How to survive the great tax clampdown
Daily Telegraph Last Updated: 1:41am GMT 01/03/2008
The Government is looking to increase tax revenues by targeting offshore accounts and avoiding the bad publicity of raising tax rates, writes Emma Simon
The Government's crackdown on tax-evaders stepped up a gear this week: HM Revenue & Customs admitted it had paid an informant for a list of UK residents who hold money in Liechtenstein, a secretive tax-haven.
And it isn't just multi-millionaires with bank accounts in exotic places that are coming under the taxman's gaze.
This latest raid is part of a wider move to increase tax revenues without the bad publicity involved in raising tax rates.
Current investigations are focusing are offshore accounts closer to home, be it savings or investments in the Channel Isles, the Isle of Man or Gibraltar.
HMRC has also warned the nation's amateur landlords that "new intelligence" will make it far easier to identify those that fail to pay tax on the rental income they receive.
The Revenue said that it was now common practice to pay third parties for information about tax-dodgers.
But the size of the payment, and the fact that it was reportedly paid to a convicted criminal who smuggled this information out of Liechtenstein, has raised eyebrows.
HMRC refused to comment on these specific allegations, but said that as a result of this information it was now investigating individuals who may owe up to £100m in unpaid tax.
Mike Warburton, a partner at accountants Grant Thornton said: "We would never condone tax evasion of any sort. And it is clear that in pragmatic terms it makes sense to pay £100,000 to reclaim £100m in unpaid taxes."
But he added that he was "uneasy" about the methods HMRC may have used to get its hands on this data. However, he said that this latest tax raid should sound a clear warning bell for all taxpayers.
"This just goes to show the lengths that the Revenue is prepared to go to in order to collect the money it is due," he added.
His words are echoed by Dave Hartnett, the acting chairman of HMRC, who has said: "HMRC is determined to protect the UK's tax base from evasion and, in doing so, we will use all the statutory powers we have. It should now be clear to everyone that there is no safe hiding place for the proceeds of tax evasion."
So why did HMRC need to pay such a high sum to get information about these Liechtenstein bank accounts?
As many readers will remember, last year the taxman offered an "amnesty" for those who have undeclared offshore accounts. This gave these taxpayers a limited opportunity to disclose their holdings, and pay a reduced penalty, before HMRC came knocking on the door.
This, for the first time, was a very real possibility, following a landmark court case which forced banks in most European jurisdictions to hand over details of all British residents holding offshore accounts to the UK tax authorities.
However a number of countries refused to comply with this directive. Liechtenstein was one; the others were Andorra and Monaco. Even Switzerland, synonymous in the public imagination with a locked bank vaults and secret accounts, is part of this cross-border initiative.
Although it agreed not to divulge information on those who choose to bank in the country, it requires those who "opt-out" of this system to pay a withholding tax instead.
But the willingness of HMRC to pay for this information, suggests that these locations may no longer provide refuge for tax-evaders as other "informants" may well come forward.
This, too, applies to further tax havens further afield, such as Singapore, Dubai and the Cayman Islands which, until now, have been largely out of reach of Revenue officials.
Mr Hartnett clearly hopes that this week's action will alarm tax evaders and he urged all those with hidden income or gains overseas to "make a prompt and complete disclosure to HMRC."
Simply coming forward may significantly reduce any subsequent penalty if you have been found to be harbouring gains overseas. (see Q&A). While most people will applaud any action to bring tax evaders to book, there have been some concerns about paying informants for information.
George Bull, a partner at accountants Baker Tilly, said this precedent could lead unscrupulous individuals to pass false information to Revenue officials, in the hope of receiving payment. As a result this could see innocent taxpayers subjected to costly and stressful investigations.
As he pointed out, evidence gathered by such means is likely to be inadmissable in court.
Mr Warburton added: "If money has been paid to a convicted criminal then there should be independent verification of the accuracy and validity of this data, before it is used to pursue a potential damaging investigation against an individual."
But the HMRC gave short shrift to their concerns. A spokesman pointed out that failure to declare taxable income or gains was a criminal offence and one that could result in prosecution and a jail sentence.
He added: "The only thing that has been 'stolen' here is money that rightly belongs to UK taxpayers, and we have used our statutory powers to investigate fully."
He continued: "We receive hundreds of tip-offs every year about tax evasion. Some of these will be inaccurate or even malicious. But our tax investigators are highly trained and carefully evaluate information from a range of sources before triggering a formal investigation."
Most of the information that HMRC receives does not come from clandestine payments made to overseas informants. Instead most of its investigations are far closer to home.
Tax investigators will trawl through small traders' advertisements and look at regular eBay dealers and then cross-reference these with the information it receives on self-assessment forms.
It also receives numerous anonymous tip-offs through the hotline that it runs.
According to HMRC, these are all "checked thoroughly" before investigations get underway. It also has access to a number of Government databases.
Not only now does it have records of UK residents with offshore accounts, it also will also be able to access details of landlords that have registered with one of the new deposit guarantee schemes. Again, this information can be cross-reference to tax files.
If it spots discrepancies then it may not be long before the taxman comes calling.