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KEY POINTS
- Offshore disclosure facility was meant to be a one-off.
- Still at least 40,000 non-disclosures on HMRC statistics.
- Too few investigations, but badly targeted letters.
- Continued rumours of ODF2 damage its credibility.
All the parenting programmes on television agree that the most important thing is consistency. If you say that an action is going to have certain consequences, then those consequences must follow.
You can argue about whether 'No pudding if you don't eat up your greens' is a good dietary principle; but if after saying it you give in and dole out the ice cream despite a plateful of untouched sprouts, then the next mealtime is only going to be worse.
But you don't buy Taxation for parenting advice; so what has this got to do with tax?
The offer
Back in April 2007, HMRC announced that taxpayers with offshore assets, where a tax liability arising from either the origin of the asset (e.g. the capital in an offshore bank account) or the income from it had not been properly declared, were to be given the opportunity to make a disclosure and pay a fixed penalty of 10%, in addition to the tax and interest.
Although universally referred to in the general press as an 'offshore amnesty' it was therefore nothing of the sort, and HMRC referred to it as the 'offshore disclosure facility' (ODF).
In the first article we had on the subject, Amnesty international? Francesca Lagerberg and Paul Roberts, commented that Ireland, when it carried out a similar exercise, raised £550 million, and that the UK experience 'could easily raise several billions'.
This, as is the case for many of the comments from our articles over the past eighteen months referred to below, reflected the general understanding of the profession after a long period of consultation with HMRC.
The sanction
But why would taxpayers come forward and volunteer that they owed money to HMRC? The ODF was triggered by HMRC's success in getting details of the offshore accounts held by customers with UK addresses from six of the major UK banks, so there was an element of 'we're coming to get you'.
Even more important was the threat that, if this supposedly generous offer was not taken up, the alternative would be much less palatable.
The same article from Paul and Francesca said that those with a bank account which HMRC knew about, who did not give notification of an intention to disclose by the due date, were likely to be the subject of a swiftly opened enquiry and a much higher penalty — a minimum of 30% was suggested.
Deadline
So there was a good deal of anticipation as the 22 June deadline approached. There were, however, also some immediate problems. There was just over two months from the initial notification of the ODF to the deadline. No adviser was going to say that a client should register for disclosure without having a discussion with them first.
Worse still, many of the people affected by the ODF were unlikely to have advisers, and therefore needed to go through new client procedures before they could be advised. If they already did have advisers, then by definition they had not been telling them about their offshore stash. That meant that the taxpayers who had offshore accounts needed to hear about the ODF quickly.
However, HMRC appeared to have no real plans to publicise the ODF other than through normal press releases. They seemed to be relying on advisers to alert their clients; for the reasons given above that was unlikely to achieve the desired result.
Alternatively they hoped that the letters sent to the account holders by the banks who had been obliged to disgorge their records would stimulate disclosures.
While it undoubtedly did, this then created a significant problem for the future, in that the account holders in those banks had received more warning than those in other banks, yet the ODF was meant to be a once and for all offer to anyone with liabilities to declare.
It seemed odd that a scheme which had been the subject of such significant levels of consultation did not have a publicity plan in place.
A few weeks before the deadline HMRC were very disappointed with the response. They then sent out their own letters to some 200,000 people whose details they felt fairly certain about. Whether it was this or the natural rush as the deadline approached, it triggered a last minute surge in registrations.
In the immediate aftermath there was some bullish briefing from HMRC about how this showed that they were serious and how successful it had been. In fact, given the low level of publicity prior to this, it smacked rather of desperation, and it certainly could not be seen as a success, given the high hopes that they originally had.
Statistics
As John Cassidy pointed out in the first of his articles for us on the ODF, After the amnesty, HMRC had received the details of 400,000 offshore account holders.
When they originally took the case against the banks to get this information, they showed some statistical results from samples which suggested that they expected 25% of the cases to yield further tax. They therefore expected that 100,000 of those 400,000 should need to notify that they had a liability.
In fact, the total number of people who registered was around 60,000, and the tax raised through their disclosures was some £450 million. John concluded that HMRC therefore needed to work through the remaining 340,000 in some way in order to find the missing 40,000, but it is worse than that.
First, talking to advisers since, many have stories about clients who were panicked by the publicity into registering when they actually had no liability.
Second, a proportion of the people who registered and who do have a liability will not have had accounts with the banks already targeted, so will not be within the original 400,000.
Enquiries
If the ODF was to be a success, the people who had not registered needed to face some serious but fair questioning. The banks had given not only the details of the account holders, but also the balances in the accounts at certain dates, so HMRC knew where the large stashes were.
Since these would inevitably be interest-bearing, the only real defence in such situations was to claim remittance basis status.
HMRC originally said that they were going to start the investigations in July, but in August they told Taxation that they 'were planning' to investigate 3,500 cases a month.
In reality it seems that nothing like that number of cases has actually been taken up. In his most recent article for us, Turning up the heat, John says that reportedly there have only been some 5,000 cases in total.
Even more problematically, there have been no prosecutions. There have been rumours of prosecutions — continual rumours of prosecutions. At different times over the past six to nine months, on the basis of the 'mood music' I was hearing, I have told people that I expected prosecutions to be announced very soon. So far there has been nothing.
Guilty until proven innocent
Instead, there has been an 'intervention letter' approach to many on that long list of 340,000. This was the outcome of what Dave Hartnett referred to as 'automated risk assessment on an industrial scale' to find further cases in the 340,000 once those which merited COP 9 investigations had been sifted out.
Again, from the comments I have heard and some of the pieces we have published on the subject, it seems clear that the risk assessment has not always worked well — I have heard of several cases where people with less than £100 in their account at any time have been targeted, for example.
Even more problematically, agents say that the letters assume that there is a liability, when HMRC themselves only seemed to expect to find a liability in 25% of cases at the outset. It is one thing to say that if there is a liability the taxpayer must come forward, quite another to imply that just because they are getting the letter they probably do have a liability.
Second bite
And then there is the worst example of all of 'bad parenting', in my view — the continual rumours of a second ODF. Our first reports that this might happen were published even before the disclosure deadline for the first had passed.
Eventually in July this year Dave Hartnett gave an interview to The Sunday Times where he said that there would be a new version of the ODF, though with a more complex system of calculating penalties than the first one.
We reported Scott Gilbert, from Gilbert Tax, saying that 'those who did own up [under the first ODF] might now wish that they hadn't', and I think he is right.
The whole point about the ODF was that it was meant to be a one-off. As soon as you make it clear that it isn't, the credibility of any subsequent statement that 'you had better own up now' is seriously weakened. Other countries which genuinely do offer tax amnesties, such as Italy, have found that this is definitely an area where the law of diminishing returns applies.
If that were not enough, the repeated references to a new ODF without actually announcing the details of one seem designed to frighten taxpayers into making a disclosure now, with an intimation that the deal which would be on offer might not be that different from the 10% given in the ODF.
But we are now well over a year after the deadline for registering to use the ODF; failure to meet that deadline was meant to mean significantly higher penalties. Are HMRC really going to give people a second bite at the cherry?
The latest indication we have is that, yes, there will definitely be an ODF2, and it will have an attractive offer on penalties, but it won't be as good as the 10% for ODF1. Well, I should hope not.
My concern is that the sort of figures I hear being talked about are 15% for the smaller cases, and one of my problems is understanding why such a generous offer should be made to these taxpayers.
Fair treatment?
Part of the answer may be that ODF2 is tied in with the further details that HMRC now have from other banks and from information exchanges with other revenue authorities. This comes back to the issue raised earlier — those who did not have accounts with the banks that initially had to provide information may not even have heard about ODF1 because of the lack of publicity from HMRC.
HMRC do therefore have a problem in trying to steer a path of fairness. On the one side is the Scylla of honouring the deal made with those who did come forward; that by doing so they would get a significantly lower penalty than they might have expected if they had stayed quiet.
On the other is the Charybdis of those who would have come forward if they had known about the first ODF but who genuinely did not hear about it, or at least did not believe it applied to them, and who will only realise they are in the frame when their banks (caught by the second wave of disclosures after the ODF was over) write to them and tell them.
There have been some suggestions that those who received letters before ODF1 will be more severely treated than those who did not, although that might be a difficult test to apply in practice. How, for example, would HMRC prove that the letters were received, given that some of the addresses appear to have been out of date?
But my other concern is what might be behind this dance of the seven veils where an ODF2 has been continually hinted at but not still not fully announced.
Detailed private consultations with members of the profession have been going on for some considerable time now, and the nods and winks are coming faster than a bookies' convention. So why do we still not know the details of ODF2?
It surely cannot be the case that HMRC are waiting until the full introduction of the increased penalty regime in April 2009? Since a disclosure in these circumstances would almost certainly be a prompted disclosure, the minimum level of penalty for even a careless error would be 15%, which will then make any reduced penalty in ODF2 look even more attractive.
If that were the motive, it would be an extremely cynical ploy, which would further damage the credibility of the whole process. If, as we are assured, there is going to be an ODF2, I do hope that we will be hearing the full details of it very soon.
