The Common Reporting Standard—What is it and Where are we now?

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Amit Puri

Amit Puri Grant Thornton UK LLP

Amit Puri is a Director, Tax, with Grant Thornton UK LLP

Awareness of the Common Reporting Standard and its requirements is still limited: however, taxpayers who may be affected should be taking steps now to address the situation.

Coverage of the Common Reporting Standard (“CRS”) has been abundant and yet it seems awareness of the regulation and its potential impact is still very limited. Our focus remains on the fall-out for people who are yet to hear about it and fully appreciate the consequences, which in my mind are around the corner. The international banking and tax worlds have collided and as a result are much smaller than you may think. Under the CRS, over 100 jurisdictions now automatically receive rich financial accounts information from one another every year.

A New Global Standard of Information Exchange

This new global standard, developed by the Organisation for Economic Co-operation and Development, along with a myriad of accompanying agreements, will allow a legal exchange of personal financial information between the many tax and fiscal authorities around the world. This new transparent international community includes territories such as Switzerland, Singapore, the British Virgin Islands, India, Israel, the United Arab Emirates and Panama.

The move marks a step away from the previous reactive requests for information, to a new era where authorities will be in receipt of large bulks of personal financial data, including details of any overseas assets and investments.

While the primary objective of the CRS is to support authorities in identifying tax evasion, in practice, it is also likely to unearth evidence of tax avoidance, bespoke tax planning weaknesses and any unsophisticated arrangements, such as gains on the disposal of assets outside of the U.K.

Those jurisdictions that have already adopted the CRS will be a step ahead. The U.K. has already started receiving millions of lines of banking data under precursor automatic exchange of information agreements with its Crown Dependencies and Overseas Territories. The comprehensive data will be compared with the information already held on record to help authorities identify potential tax evasion or money laundering risks.

The details exchanged under the CRS are considerably more detailed than the annual information currently provided to HM Revenue and Customs (“HMRC”) by U.K. banks, and so many may not be aware that they should be coming forward. Along with declaring any interest income on current and savings accounts it also documents dividend income, cash-value insurance products, proceeds from the disposal of financial assets and annual balances and values on reportable accounts overseas.

In many circumstances where reportable overseas financial accounts are held by certain entities rather than people, the extended CRS requirements also ensure that, as part of the bespoke due diligence process, “controlling persons” are identified. These can include shareholders, directors, trustees, protectors, settlors and beneficiaries when they are resident in the U.K. and so a form of reporting applies for them too.

Lack of Activity Ahead of Deadline

With such major change underway and greater transparency around people's financial affairs afoot, the low number of people coming forward is concerning. I spend a lot of time meeting new people to raise awareness about tax risks such as the CRS, including other professionals such as smaller accountants and book-keepers, lawyers, financial advisers, private bankers and wealth managers. Surprisingly, the vast majority of them still do not know about the CRS, nor the implications it will have. So, there is a real risk that people could be walking unaware into unnecessary encounters with HMRC.

One reason for the lack of activity ahead of the deadline for the CRS could also be due to the lack of incentives to come forward. Following the introduction of the new Requirement to Correct obligation and Failure to Correct sanctions, previous attractive offers, such as immunity from criminal charges and low fixed penalties, are gone and all that remains is the threat of a very large stick after September 2018—including the introduction of 100 percent minimum penalties and it being easier to publicly name defaulters.

Who Could be Affected?

So who could be affected by these changes and what should they be doing to address their situation?

Example one: An elderly client holds liquid funds in a current account in, for example, Israel, where he or she was born and educated before coming to the U.K. to live and work. Irrespective of the balance on that account, HMRC might, for example, contend that historic interest income and gains have gone untaxed (giving rise to income tax and capital gains tax liabilities). They may also assume that some or all of the funds have since been expended or gifted to family members to hide their existence. It is important to remember that even nil balance and non-interest bearing accounts will be reported.
Example two: A client inherited a mixture of funds, some liquid and some longer-term investments, in a country such as India. The deceased was born there and had lived overseas all their life, but the benefactor was born in the U.K., educated here and currently works here. HMRC could contend that the income and gains have gone untaxed in the hands of the successor, and perhaps wonder whether other income producing assets exist overseas, for example properties.
Example three: As in the example above, the client holds funds overseas, but through a complex legal holding structure involving non-U.K. companies and/or trusts. As part of the reporting financial institutions' due diligence processes, they identify the entities, which in this instance require further attention. Where the “controlling persons” are U.K. residents, the identifying information will be exchanged with HMRC, and so perhaps give rise to additional tax liabilities in the beneficial owner's hands.

In these situations it is extremely important to first seek professional advice and ensure you make the necessary voluntary disclosures to HMRC before more stringent sanctions take effect.

There are of course many reasons why people hold financial accounts and investments outside of the U.K., for example, greater privacy, greater returns on capital, inheritance of ancestral wealth and temporary residence. Therefore, receipt of personal information by HMRC will not always result in additional tax needing to be paid but it is likely to require people to be able to demonstrate to HMRC that they are U.K. tax-compliant.

Make sure you seek advice and take advantage of the free, high-level tax health checks available to ensure your assets and holding structures are U.K. tax-compliant.

Amit Puri is a Director, Tax, with Grant Thornton UK LLP.He may be contacted at:

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