Tax Amnesty: What are the Potential Implications?  

In an earlier article the author speculated whether he believed that HMRC would offer a tax amnesty in the near future. The answer to this was yes. So what are the possible implications of a tax amnesty?

Although there has been no publicised consultation process relating to the speculated tax amnesty it is believed that in return for making a voluntary disclosure of tax evasion under a tax amnesty HMRC will restrict the penalty to between 10 and 25 percent of the tax found to be due. This will have to be paid along with the tax and interest from the date the tax was due. It is not clear at this stage whether the tax amnesty will include VAT in additional to direct taxes.

It is believed that this information will be required in a tax return like format (although it could be in a report format). It is likely that the information required under the tax amnesty will cover a minimum of the period for which the tax evasion occurred or 20 years (whichever is lower). There is also speculation that at most the tax amnesty will allow a 3 to 6 month period for the preparation of the disclosure detailing the tax evasion declared under the tax amnesty. It is believed that if the "tax return" like format is used then the provisional drafts are very complicated and difficult to complete.

At first glance all of this seems quite reasonable. For low level tax evasion, such as where the funds in an offshore account have arisen from taxed sources and the only tax evasion to be declared relates to undeclared interest generated, this would seem to be more than reasonable. However, our experience of dealing with tax disclosures and reports where there is an offshore bank account is that a significant proportion of the underlying funds are a result of tax evasion. Thus there is a disclosure to be made of both the undeclared interest and the underlying funds.

Also most institutions can only provide information for the last 5 to 10 years. Thus if the omission has occurred over the last 20 years how is the individual to make a disclosure under the tax amnesty without some degree of estimation? To be able to accurately estimate the levels of income over a number of years takes considerable time and work if it is to be done in a way that HMRC would find difficult to challenge.

In the current regime, where the tax at stake is over £75,000, this is usually dealt with under the Civil Investigation of Fraud procedures and Code of Practice 9 is issued guaranteeing that if the individual gives a full disclosure then HMRC will not prosecute regarding that particular tax offence provided there are no material errors or omissions.

It is normal under the Civil Investigation of Fraud procedures for the practitioner and their client to be allowed 6 months from the date of the initial meeting between the taxpayer and HMRC to prepare a report. Often it will take up to 3 months from the initial disclosure of tax evasion to this meeting taking place and thus it allows up to 9 months to obtain all of the information and process it to arrive at a detailed report of tax irregularities. In more complicated cases the practitioner will often be able to obtain further time to complete the report provided HMRC are satisfied that progress is being made.

This is not an unrealistic timetable given that a report has to cover the complete tax history of the individual, comment on all taxes and the implications of any tax evasion committed, and has to include a detailed explanation as to how the tax irregularities occurred and any estimates and assumptions that have been made. Bearing in mind that the individual can be prosecuted if there are any material errors in the report then a significant amount of work has to go into making the report robust. As with the proposed tax amnesty, the Civil Investigation of Fraud procedures cover the lesser of the period of the tax evasion or 20 years tax history.

It is expected that HMRC will want any disclosure under the tax amnesty to be as robust as those already undertaken under the Civil Investigation of Fraud procedures. Thus it would appear that the timescale of 3 to 6 months will be difficult to meet for even the most seasoned of practitioners working with the most cooperative of clients who has all of the appropriate information to hand.

What happens if the likely 6 month deadline suggested for the tax amnesty is not met is not known but it may be that the level of penalties will be increased proportionately. Thus the individual could be left with the choice of making a material error because not enough time has been given to prepare the report properly (in which case is he open to prosecution) or he may prefer to risk an increase in penalties to get it right.

It is not known whether HMRC will issue a Code of Practice with regards to any tax amnesty (as they do in all other cases such as Code of Practice 9 for Civil Investigation of Fraud procedures). If a code of practice is not issued then where are the protections for the individual? The Civil Investigation of Fraud procedures guarantee that an individual will not be prosecuted if they make a full disclosure of all tax evasion. Without a code of practice what guarantees will be there with regards to prosecution of individuals who take advantage of the tax amnesty? No one will know this until any tax amnesty is formally announced.

There is also the logistics of the tax amnesty to consider. Let us estimate that there are 300,000 people who have undeclared offshore bank accounts and only 10 percent of them come forward to take advantage of the tax amnesty. That is 30,000 reports that will need to be undertaken in a 6 month period. Although the reports can be dealt with by any individual or practitioner, given the serious nature of the irregularities, it is likely that many accountants will not want to undertake work of this nature as it is outside their normal remit and very time consuming. Getting it wrong can also have serious implications for the clients of the practitioners.

At an estimate there are maybe 300 people, at most, who have experience in undertaking tax disclosures under the Civil Investigation of Fraud procedures. Thus if all work goes to people with experience of the Civil Investigation of Fraud procedures each individual will have to do 100 reports in a 6 month period. A standard report can take between 100 and 200 hours to prepare thus a total of say 15,000 hours of work will be required by each individual. In a 6 month period working 24 hours a day there will be just over 4300 hours. It can be seen that, based on what are probably underestimates of the figures of disclosures and an overestimate of the number of people with the appropriate experience, there are not enough experienced practitioners around to undertake the likely levels of work generated by a tax amnesty in the estimated time scale.

The last logistical hurdle is for HMRC to review the reports. If 30,000 reports are presented to HMRC then how long will it take them to review? Even a cursory review of the reports generated by the tax amnesty by HMRC will take considerable time and then there will be significant amounts of paperwork regarding settlement for HMRC to process. Thus it is quiet feasible that it will take HMRC 6-12 months to just read the reports and issue the paperwork. They are likely to want to meet the individuals to get them to sign a certificate of full disclosure and remind them that if there are any material errors they could be prosecuted. Again how long will it take to undertake 30,000 meetings?

It is more than likely that HMRC will accept the reports from practitioners who they are used to dealing with and who they have built a good professional rapport with. The reports they are more likely to review are those by inexperienced practitioners who prepare what HMRC consider a sub standard report.

Given HMRC's requirement for publicity relating the tax amnesty it is likely that a number of these, where material errors have been made, will result in a prosecution with the report being the key evidence in the prosecution. Thus for some unlucky individuals it may be that their own disclosure of tax evasion under a tax amnesty will be used in an HMRC prosecution.

It is our opinion that a more realistic timescale would be for individuals to be given 3 months to make a disclosure under any tax amnesty and to make a significant payment on account. HMRC should then work with the accountancy and tax professionals to agree realistic timescales to take into account the need to do the reports right and the resources available. This would be achievable in a 18-24 month period. However, given HMRC's move over the last few years towards more rigid procedures, an increased use of penalties for failure to meet deadlines and the move to strict deadlines being imposed in many investigations this is unlikely to happen.

All in all a tax amnesty is a good and positive move to allow people to come back into the tax system. We know from experience that there are many individuals who inadvertently missed declaring information to HMRC and after a few years wonder how they are going to get out of the situation. A tax amnesty may give them the opportunity to do this and to lift the burden of waiting for the brown envelope from HMRC to drop on their doormat. However, It is our view that the tax amnesty could easily be rushed through without proper thought and consultation and the result will be one of unmet deadlines and significant delays in dealing with the reports by HMRC.

It is also rumoured that in the larger cases HMRC are considering registering these cases under the Civil Investigation of Fraud procedures before the tax amnesty is formally announced. Thus may people could be receiving notices of investigation before the tax amnesty is announced.

Anyone who comes forward before the tax amnesty is announced, who would fall within the Civil Investigation of Fraud procedures, could secure penalties in the region of fifteen to thirty percent provided the disclosure is made in the right way. Thus there is very little difference in the penalty loadings between a voluntary disclosure using the existing Civil Investigation of Fraud procedures or those reported to be offered with regards to the tax amnesty. The key difference appears to be that an individual will probably be afforded more time under the Civil Investigation of Fraud regime than in participating in the tax amnesty and the format of the disclosure may be more restricted with regards to the tax amnesty. Thus it may be better to bring any tax evasion to the attention of HMRC before the tax amnesty starts.

If you would like to discuss any possible disclosure to HMRC or any matter to do with the potential tax amnesty or how to deal with any tax evasion difficulties please phone 0800 734 3333 or e-mail scott.gilbert@gilberttax.co.uk now. All enquiries are strictly confidential

For more information about the different types of tax investigation cases we deal with on a regular basis please click here.

To find out what some of our clients have said about us please click here.