Tax Transparency Initiatives Could Spell Trouble for U.K. Property Investment

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John Cassidy Stacy Eden

John Cassidy and Stacy Eden, Crowe Clark Whitehill, U.K.

John Cassidy and Stacy Eden are partners at Crowe Clark Whitehill, U.K.

U.K. beneficial ownership register proposals are aimed at curtailing tax evasion and criminal money laundering activity—a laudable goal—but could also dampen investment in the U.K.’s property market.

On April 5, 2017 the government published a 54-page “call for evidence” document which invited comments on a proposed new register of who owns or controls overseas entities that own U.K. property. In this context, “entity” has a wide definition, extending beyond simply “companies”. The register would apply to future investments, while entities which already own U.K. property will be given a year to register their beneficial ownership details or sell their property.

The document focuses heavily on transparency and the benefits that brings. Clearly, however, such a register goes beyond being transparent; it also provides valuable intelligence to government bodies. Staff at HM Revenue & Customs (“HMRC”) charged with identifying tax underpayments linked to overseas structures will be very pleased with this development. It has long been a goal of HMRC to unravel offshore structures that appear opaque, for example where ownership is held through trusts and nominee companies, in order to establish if the economic reality dictates that U.K. tax is payable. In many instances, offshore structuring is not, however, utilized for tax efficient or financial reasons at all but, rather, is done for sound commercial reasons including privacy protection, safeguarding against competition threats, or high net worth individuals seeking to protect their families.

HMRC and Offshore

HMRC has been interested in all matters offshore for a long time and this latest move fits into its wider strategy to reduce the U.K.’s tax gap by more effectively combatting tax abuse and loophole exploitation. Despite repeated attempts to encourage anyone with offshore interests to review their affairs and make a disclosure if tax is found to be due, HMRC remains convinced that a huge amount of tax is still going underpaid.

Discovering who truly owns U.K. assets will clearly help with this. It may be, for example, that the beneficial owner is, in reality, a U.K. resident person or that an offshore company is managed and controlled by a U.K. resident person, which could mean that the company itself is classed as a U.K. company for corporation tax purposes. The intelligence gathered could also be used to build a bigger picture of any named individuals using HMRC's extremely powerful “Connect” computer system which pulls together into one report a huge amount of information about the person from billions of lines of data.

The threat of “mission creep” may be worth dwelling on momentarily, here, too. Authorities having access to greater levels of information is, on the face of it, clearly a positive development. However, there is an inherent threat that data may, over time, be used for purposes beyond its initial objective. With the volume of data dramatically increasing, the risk of “misuse” of that data (that is, use that is not directly attached to the original motivation for collection) also increases.

The Finance (Number 2) Bill 2017 also originally* provided for a final opportunity to review offshore structures and put right any tax problems by September 30, 2018, with the threat of strict new penalties later on if this is not done. The significance of this date is that it is the end of the period during which all countries (more than 100), that are signed up to the Common Reporting Standard (“CRS”), will have provided huge amounts of data to HMRC concerning holders of offshore assets. Therefore HMRC will not only know who is behind offshore structures that own U.K. assets, but also who owns offshore assets such as bank accounts. “Connect” will be able to find any links.

Penalties

Linked to this is a new “Failure to Correct” (“FTC”) penalty which will apply if the person is found, after September 2018, to have additional tax to pay. These penalties are huge, starting at 200 percent of the additional tax found to be due, which can then be reduced in certain circumstances, but only to 100 percent. There is therefore a huge incentive to find and correct any offshore irregularities under the current penalty regime before FTC penalties enter into force.

These new penalties also apply to all offshore irregularities, no matter when they occurred, and to all behaviors; everyone will be subjected to the same penalty levels whether the cause of the problem is simple human error or, at the other end of the spectrum, deliberate or willfully fraudulent actions.

In some cases there will be even higher penalties, including an asset-based penalty (up to 10 percent of the offshore assets) and an enhanced 50 percent penalty where the individual has moved assets around in an attempt to stay ahead of the CRS. This is expected to be relatively rare.

As a general overview statement, moves towards greater levels of transparency, such as this one, are a good thing. What this does mean, however, is that there will be an increase in the administrative burden tied to the purchasing of U.K. property. Aside from the aspects explored above, property owners should also be mindful of proposals to bring offshore property-owning companies within the charge to corporation tax—yet another change that would increase the administrative burden (and cost) for property market operators.

Given the already hefty levels of administration to contend with in these areas, the additional hurdles may negatively impact the property market. As with most policy provisions, there is an inherent trade-off in assessing the success/failure of any new measure. If the register allows U.K. authorities to clamp down on money laundering, illegal tax evasion and other artificial tax structures, and enables HMRC to recoup additional revenues for the exchequer, the trade-off may prove to be worthwhile.

Next Steps

While it is hard to gauge the impact of increased transparency around beneficial ownership, a far more pertinent and direct threat to dampening property investment is the incredibly high cost of property taxes—stamp duty land tax (“SDLT”) being the clearest example of this. The numerous changes affecting overseas investors into residential property are dampening demand, which is already suffering from uncertainty in the U.K. economy stemming from Brexit and the General Election.

Regardless of the transparency versus administrative burden trade-off discussed here, anyone with offshore affairs should have these reviewed by an independent expert without delay. The independence of any such expert is important, as the draft legislation also introduced a further new development under which the reliance on advice from any person (no matter how expert) who received any consideration when helping the taxpayer enter into the offshore arrangements may well not qualify as being sufficient to remove the FTC penalty. A third party review is essential.

*These draft provisions were amongst those removed from the Finance Bill in the cull on 25 April, but it is likely that they will be reintroduced shortly after the election. The proposals have already been through the full consultation process so are unlikely to change and, when announcing the changes, the government confirmed that the clauses would be reintroduced“at the earliest opportunity”post-election (assuming the polls are accurate in predicting a Conservative victory).

John Cassidy and Stacy Eden are partners at national audit, tax and advisory firm Crowe Clark Whitehill, the U.K. member firm of Crowe Horwath International. They may be contacted at: john.cassidy@crowecw.co.uk; stacy.eden@crowecw.co.uk

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