Tax disclosure facilities – a 5 minute guide

Since I starting working back in 1986 I have seen more than a few disclosure facilities. The hardest part, from a tax advisors perspective, is having to cajole sometimes unwilling people into availing of the facilities.
 
Sometimes there seems to be a fear of the unknown, ie what happens as a result of the disclosure. Other times there seems to be a desire to avoid conflict which is feared to arise from the disclosure process itself. These fears do not take account of the real reason for these facilities; to allow undeclared profits or maybe just mistakes made in tax returns to be disclosed and tax paid without fear of prosecution. Simply put the process is designed to allow for correction of mattes in a defined and uncontentious way.
 
So the core issue really is cost. From a tax advisor’s perspective this means highlighting how attractive the facility is compared to the alternatives.
 
The main advantage of a disclosure is that doing that has a huge impact on penalties. This is because that disclosure automatically reduces the amount of penalties that can be applied. Penalties often start at 200% of the tax due which is then reduced to as low as 10% in some cases from having made the disclosure.
 
The disclosure and reason for making it can also impact on how many years back the tax authorities can go in charging tax. Assessments can be made for events as long ago as 20 years depending on the reason for the mistake. The more defensible the mistake typically the shorter the period but the system seems to have developed along the lines of it being necessary to be able to demonstrate why mistakes arose before a decision is taken on how many years back tax can be taxed. The ability to make claims such as capital allowances or loss reliefs etc is also subject to this sort of test.
 
Often the cost from not correcting mistakes is far higher than the cost of correcting them. The comparison is where some time later the tax authorities act on information provided to them from some source and launch a full scale investigation when interest and penalties then really do escalate.
 
Often mistakes don’t actually need a facility, these can be negotiated in a direct manner anyway, but these facilities do offer a single point of contact which helps keep things simple.
What is the issue behind these facilities?
 
There have been huge international changes to automatic exchanges of information regimes.
 
The US has introduced automatic exchange of information (FATCA) across virtually the entire worldwide banking world. The UK entered into the UK Swiss cooperation agreement and then introduced its own version of FATCA to piggy back on the US model. The European Union is expected that do much the same.
 
What started this process was the acquisition of bank details from the Swiss banks by various governments, each of which used different means to obtain it.
 
What will be the effect of FATCA? The experience from the Swiss process should give a good indication of what to expect there.
 
The experience from the Swiss agreement was banking information being automatically exchanged with the UK which was then followed by queries from HM Revenue & Customs to UK residents regarding that information. This process is still ongoing but clearly shows that information received under the information sharing agreements will lead to queries.
 
A similar process was followed last year when HM Revenue & Customs wrote to non-domiciled remittance basis tax payers. Letters were sent to non-domiciled tax payers, identified from submitted UK self-assessment tax returns, advising a review of remittances in case these were not correctly identified, all of this being rather complex.
 
So it is clear enough that there will be enquires from tax authorities as a result of FATCA and that the tax authorities will match data received to individual taxpayers.
 
For effective and well executed offshore planning this will not be a problem. In some cases however there may be interpretation issues that will become apparent when issues are subject to greater scrutiny. UK tax law is extraordinarily complex so it is inevitable that there will be differing views of how some of the more complex issues are treated from a tax perspective. What constitutes remittances is one such issue hence queries on this from the UK authorities already. In other cases simple mistakes will come to light from the process.
 
What’s next ?
 
All experienced tax advisors will tell you that it is better to get things right first time than to try and correct things afterwards. Implementation is usually where things go wrong so proactive action must be standard operating procedure.
 
Secondly existing arrangements should be stress tested in case there are matters that need attention.
 
Thirdly, in the event that issues are found that require disclosure then the Isle of Man Disclosure Facility provides a good opportunity to correct those. It may be critical to do this before HM Revenue & Customs query transactions at some later date which can simply, by passage of time, lead to greatly increased tax charges. This could be because claims for elections or similar could be disallowed by the tax authorities later on as being out of time (such as where example negligence is arguable because of inaction).
 
The key is it is always better to identify and deal with a problem unprompted by the tax authorities, penalties are automatically reduced by this factor.
 
As an example of the ease by which information can sometimes be picked up by tax authorities and what impact it can have on financial transactions take a look at this link:
http://ec.europa.eu/competition/state_aid/cases/253200/253200_1582634_87_2.pdf
 
This is an extreme example some would say but with FATCA there will be far more flows of financial information which would make some of these issues far easier to identify
 
 

photo credit: NJ.. via photopin cc

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