Tax avoidance scheme of the week

This week we highlight reports of the latest turn of events of a non-UK tax scheme as the amounts involved are just so huge. The scheme involves Switzerland's No. 1 private bank, UBS, which, in February agreed to pay $780m (£547m) to the US authorities to avoid a criminal prosecution for helping thousands of wealthy Americans avoid tax by hiding their money in secret bank accounts.

SwissInfo today contains a report titled: Spotlight falls on shadier tax evasion scams.

"The murky and sophisticated world of tax avoidance has been glimpsed in the details of a treaty to turn over UBS bank clients to the United States authorities."

In the summer, UBS agreed to reveal the names of thousands of UBS's rich U.S. clients to Washington to settle the tax-avoidance dispute. The request for such information was first reported around a year earlier in the New York Times: U.S. seeks client names in UBS tax evasion case.

Under US law, Americans are supposed to declare all foreign bank accounts containing more than $10,000. According to prosecutors, some 20,000 Americans had private accounts at UBS containing $20bn between 2002 and 2007. Some 17,000 of these accounts were concealed from the tax authorities.

So the scheme here was clearly more in the way of fraud in that taxable income was not being disclosed.

SwissInfo reports that:

UBS clients who used sham shell companies, disposable mobile telephones and credit cards to funnel cash into Switzerland will also come under the scrutiny of the Internal Revenue Service (IRS).

The Swiss government agreed a deal with the US authorities in August to hand over the names of 4,450 UBS clients following a confession from the bank that some staff had actively helped US citizens evade taxes.

Details of which names would be disclosed were kept under wraps until the end of a recent US tax amnesty.

A prime example, covered by the treaty, would be indirect ownership of accounts. In other words, clients who hid their identity behind overseas trusts, corporations or foundations – sometimes fronted by third parties – that sifted assets into Swiss bank accounts.

A US lawyer is reported to have warned that:

"even the most sophisticated methods of disguising identities and salting away undeclared cash could prove paper thin given the level of cooperation between the Swiss and US authorities."

"All codes are breakable and recent events [such as the UBS investigation and the Swiss-US disclosure deal] have shown that these holding agencies are extremely vulnerable," he said.

In the UK there is no exemption for any foreign bank accounts. Indeed HMRC's current New Disclosure Opportunity is intended to provide a final opportunity for any UK residents to tell the taxman about previously hidden foreign bank accounts. The deadline for notifying HMRC of your intention to make a disclosure is 30 November.

Equitable liability to become a statutory right

One of the challenges of writing this blog is that I'm unable to cover all areas of tax policy. One development that I chose not to address earlier this year concerns the concept of equitable liability.

What is it? It's a concession that can be applied by HMRC such that a taxpayer need only pay what is fair and reasonable despite legally owing much more than this. Thus, in certain tightly defined circumstances HMRC will, by concession, accept that only an ‘equitable liability’ be settled rather than the full amount of income tax or corporation tax that is legally due from a taxpayer. In agreeing an 'equitable liability' HMRC normally accept the evidence of time-barred returns, accounts, claims etc where there is a tax debt but no longer any legal right to adjust the liability. The amount of the legal liability is not actually amended, but HMRC will not pursue the difference between the original liability and the revised amount.

In May 2009 HMRC announced that they intended to withdraw this concession. Numerous representations were made in an effort to persuade HMRC and the Government that this was a bad decision. Taxation magazine published hard hitting arguments to this effect by Barrister Keith Gordon and by editor Mike Truman. The ICAEW Tax Faculty and the CIOT also made the point strongly.

I'm delighted to confirm that the protestations have been heard and that legislation is to be introduced such that the concept of equitable liability will become a statutory right. Earlier today I received a press release stating that the Government have told the CIOT that they will be legislating “at the earliest opportunity” to retain the practice.

Why am I now making reference to the issue? Partly it's a public admission that I should have addressed this earlier in the year. My mistake. It's also an opportunity to note that some campaigns are worthwhile and can effect revisions to decisions that appear to be fixed in stone. That's what has occurred on this occasion. I would expect however that the turnaround has occurred because of patient diplomacy by the professional bodies and the heavyweight articles in professional publications.

Wives of promoters of Vantis tax scheme also facing charges

I was shocked to note that the wives of the two Vantis directors who are accused of organising a multi-million pound tax scam appeared in Court yesterday along with their husbands. The wives are accused of involvement in their husbands' dealings.

This follows the reports last month about which I wrote on the TaxBuzz blog here: Vantis tax advisers to face charges of “cheating" re tax scheme.

Now it just so happens that I used to work with two of the accused when we were all at what was then WJB Chiltern plc (which is now owned by BDO). Although I haven't spoken to either of them for some years I know that, based on the way that they dealt with things in my day, I wouldn't anticipate that they knowingly instigated, arranged or become involved in anything illegal. In those days the idea of their wives being involved in their tax advisory affairs would have been fanciful. I should stress that I can pass no comment on what may have happened in the lead up to this case.

As regards the tax scheme, scam or evasion of which they are accused however I can make some reasonable assumptions. I am, for example, pretty sure that they would only have proceeded with promotion of this scheme if they had first secured a solid Counsel's opinion. Possibly more than one. I would expect that they had disclosed everything necessary for those Opinions to be worthwhile and sufficient for them to advise clients by reference thereto. Such Opinions are routinely sought and highlighted by the promoters of schemes to evidence the legality of the plans and to ensure that the promoters and those involved should be safe from prosecution for tax evasion. I also doubt that the accused went 'Opinion shopping' as some promoters do in an effort to find a Counsel who will give the desired Opinion.

Indeed the two Vantis directors know more about tax and the issues relevant to schemes on which they might advise than many promoters I have encountered over the years. So what has happened here?

For the moment I tend to hope that they are simply the victim of a more aggressive stance taken by HMRC.

For the same reason I'm sure that this prosecution is one which the promoters of other aggressive structured tax avoidance schemes will dismiss whilst they continue to promopte their own structured tax avoidance schemes.

Other promoters will suggest this is simply an HMRC tactic intended to scare people away from the arrangement of aggressive tax schemes. They will argue that HMRC are exceeding their powers and that this is a one-off never to be repeated case.

Promoters may also seek to cast aspersions as to the technical competence and ability of the accused in this case. And yet, as I have indicated above, unless they have changed, they cannot be dismissed as loose cannons, novices or crooks who recklessly promoted a fraudulent scheme.

Finally, of course, some promoters of structured tax avoidance schemes will distinguish theirs as not being so aggressive as to ever warrant such a prosecution. I would imagine that the accused in this case would have said exactly the same thing had they put their minds to it when advising clients when they first started promoting the scheme back in 2004.

I have to say that even if I were bullish about such schemes generally (and evidently I'm not) the prospect of my wife being dragged into any legal proceedings would have the, no doubt, desired effect.

What say the readers of this blog?

Offshore bank accounts - HMRC warning video

Remember, remember the 30th of November. That's the deadline for notifying HMRC that you intend to come clean if you have any previously undeclared income from offshore investments.
I referenced this "New Disclosure Opportunity" (NDO) in an earlier post on the TaxBuzz blog: 5 tax facts and advice if you have an offshore bank account.

HMRC had originally provided a similar opportunity to come clean and pay reduced penalties in 2007. This followed from the access HMRC had secured to information about offshore bank accounts held with the five main high-street banks in the UK through their offshore subsidiaries.

The NDO is now targeting UK residents who have offshore accounts operated by over 300 banks and other financial institutions which also have an onshore presence in the UK.

A separate and distinct procedure has been announced in recent weeks that is only relevant to those who held accounts with banks in Liechtenstein. HMRC have not ruled out other similarly targeted arrangements with other specific territories. It would be a brave or stupid person who planned to await any such announcement before coming clean - and in so doing ignores the NDO.

Here's the top HMRC man, Dave Hartnett, to explain their position in stark terms.



Tax Investigations specialist members of the Tax Advice Network are well placed to advise and assist you if you have any worries on this issue. Simply choose one near you or whose profile you like and give them a call.

How much should you disclose in the 'white space' on tax returns?

Most people are keen to minimise the prospect of HMRC opening an enquiry into their tax affairs. A recent case may make this more difficult in the future.

Where, as is often the way, the tax return or the underlying accounts include the use of any judgment a question arises if there is any possibility of the taxman taking a different view: To disclose or not to disclose?

If you disclose the uncertainty - which would include details of the transactions involved in an avoidance scheme, you may feel that you are increasing the risk of an enquiry. However this would only transpire if a suitably experienced tax officer actually reads and understands the implications of your 'white space' disclosure. Surprisingly this is quite rare so as long as your disclosure is sufficiently detailed you should only have to wait until the end of the normal enquiry window to achieve 'certainty' as regards your tax position for the period covered by your tax return. In most cases this is now simply 12 months from the submission of your tax return.

If you don't disclose the uncertainty you are at risk of the taxman making a later 'discovery' - this could occur some time into the future - certainly long after the end of the normal enquiry window.

The issues relevant to this choice changed in the light of the 2004 case of Langham v Veltema. The decision in favour of HMRC caused concern in the profession. Eventually HMRC clarified the position with Statement of Practice 01/06 which is now contained in EM3261 - Reopening Earlier Years: Discovery in SA Years. In effect this set out the level of disclosure that is required to protect taxpayers from later discovery assessments.

Last month the Scottish Court of Session again found in favour of HMRC despite the taxpayer having made what appeared to be a full disclosure on his tax return. He had 'invested' in a tax avoidance scheme and wanted to deny HMRC the right to issue a section 20 discovery notice seeking disclosure of all relevant paperwork.

The taxpayer had made what he and his advisers considered to be a full disclosure of the scheme and the tax consequences using the 'white space' on his 2003/04 tax return.

The Court held that the discovery notice was valid despite the disclosures made on the tax return as to the Capital Redemption Contract, the relevant legislation and all of the steps involved in the transaction. Such disclosures had been made in a deliberate attempt to deny HMRC the facility to make a discovery assessment after the normal deadline for enquiries into 2003/04 tax returns.

The Court determined that the disclosure in the taxpayer's tax return was insufficient and that HMRC had 'discovered' the taxpayer was involved in a specific type of packaged tax avoidance scheme. The Court also determined that the tax return disclosure did not contain sufficient detailed information about the scheme to provide the hoped for protection from a discovery notice.

There is already much misunderstanding as to when HMRC are entitled to make a 'discovery' about underpayments of tax. Many people wrongly assume that they are 'safe' after a year or two. Equally HMRC have been known to attempt to make a 'discovery' and charge extra tax when they are not permitted to do so. Even so, this latest case gives HMRC more ammunition I think. R(on the application of Pattullo) v CRC