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HMRC targets businesses using tax havens

HMRC is tracking 277 businesses it suspects of using ‘tax havens’ to reduce their tax bills artificially in the UK, says law firm Pinsent Masons.

The firm says that HMRC is concerned that some UK businesses are still avoiding tax in the UK by recording income in countries with zero or near-zero corporation tax. Countries traditionally seen as tax havens include the British Virgin Islands, Cayman Islands and Bermuda.

HMRC has received data - likely to relate to a number of earlier years - from tax authorities in 12 tax havens over the past year as part of its ‘no or only nominal tax jurisdiction project’. Substantial Activities in No or Only Nominal Tax Jurisdictions: Guidance for the Spontaneous Exchange of Information - OECD

Under this initiative, operated by the Organisation for Economic Co-operation and Development, tax authorities in tax havens must provide information on the identities, activities and ownership of multinational businesses reporting revenue in their countries to HMRC and other tax authorities within the programme. HMRC can then use the information to open investigations and levy penalties where it believes UK tax has been unlawfully avoided or evaded.

In 2018 an international agreement was reached on the application of the ‘substantial activity’ factor to tax havens. Substantial activities such as having offices and senior employees in the country indicate a presence there that is less likely to be purely driven by tax. By January 2022, all 12 havens had introduced a ‘substantial activities’ requirement into their legislation.

Responding to a freedom of information request, HMRC confirmed that under the no or nominal tax jurisdictions regime, it had received ‘a total of 429 records relating to UK taxpayers from 16 March 2021 to 16 March 2022. The total number of UK taxpayers these records relate to is 277’.

Jake Landman, partner at Pinsent Masons, says HMRC is particularly on the lookout for ‘high risk’ UK businesses in tax havens. This includes those set up only to hold intellectual property, without having any significant operations in the tax haven. Although this has become more difficult, this technique has been used by multinationals to charge their UK subsidiaries significant fees and reduce their UK tax bills.

He added: ‘HMRC won’t allow businesses connected to the UK to simply channel funds to Jersey or the Caymans if they don’t have genuine operations there. HMRC has a real focus on worldwide profit-shifting and it will be looking for extra tax and penalties from businesses that use tax havens artificially.

‘HMRC has received a total of 429 records, relating to 277 UK taxpayers, which may suggest that some taxpayers are engaged in more than one tax haven. This may heighten HMRC’s assessment of the taxpayer’s risk profile.’

OECD Substantial Activities in No or Only Nominal Tax Jurisdictions: tinyurl.com/oecdnoontj