HMRC is keen to expand its powers to tackle debt, say Emily Springford and Vanessa Whitman
The British Bankers’ Association has sent messages to British banks and some other financial and credit organisations alerting them that HM Revenue & Customs (HMRC) is running a large-scale investigation to reclaim unpaid tax on interest earned in offshore accounts. Following negotiations with some major banks in 2006, HMRC will probably embark on a similar process with other banks and financial institutions to maximise its recovery of unpaid tax on interest earned in offshore accounts. HMRC is likely to put banks under pressure to release information about customers’ accounts, possibly including the accounts of deceased customers, as well as dormant and closed accounts.
INVESTIGATIONS
The recent investigations have focused primarily on taxpayers who have a UK address and an offshore account, or credit cards linked to or funded by offshore accounts. The details sought by HMRC have been wide and include personal, business and transactional data. Moreover, HMRC has served notices under the Taxes Management Act 1970 (TMA 1970), s 20(8A), which is used to obtain disclosure of documents relating to an unidentified taxpayer or a class of unidentified taxpayers, and has asserted that it has the right to seek documents dating back more than six years—the limit for other notices served under s 20. This contention is yet to be challenged, perhaps because an appeal to the High Court would mean that the anonymity afforded to the banks at the tax tribunal would be lost. The burden on investigated banks is potentially heavy, although in the majority of cases HMRC has agreed to limit the scope of the notice to documents dating back six years.
Under the Serious Organised Crime and Police Act 2005 (SOCPA 2005),
s 60, HMRC now also has wider powers to conduct its own investigations into tax-related crimes, such as tax fraud. Under these powers, HMRC can compel individuals to answer questions by issuing a disclosure notice—which can be done without seeking permission from the commissioners. By contrast with its powers under TMA 1970—which relate only to the delivery up of documents—under SOCPA 2005, HMRC can also compel banks to answer relevant questions. HMRC also has the power to execute a search warrant without a police officer being present if the disclosure notice is not complied with. These powers do not appear to have been widely used by HMRC so far, but they could be in future cases.
EFFECT ON BANKS
Banks should be made aware that if HMRC does wish to investigate their customers, this may include dormant and closed accounts as well as accounts of deceased customers. Banks should be advised not to destroy any documentation that may be relevant, as it is an offence punishable by a fine and up to two years’ imprisonment under TMA 1970,
s 20BB to conceal, destroy or dispose of documents which are required for inspection.
The major implications for banks targeted by HMRC will be the administrative burden of producing the information requested; the risk of breaching confidentiality laws in the countries where the offshore accounts are held—for example under Swiss and Cayman Islands law there are criminal sanctions for breaching client confidentiality—and other conflict of laws issues; and the risk of Financial Services Authority investigations if it seems that the bank had encouraged the use of offshore accounts in a misleading way, eg by advertising them as tax-free, or by suggesting that HMRC would never know about the income earned on sums in the accounts.
CONFIDENTIALITY
The fact that compliance with an s 20 notice may cause a bank to breach its duty of confidentiality to its clients—even where this may put the bank at risk of criminal sanctions—may not be enough to persuade the special commissioner that the notice is too onerous and should be refused permission or limited.
In Re an Application by Revenue and Customs Commissioners to Serve Section 20 Notice (No 2) [2006] STC (SCD) 360, involving a bank which had branches in a number of offshore jurisdictions—although the exact locations were redacted from the published decision—the special commissioner held that even if delivering up documents relating to customers of those overseas branches meant that the bank was breaching its duties of confidentiality in those jurisdictions, they must be delivered up if they are in the possession or control of the bank. In this case, the UK branch provided services under contract to its foreign subsidiaries, subject to a duty of confidentiality, and that is how certain documents—the disclosure of which would breach the foreign confidentiality laws—came to fall within the scope of the s 20 notice. The special commissioner stated:
“The solicitors state that it is a crime under the operative law in some foreign jurisdictions in which it operates to disclose documents relating to the accounts in that jurisdiction. I have no information about the operative law in those foreign jurisdictions other that this assertion, and...it is not obvious to me that such law is relevant to a notice given to a UK company to make available documents situated in the UK.”
As a result of this decision, banks may wish to ensure that, so far as possible, documents relating to offshore accounts remain in the offshore jurisdiction and are not held by the UK branch, so that they can not be at risk of falling within the scope of an s 20 notice.
HMRC’S PROPOSALS
If the investigations aren’t enough to keep banks on their toes, HMRC has issued Payments, Repayments and Debt: The Developing Programme of Work, a consultation which proposes to extend HMRC’s powers to allow it—without the benefit of a court order—to direct banks to freeze taxpayers’ accounts up to the level of the debt owing, and for that amount to be handed over to HMRC after a certain period of time if other attempts to collect the debt are unsuccessful.
The consultation, which closed earlier this month, states in justification of the proposal that: “The majority of taxpayers want to pay what they owe on time. HMRC aims to make it as easy as possible for them to do so. It is then only fair that the minority who do not pay on time are pursued promptly for what they owe, so that the non-compliant do not gain an advantage over the compliant.”
HMRC claims that with over £22bn outstanding (as at March 2006), the extension to its powers is necessary to ensure that tax is paid, and paid on time.
This proposal has caused quite a stir in the tax world. Rob Ellerby, president of the Chartered Institute of Taxation (CIOT), states that while CIOT is supportive of HMRC’s consultation, there are serious issues that need to be addressed: “If someone has a joint bank account, what redress does the ‘innocent party’ in the relationship have? Furthermore, what happens where HMRC and the taxpayer do not agree whether anything is owing?” There are also concerns that the proposed powers are unchecked and would leave some taxpayers vulnerable to over-zealous tax inspectors.
POINTS FOR TAXPAYERS
Although a scheme whereby HMRC promised taxpayers a smaller penalty for voluntarily disclosing unpaid tax has now closed, the general consensus seems to be that honesty is the best policy, and that taxpayers may be treated more favourably if they voluntarily disclose their unpaid taxes, rather than waiting to be discovered by an HMRC investigation. Some banks have reportedly written to customers advising them in this way. However, there have been warnings by some commentators that dishonest or forgetful taxpayers who work in the legal or tax industries will be dealt with particularly strictly. The message for any taxpayers who think they may owe tax to HMRC is to seek individual advice as soon as possible.
Emily Springford is a solicitor and Vanessa Whitman is a trainee solicitor at CMS Cameron McKenna
