By: Bill Blevins
Financial Correspondent, Blevins Franks
UNTIL RECENTLY, you could bank on banking secrecy. You knew that if you opened an offshore account in the Channel Islands or Isle of Man, no one could find out about it unless you authorised it. Financial confidentiality was alive and well. Over just a few short years the situation has, however, changed dramatically.
Offshore financial centres have been under attack from all angles: internationally; within the EU Directive; and from the UK Treasury with its relentless crusade against tax evasion.
The ultimate aim of the Savings Tax Directive is for all EU Member States, and participating jurisdictions (the British offshore islands, Switzerland etc), to automatically exchange information about the interest earnings of all EU residents.
This would make it impossible for EU residents to evade taxation through non-declaration and everyone would have to pay the full tax rates applicable on that income in their country of residence (even if the monies are earned and held offshore). This is what EU residents are already legally required to do, but some either misunderstand the rules or, unwisely, choose not to make a full declaration of assets or income.
Withholding tax
Although the EU wanted this automatic exchange of information in place across the board from day one, they had to compromise and allow Switzerland to deduct a withholding tax instead, for a transitional period. This way, tax is collected but the client details remain confidential. Jersey, Guernsey and the Isle of Man were allowed the same concession.
Many breathed a sigh of relief that banking secrecy was alive and well. How wrong they were! The UK’s HM Revenue & Customs (HMRC) has won landmark High Court cases, giving them the authority to force offshore banks to disclose private client information. This completely sweeps aside the withholding tax ‘safety net’ because tax and interest earnings information has been provided to the UK tax authority anyway.
Barclays, HSBC, Royal Bank of Scotland, HBOS (which owns Halifax) and Lloyds TSB have, therefore, now given HMRC information on their clients with UK addresses, who have an offshore bank account or offshore credit cards. The information goes back six years and may include accounts now closed.
You don’t get much more proof than this that the days of banking secrecy and financial confidentiality are over. Here is a copy of an actual letter sent to a client by Royal Bank of Scotland:
May 2007
RBS International, Account Number(s): XXXXXXX
You may be aware from recent press coverage that Her Majesty’s Revenue and Customs (HMRC) are currently investigating the use of offshore accounts by UK residents.
Together with a number of other leading banks, The Royal Bank of Scotland Group (the Bank) recently received Statutory Notices which required the Bank to provide to HMRC information relating to customers who either have, or have had, an offshore account with a link to a UK address in the last six years.
The Bank takes its duty of confidentiality to customers very seriously, but in this instance had a legal obligation to comply with the Notices that were served.
It is your responsibility to ensure that tax due all any income, including that arising from an offshore account is dealt with appropriately. Accordingly, if you are satisfied that your tax affairs are in order, you do not need to take any further action. However, if you have any concerns about the possible impact of these Notices, we strongly recommend that you contact your tax adviser immediately.
HMRC has announced an Offshore Disclosure Facility for individuals who may have paid an incorrect amount of tax in the UK. The facility makes provision for reduced penalties on any tax due.
Should you wish to apply under this facility, notification needs to be made to HMRC by 22 June 2007, with any payments due being made by 27 November 2007. Details of this scheme are available at www.hmrc.gov.uk or by contacting HMRC directly on 0845 302 1401 (international +44 1506 476 094)
HMRC has promised to take serious action against all who fail to use the Offshore Disclosure Facility, to come clean. Considering the amount of information HMRC now has about offshore bank holders, it would be foolish to believe that you could continue to hide from the taxman.
If you are now an expatriate but your bank still has your UK address, your information has been passed on. If you have not been a UK resident for the last six years, you would not be liable for UK income tax but you would need to prove this to HMRC. And under the exchange of information provisions, any information obtained by HMRC will be passed over to your overseas tax authority.
You should speak to your financial adviser immediately, if you are unsure about whether you should make a disclosure or not. You need to notify HMRC by June 22, so there is very little time left.
Penalties
Under the Offshore Disclosure Facility, penalties are reduced to just 10 per cent (from 30 – 100 per cent). Maybe more importantly, making a disclosure allows those who have not made a full declaration to wipe the slate clean now, before the taxman eventually catches them when the penalties will be severe. Remember, it could be your beneficiaries who have to face a tax investigation in the future.
It is legal to use an offshore account but illegal to fail to declare the interest earnings on your annual tax return. Paying the withholding/retention tax applied by Jersey, Guernsey and Isle of Man is not the same as declaring the income for tax. Failing to mention your offshore interest because you have already had tax deducted at source is still tax evasion. You need to declare these earnings regardless and possibly pay the difference to your local tax authority.
