Amnesty day

HM Revenue and Customs has taken UK taxpayers by surprise by its recent announcement of a form of amnesty for all tax evasion including VAT, income and corporation tax, inheritance tax and PAYE. This is the first time in living memory that the UK has embarked on such a bold initiative. But it remains to be seen whether it will have the effect HMRC so desperately wishes to achieve.

The move is born out of a need to cope with the anticipated surge in investigations following HMRC’s success over the last 18 months in obtaining, from five high street banks, access to the details of UK residents with an address in the UK and an offshore bank account.

In the course of the next few years, HMRC will serve similar information notices on all banks trading in the UK, including the branches and subsidiaries of foreign banks. It is estimated that this exercise will yield almost a million pieces of information. The amnesty, it is hoped, will clear the decks by encouraging evaders to come forward and make a clean breast of previous irregularities, leaving HMRC free to target the hard core who choose not to make a disclosure.

The booklet published to coincide with the announcement appears to suggest that the benefits are open only to those who hold, or have held, an offshore bank account. However, this would have led to a challenge under human rights legislation, and the booklet goes on to make it clear that tax evaders who have never held an offshore account are entitled to make disclosures on the same basis and can expect the same treatment.

Those who wish to avail themselves of the amnesty have until 22 June 2007 to simply notify HMRC of their intention to make a disclosure of all irregularities, not just those connected with an offshore account. In doing so, they can be certain of receiving a fixed penalty of 10% of the tax/duty to be paid, and no penalty at all on disclosures of untaxed amounts less than £2500. The taxes/duties to be disclosed are those underpaid for the years 1987/88 to 2005/6. For the years 2000/1 and earlier, undeclared income and trivial gains need not be disclosed.

It is important to recognise how crucial the 22 June date is. Notifications received even a day late will not be accepted. Those who have notified will then have until 26 November 2007 to quantify their disclosure. This must be sent to HMRC along with a statement of offshore bank accounts open at 5 April 2006, a statement of offshore assets held at 5 April 2006, a formal letter of offer to pay, a declaration that the disclosure is correct and complete and payment of the full amount disclosed including interest and penalty. Where the full amount cannot be paid by 26 November 2007, that fact must be notified to HMRC immediately along with a statement of assets and liabilities and proposals for clearing the debt.

HMRC has said it will not act on notifications which are not followed up by a disclosure. Indeed, such notifications will be expunged from the taxpayer’s computer records.

The certainty of a 10% penalty and the very slim chance of any detailed enquiry makes this an extremely attractive proposition for most tax evaders

Those who are not eligible to use the Offshore Disclosure Facility because they do not have an offshore account, but who have a disclosure to make, may make that disclosure and payment directly to their normal tax office. They may expect to receive the same benefits, but will almost certainly have to provide evidence to satisfy HMRC that the disclosure is complete, since HMRC will not have information from a bank to help them with the verification.

HMRC will check a number of disclosures where its risk assessment highlights the most significant possibilities of under declaration, but the majority of disclosures will be accepted.

Immediately after the initial phase ends, HMRC investigators will move to target those who have, or have had, offshore accounts but have not notified their intention to make a disclosure and whose accounts and/or tax returns suggest that tax may have been underpaid.

Those who decline to disclose under the amnesty can expect to be charged penalties of 30% or higher and some may face criminal prosecution.

It is believed that banks which have already complied with information notices will be writing to customers whose details they have been obliged to hand over to HMRC. Customers of banks which have not yet been served with a disclosure notice must not be lulled into a false sense of security. Assume that all banks will, in due course, be approached by HMRC for information.

The opportunity to make a clean breast of all past tax irregularities, the certainty of a 10% penalty and the very slim chance of any detailed enquiry make this an extremely attractive proposition for most tax evaders.