The tax man has had enough. It's time to crack down on hidden bank accounts and people setting up home on far-flung sunny isles. As Lisa Miles discovers, offshore financial arrangements are under scrutiny like never before
"The tax man thinks that "offshore' plus "UK person' equals tax dodger. There is a general paranoia in the Revenue that people have something to hide," says Martin Dawson, a Manchester partner at business advisory Grant Thornton.
Paranoia it may be, but the tax man's concerns seem justified when you consider the 400,000 people HM Revenue & Customs has identified as having failed to admit to holding offshore bank accounts.
"A lot of people think that because they've put their money in an offshore jurisdiction it disappears off the tax man's radar. But as a UK resident born and bred, who lives here, you pay tax on your worldwide income. It doesn't matter where it arises - it has to appear on your tax return," says Dawson.
Lured by the promise of high interest rates and the thought of avoiding a range of growing taxes in the UK, individuals and business owners continue to be attracted to offshore deposits, investments and financial structures. They are not put off by Revenue clampdowns or by prominent court cases.
Celebrities often bear the brunt of the Revenue's need to publicise its determination. Liverpool comedian Ken Dodd was chased for tax evasion in the 1980s and won; jockey Lester Piggott was jailed in 1987 and stripped of his OBE after being found guilty of an alleged tax fraud of over £33m involving offshore accounts; and, in the business world, North West multimillionaire Ron Wood finally won an appeal in 2006 over an alleged evasion of £323.7m of capital gains tax (CGT) on the sale of his greetings cards business, which he had avoided through complex tax planning involving a Dutch company.
Martin Portnoy, a Manchester tax partner at accountancy Ernst & Young, says: "People are feeling the tax burden going up not down. Most people ask questions when these cases happen, but they ask sensible questions rather than being put off."
The issues surrounding UK residency and domicile are complex, but for the average person the myth persists that the interest received on offshore bank accounts is tax free. Or that money made from selling a business, from selling a property abroad or from an inheritance may be squirreled away in another jurisdiction without being subject to UK income, capital gains or inheritance tax.
"The golf course advice has traditionally been to stick money offshore because then you won't have to pay tax," says Adam Waller, a director in the entrepreneurial business team at Deloitte in Manchester. "Some people still seem to think that. The Revenue is trying to catch up with those people."
The Revenue is hoping to generate an estimated £35bn in unpaid taxes from income and interest earned offshore over the last 20 years by using the information it has obtained from five major banks regarding 400,000 UK investors.
Friday 22 June 2007 was the last day on which taxpayers could register to take advantage of so-called amnesty arrangements, thereby opting for a generously low 10 per cent penalty on any unpaid tax, instead of the 30 to 100 per cent or even prosecution for those who failed to disclose. Of course, hitting the deadline doesn't guarantee an easy escape if the Revenue wants to investigate and penalise you further.
"This really is a unique opportunity for people who have offshore accounts that they have not been telling us about to come forward, save money and put matters straight," said Dave Hartnett, HMRC director general in charge of the Offshore Disclosure Facility, trying to sound as friendly and inviting as a tax man possibly can.
The next step is to make a full disclosure of the source of funds and the liabilities and to pay the interest and penalty by 25 November 2007.
But by midnight on 22 June 2007 only a small proportion of the 400,000 had registered. The banks involved had written to the account holders - although some included more detail than others in their letters - and on 14 June the Revenue hastily sent out correspondence of its own to half the individuals concerned when it began to realise the flood it expected was only a trickle.
Some advisers blame poor communication about the amnesty, which was also advertised in the Sunday newspaper supplements, but others believe it was more a case of heads being stuck in sand.
"I think the Revenue will be disappointed with the trawl they will get. Those that have done nothing think their structure is watertight or people will wait for the Revenue to come and knock on the door," says Alan McCann, tax director at accountancy DTE in Manchester. And knock on the door they will. "The Revenue has very limited resources, but will probably work its way through from A to Z eventually. It could take years."
There are rumours of a celebrity list, but most of the 400,000 people will be ordinary people and some will only hold relatively small amounts of money offshore. "They are a cross section of people, including those who had not given it any thought, and those who genuinely believed that putting some capital abroad means they did not have to pay tax on it," says McCann. "There is a group of people that were perhaps ill-informed. And there are clearly people who have done it with the sole purpose of tax evasion."
A common theme is people not taking or choosing to ignore advice. Bruce Tyler, director at HSBC Private Bank in Manchester, says: "These are people who opened accounts years ago thinking they would just get away with it. I expect a lot of people caught in this are people who didn't take advice. If someone in the North West had telephoned a bank in Jersey and asked to open an account it would not be incumbent on the bank to ask the customer if they are sure they can open an account."
The tax man is hitting back and will want to be taken seriously. Investigations could start in the autumn and advisers say it is still not too late to make a voluntary disclosure.
On the hunt for tax evaders, the Revenue has also been taking another look at its antiquated rules on residency and cracking down on people trying to claim that they are not domiciled in the UK. In the good old days you could catch an 8am plane from your Isle of Man home to Manchester every working day, fly home in time for tea and consider yourself non-resident without the Revenue batting an eyelid.
But in recent years there has been an explosion in the number of people using non-residency and non-domiciled status to exploit loopholes in the UK tax system. "The problem with the non-residency rules is that they were established in the 1960s and 1970s, when people could not be whizzing in and out of the country at the drop of a hat," says Mervyn MacDonald, a partner at DTE in Manchester. "The only way in and out was on the boat and communication was in its infancy. Circumstances have changed and people have tried to push the rules to the limit."
A person's domicile of origin is acquired from their father, or unmarried mother, at birth and is difficult to change. Whether you are resident or not in the UK has traditionally depended on the number of days spent in the UK in any tax year. Spend 183 days and you are UK resident, spend an average of over 90 days a year over a four-year rolling period and you are defined as ordinarily resident. There are concessions that disregard days of entry and departure, but these have only been used at the discretion of the Revenue - draw attention to yourself and you can expect an investigation.
The question of residency and domicile was thrown into the spotlight with the 2006 case of multimillionaire Robert Gaines-Cooper. He left the UK many years ago and owned a house and estate in the Seychelles, where he had obtained a residence permit, but not a Seychelles passport. He claimed to have made the Seychelles his permanent home and in his will stated it as his domicile.
But the Revenue argued that Gaines-Cooper had never really left the UK. For example, he retained his British passport, kept a house in Henley-on-Thames where his second wife lives, spent 12 days a year pheasant shooting and three days a year at Royal Ascot. He could not produce complete records of his movements since claiming a Seychelles domicile. The Revenue successfully argued that discounting days of departure and arrival distorted the picture, saying that one night's visit should count as one day.
This case has overturned common understanding of the guidance on residency and domicile. The tax man has got tough - if you really want to claim you have left the UK then it is time to sell the family home, cancel the golf club membership, close your UK bank account and take the wife with you. You have to prove an intention of permanent or indefinite residence in your new country.
As the Revenue cracks down on tax evaders, anyone with a tailored product or structure needs to consider how robust that tax planning really is. Tyler at HSBC says: "The tax adviser may say: "This has not been proven in the courts. We think it will pass the test, but it's not been tested.' The individual has to make the decision. HMRC just provides guidance, which leave the door open for aggressive planners."
Portnoy at Ernst & Young says all aggressive tax planning should come with a health warning. "Something can look very good on paper, but then you have to implement it," he says "A lot of these structures will rely on the fact the entity is tax resident outside of that country, so a level of control has to rest outside of that country. It can be quite hard to give up a level of control."
The Revenue may be low on resources, but it is in no way short on tenacity and determination. Even if it takes years, the tax man will catch up with everyone who is hiding money offshore eventually. Be prepared.
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