It sometimes surprises people with whom I discuss the issue of tax evasion that those of us who play the tax game strictly by the rules always like to see those who do not getting their just desserts. Thus news of HMRC initiatives to combat tax evasion is always welcome, provided of course they contribute to a level tax playing field, and do not unduly advantage those who have sought to slip under the tax radar.

Of course the best form of tax enforcement is going out and finding the tax evaders and ‘bringing them to justice’. Overwhelmingly, ‘justice’ represents a civil settlement covering tax, interest and penalties, both because a financial outcome is a restoration of the status quo in terms of what ought to have happened, and because the resources necessary to mount a criminal prosecution and the uncertainty of the result of such a prosecution (see the Redknapp case for a classic recent example) militate in favour of a negotiated agreement with the taxpayer.

However, HMRC faces significsnt resourcing issues, which is a polite way of saying that it is suffering savage staff cuts as a public sector economy measure, and is thus not best placed to devote massive numbers of staff hours to rooting out individual cases of tax evasion, however heinous. The exception to this is VAT carousel fraud, which has been too massive a problem to ignore and at which significant resources have been thrown, even though the main result most UK taxpayers see is an extraordinarily long delay in obtaining a VAT registration number. 

Thus HMRC has been obliged to find alternative means of persuading errant (non) taxpayers of the merits of coming clean and coughing up the necessary to put them back on the tax straight and narrow. A wide variety of methods have been, and in many cases continue to be, employed in this respect, including:

The offshore disclosure facility – unique in the UK at the time of its introduction, this offered errant taxpayers the chance to disclose their undeclared income and pay a flat rate penalty of 10%. Given that this was introduced in the wake of HMRC success in obtaining, either through court action, negotiation or ‘whistleblowing’, vast amounts of detail of offshore bank accounts held by UK residents.

Indeed, in my experience a significant number of offshore disclosures were prompted by correspondence either from banks or HMRC itself, pointing out to account holders that HMRC had received access to the customer’s bank account details. I will come back to the problems with this approach later in this post.

The Liechtenstein disclosure facility – structured along similar lines, and like all disclosure facilities something of a misnomer, as it is not open to HMRC to restrict a favourable disclosure facility to any particular class of taxpayer. The facilities are therefore available to all taxpayers, whatever their circumstances. The name of the facility reflected a particular HMRC concern about bank accounts held in the principality and in the country which wholly encloses it, Switzerland, as indeed does the next measure……..

The UK/Swiss Tax Treaty – Switzerland is not big on tax treaties, and is absolutely rigid about total customer confidentiality, which is after all why so many people bank there. Thus to achieve a Treaty with the Swiss was a aignificant achievement for the Treasury, even though certain compromises had to be made along the way.

The first thing to say is that this is not a disclosure opportunity, nor an amnesty (quite rightly, in my view, HMRC does not ‘do’ tax amnesties). Thus its application is, uniquely for the initiatives detailed in this post, strictly limited to Swiss bank accounts. It offers taxpayers an opportunity to come clean about past misdemeanours and regularise past tax liabilities (plus interest and penalties) at a composite rate of tax etc. in a range between 19% and 34%, depending on a number of factors with regard to the account.

Those who take this opportunity will obtain ‘clearance’ for funds still in the Swiss bank account, both for past and future purposes. However, if funds have been withdrawn, they can only be cleared if they are reinstated into the account, and the composite rate of tax applied to them.

However, the really interesting aspect of the Treaty stems from the Swiss banks’ obsession with privacy. From 2013 onwards withholding tax will be applied to interest and other income (48%) ,dividends (40%) and capital gains (27%) arising on or in connection with Swiss bank accounts, when paid to a UK recipient. This will be collected by the Swiss tax authorities and paid over to HMRC by them. In order to avoid this witholding tax, it is necessary to have the bank account cleared, as discussed above.

However, it will be possible to opt not to have one’s account cleared, and instead to accept the withholding tax and retain one’s anonymity, in which case the Swiss authorities will simply pay over the withholding tax to HMRC as part of a global sum not broken down between taxpayers.

This appears to be a case of accepting pain going forward as opposed to pain relating to the past, and as such is likely to mean that those with most to hide (not only those with the largest balances, but also those who are laundering the proceeds of crime or who feel they may be particularly vulnerable to an HMRC prosecution (celebrities, those who have previously signed certificates of full disclosure in tax enquiries or professionals active in the tax field such as accountants and solicitors).

The fact that HMRC will thus not obtain details of those taxpayers of whom it might most like to will no doubt be a significant frustration for HMRC. However, they have agreed with the Swiss a provision which may be of some help in tracking down the people concerned.

It is to be expected that people with Swiss bank accounts who wish to retain anonymity will be likely to close them to avoid the withholding tax and move the funds elsewhere. In the light of this, HMRC has agreed that the Swiss will notify them of the 10 most popular destination countries for funds wthdrawn from relevant bank accounts in the wake of the Treaty. Thus we might then expect similar HMRC initiatives in respect of those countries, until no hiding place is left for the funds concerned.

Anonymity appears to be the only possible reason why one might prefer the Swiss Treaty route to the Liechtenstein Disclosure Facility, as it offers a much harsher regime than the latter in almost all other respects.

 Specific industry campaigns

These have thus far been targeted at plumbers, doctors and other medical staff, teachers/tutors, on-line traders and electricians, with a more wide-ranging construction industry campaign expected soon. Again a preferential penalty regime is offered, together with a threat that HMRC will ‘throw the book’ at those who fail to come forward and who are known to the tax authority.

Task forces

HMRC has also set up task forces to deal with particular ‘problem’ industries, such as the restaurant trade.

Up to a point I applaud these initiatives as an efficient use of scarce HMRC resources, particularly as a taxpayer taking advantage of a disclosure facility seems likely to be a compliant taxpayer in future. However, only up to a point, and that point focuses on the penalty regime.

We have a ‘new’ penalty regime for tax in the UK, recognising six types of misstatement on a tax return (other than innocent or reasonable error) and specifying ranges of penalties for each type of misstatement, as follows:

Unprompted disclosure, careless error                                                     0 to 30%

Prompted disclosure, careless error                                                          15 to 30%

Unprompted disclosure, deliberate but unconcealed error            20 to 70%

Prompted disclosure, deliberate but unconcealed error                 35% to 70%

Unpromoted disclosure, deliberate and concealed error               30% 100%

Prompted disclosure, deliberate and concealed error                    50% to 100%

Concealment implies some falsification of documents as well as completion of an inaccurate tax return

My problem with this is its interaction with disclosure facilities. If errant taxpayers are to be offered a 10% penalty for a disclosure that might be of a deliberate and concealed error, and will almost certainly be at least of a deiberate error, there is a serious mismatch with the  standard penalty regime which needs to be addressed.

If a taxpayer can receive a 15% penalty for an unprompted disclosure of a careless error, how can HMRC justify a 10% penalty for unprompted disclosure of a deliberate error? And, indeed, I would argue that many disclosures under the original ODF were very much prompted, both by HMRC and by the banks, yet the 10% penalty was offered and taken up by a significant number of taxpayers.

Thus I think the level of penalties under the disclosure regime needs to go up, or the range of penalties for careless error dneeds to come down. Only then will we have an equitable penalty system across the board.