UK Makes Move Against Offshore Tax Evasion

February 1, 2011 International Tax CooperationOffshore BankingOffshore TaxationTax HavensTaxation in UK

HM Revenue & CustomsThe UK is set to impose harsher penalties on tax offenses committed by UK taxpayers through the use of entities incorporated offshore jurisdictions, in some cases even doubling the fines. However, questions have arisen regarding the potential effectiveness and ultimate motivation behind the revised rules.

On January 31st the the UK HM Revenue and Customs (HMRC) released a statement stating that from the April 6th 2011 is scheduled to impose a steep hike in the penalties imposed on taxpayers for non-compliance with tax legislation arising from activities involving companies incorporated in offshore jurisdictions. The new penalty “enhancements” will be applicable to taxpayers for late filing of tax returns, inaccuracies in tax returns, and failure to provide the HMRC with adequate notice of a change in tax obligations.

The HMRC has stated that the new penalty rates for offenses will be based on the jurisdiction in which the activities arise, and the perceived tax transparency of that country. All countries will be relegated to one of three categories, with “Category 1” being considered to be the most transparent, while “Category 3” is considered to be the least transparent. Under the revised legislation, where tax offenses arise in a “Category 1” country, the applicable penalty rate will not be altered. Penalties on illicit activity in “Category 2” jurisdictions will be increased 1.5 times, and doubled in “Category 3” countries. The HMRC has listed 37 countries as those considered to be “Category 1 ” jurisdictions, consisting predominantly of OECD-member nations. The HMRC has stated that unprompted disclosure of tax discrepancies and subsequent cooperation with tax authorities could see the taxpayer’s penalty reduced.

The new penalties come on a rising tide of public anger and political indignation in the UK towards the apparent misuse of offshore financial centers by multi-national corporations and high-income earners. However, some international taxation analysts have come to question the motivation behind the new fines and their potential effectiveness, saying that the HMRC and UK will be poorly served by restricting the use of offshore financial centers. According to a HM Treasury report released in October 2010, in the second quarter of 2009 alone, UK banks received over USD 332.5 billion of net financing from Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Turks and Caicos Islands. The nine jurisdictions single-handedly account for over 60 percent of the total financial flows experienced by the UK banking system.

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