met by a loan, to the investors, from a Guernsey company.

The Monaco company then subcontracted the services to a company operating from Guernsey. (The same £1m less charges). The Guernsey company did not actually provide the services. The money it had received, less charges, was lent on to another Guernsey company. This company then lent the money back to the partnership in the UK. The partnership then ‘invested’ in more films, none of which were actually made, repeating the cycle over and over again. No films were made and no film development service actually purchased. Instead the money circulated around the structure generating losses on the money paid to Monaco purportedly for film development services. The partnership claimed to have made a loss on the payments to Monaco and the investors received tax repayments/reductions greater than their investment.

The consultation closes on 27 February 2017.

HMRC consultation: Tackling offshore tax evasion: A requirement to notify HMRC of offshore structures is here

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