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By Ali Qassim
Dec. 6 — The U.K. tax authority has proposed that tax advisers creating or promoting certain complex offshore financial agreements should be required to notify Her Majesty’s Revenue and Customs of the complex offshore structures.
In addition, they would be expected to provide HMRC with a list of their clients that make use of such complex offshore arrangements, according to a Dec. 5 consultation document.
And clients, in turn, would be expected to include information about any complex structures holding money offshore on their self-assessment tax returns.
“This would increase transparency around these arrangements and their usage, allowing HMRC to improve its ability to assess risk; targeting the non-compliant minority who undercut and disadvantage legitimate businesses, and tackling individuals who misuse the structures to evade tax,” HMRC said in its consultation document.
In common law jurisdictions, legal professional privilege protects communications between a professional legal adviser (a solicitor, barrister or attorney) and his or her clients from being disclosed without the permission of the client.
HMRC states in its consultation that the privilege “is that of the client and not that of the lawyer.”
Similar protections also exist in other jurisdictions.
“We recognize that this issue exists, but do not believe it to be insurmountable,” HMRC states.
The proposals are part of the U.K. government’s wider “No Safe Havens” strategy unveiled in 2014 to tackle offshore tax evasion, which includes the increased sharing of financial information among governments.
The government will publish a summary of responses to the call for public comment in early 2017 before deciding the scope of the proposals to be included in the Finance Bill 2017.
There is concern about the impacts of the latest proposals and questions about what should and shouldn’t be reported.
“We have concerns that HMRC will use any information provided about offshore structures as an automatic trigger for launching investigations,” said RSM tax partner, Andrew Hubbard. “After all, HMRC says in the consultative document that ‘in many cases offshore arrangements are put to legitimate use’.”
“A skeptical HMRC inspector may take a ‘guilty unless proven innocent approach’ and require taxpayers to justify why their use of such arrangements is legitimate,” Hubbard said.
He noted that, as ever, the way that any new powers are used in practice “will be as important, perhaps more important, than the wording of the legislation itself.”
John Cullinane, tax policy director at the Chartered Institute of Taxation, said he understands why HMRC wants to look at this.
“Although there will be reams of information under the Common Reporting Standard, it will be like looking for a needle in a haystack. If this proposal operates as it should, it should help HMRC pinpoint at one of the things they are looking for,” said Cullinane.
Despite the increase in international tax transparency through projects such as the OECD’s Common Reporting Standard, the government “recognizes that there is still more that could be done to increase tax transparency”, the document stated.
Recent high-profile data leaks such as the Panama Papers, have highlighted how frequently an “enabler”, a third party such as an accountant, law firm, adviser or wealth manager- is involved in facilitating offshore tax evasion on the part of an individual, HMRC said.
Currently, the U.K. has two regimes which require businesses to reveal certain tax arrangements—the Disclosure of Tax Avoidance Schemes (DOTAS) regulations are currently in force, and the introduction of a new Value Added Tax Disclosure Regime which is also proposed for the Finance Bill 2017.
The onus to notify HMRC will be on creators which the tax office describer as professionals who have created special offshore holding structures. The tax office is seeking input on whether this responsibility should apply to creators outside the U.K. as well or only to U.K.-based professionals.
As HMRC recognizes that many offshore holding arrangements have legitimate uses, it underlined that just because creators-or their clients report an offshore structure does not mean it is being used for tax evasion purposes.
However, the act of notifying the tax office will ensure HMRC can check that the arrangement “is only put to legitimate use.”
HMRC is seeking views on the scope of the details of the arrangements that creators should include in any reports they hand over to the tax authority, including:
Based on responses, HMRC plans to launch a future consultation on the full details of the policy design, including the specific characteristics—which it described as “hallmarks"—by which it would be able to identify what arrangements should be subject to notification.
Although HMRC has not yet devised these hallmarks, it plans to use them to carefully target arrangements that could be used or misused for tax evasion purposes and exempt other transactions to avoid imposing an unreasonable compliance burden on intermediaries and taxpayers.
Tax advisers, agents and businesses who create complex offshore financial arrangements and individuals who use such arrangements will have until Feb. 27 to comment on the proposals.
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