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UK tightens grip on Isle of Man tax evasion

Latest disclosure facility leaves industry wondering which ‘tax haven’ will be next

18 March 2013

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An information sharing agreement between the UK and the Isle of Man is the latest move by Britain to try and recover billions of pounds in unpaid tax from offshore jurisdictions.

Under the automatic tax information exchange agreement and disclosure facility agreed last month, investors with Isle of Man accounts will be able to settle their past affairs before information on their accounts is shared.

“This is the latest example of HMRC’s increasingly pragmatic approach and follows on from the Liechtenstein Disclosure Facility and Swiss-UK tax agreement which will, between them, bring in hundreds of millions pounds worth of revenue to the Treasury,” tax investigations partner at BDO Fiona Fernie said.

HMRC announced in January that it had received the first instalment of £342m from the UK-Swiss agreement, which is forecast to collect over £5bn during the next six years.

The latest initiative closely follows the UK-US agreement to improve international tax compliance and to implement FATCA to minimise burdens on financial institutions.

“Five years ago such agreements would have been unheard of, yet we are beginning to see more and more being announced,” Fernie added.

The disclosure facility will operate from 6 April 2013 and run until September 2016 but HMRC will begin investigating accounts immediately if they have information which they believe means an investigation is warranted. Under its terms, liabilities arising from April 1999 must be fully disclosed and there is a guaranteed penalty rate – 10 per cent for returns to be filed before April 2009 and 20 per cent thereafter.

The facility will not be available to those under enquiry by HMRC. Where HMRC uses the information made available under the information sharing agreement, it will be seeking significantly higher penalties.

In cases of deliberate understatement, HMRC could collect 20 years of tax and interest plus penalties, which could be up to 100 per cent of the tax for years up to 5 April 2011 and up to 200 per cent thereafter for offshore matters, depending on the jurisdiction involved.

Cost effective

“We expect this to be a very cost effective way of encouraging those with undisclosed assets on the Isle Man to come forward and disclose voluntarily,” Fernie continued.

“While prosecution remains a key deterrent for HMRC, the significant backlog of cases has been well documented, so it’s crucial for them to take a cost-effective approach and, wherever possible, encourage voluntary disclosure, via bilateral tax agreements, focused disclosure schemes and increased information gathering.

“For other so-called ‘tax havens’, the question being asked is: ‘where next?’”

The agreement forms part of the government’s offshore anti-evasion strategy to be published later this year.

George Osborne said he welcomed the progress made with the Isle of Man. “The government is committed to tackling tax evasion and this agreement will greatly enhance HMRC’s ability to clamp down on those who try to hide their money offshore,” he said.

“[The latest] agreement builds on the groundbreaking work we have already carried out… We are in discussions with Jersey and Guernsey as part of our common commitment to combat tax evasion.

“Tax transparency is a focus of the UK’s G8 presidency, where it will look to further promote automatic information exchange.”

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Tax & Wealth structuring