Given the current economic and political climate, the continued global focus on tax transparency is hardly surprising. It is clear that many governments increasingly regard the ability to obtain and exchange information as a key tool in protecting tax revenues and combating evasion.
In the UK, as in many other countries, developments in this area show no sign of slowing down. In addition to the ongoing Liechtenstein Disclosure Facility and bilateral negotiations with Switzerland and various other jurisdictions, draft legislation has recently been published to extend the powers of H.M. Revenue & Customs (‘HMRC’) to obtain information from third parties – which were already significantly increased in 2009. If enacted, the new proposals will (inter alia) increase HMRC’s ability to obtain information about certain foreign as well as UK taxes.
Summary of proposals
The proposals are intended to modernise and simplify HMRC’s third party information-gathering powers, with a view to supporting more effective risk assessment and enabling resources to be targeted at non-compliant taxpayers. This is to be achieved by introducing a single set of general rules specifying:
- the categories of third party ‘relevant data-holders’ from whom information could be requested and the ‘relevant data’ which could be required from each category of data-holder. Unsurprisingly, the terms ‘relevant data-holder’ and ‘relevant data’ are widely defined;
- the form of a notice and how it must be complied with. The new rules will allow HMRC to specify the form in which information has to be provided and the address to which it must be sent. In contrast to the current law, the address specified need not necessarily be an HMRC office (this change is apparently intended to reduce risks to data security by allowing information to be sent directly to the place where it will be used, e.g. HMRC’s data centre or the office of an HMRC information technology partner); and
- the penalties applicable for failing to comply with a notice or providing inaccurate data. The draft legislation does not impose a separate penalty for providing incomplete data. It is unclear whether this is an oversight, or whether it is assumed that the provision of incomplete data will constitute non-compliance or inaccuracy.
If enacted in their current form, the new rules will replace and extend a number of existing third party information powers which are currently spread across the tax legislation and governed by separate sets of rules. However, they will not replace the rules in Schedule 36 of the Finance Act 2008 (‘Schedule 36’), which will be retained in a slightly amended form. Schedule 36 was introduced by the previous UK government following an earlier review, and itself significantly extended HMRC’s information-gathering powers. HMRC used this power to great effect in 2009 when they successfully served notices on more than 300 UK and foreign banks and financial institutions to disclose information to HMRC about clients who have offshore accounts.
The intention is that Schedule 36 will continue to be the primary tool for checking the tax position of a taxpayer who has already been identified by HMRC. To the extent that the rules overlap, Schedule 36 will apply in priority to the new rules.
- The most eye-catching feature of the proposals in an international context is that they will allow HMRC to seek information for the purposes of ‘relevant foreign taxes’ as well as UK taxes, even in relation to taxpayers who have not already been identified by HMRC. (Although some of HMRC’s powers under Schedule 36 already extend to relevant foreign taxes, most of their current information powers only apply in relation to specified UK taxes.) For these purposes a foreign tax is ‘relevant’ if it is imposed by an EU Member State or a country with which the UK has entered into a Tax Information Exchange Agreement (TIEA) or a double tax treaty providing for information exchange.
The stated purpose of this potentially significant change is to enable the UK to meet its international obligations to exchange information, which can often apply even where the information requested by the other state is not also required for UK tax purposes. Also, HMRC anticipate that the current requirements regarding exchange of information within the EU are likely to increase in the near future. Apart from that, HMRC hope that including foreign tax in the new law will have the indirect effect of improving their prospects of obtaining more useful data from overseas tax authorities for use in tackling UK avoidance and evasion (since foreign tax authorities are generally not obliged to provide information to the UK unless the UK would broadly be able to reciprocate if it were to receive a similar request).
Although the precise implications of the proposed change remain to be seen, they could well be considerable. On the face of it, HMRC will be able to use the extended power to obtain and exchange bulk information from UK banks relating to the foreign tax position of non-UK residents, if the foreign tax is imposed by an EU Member State or a country with which the UK has a double tax treaty/TIEA.
In addition to exchanging information pursuant to an international obligation, the UK increasingly also exchanges information with other countries on a spontaneous basis. HMRC’s published guidance on information exchange already encourages HMRC staff to be alert to opportunities for providing information spontaneously to overseas tax authorities. It is possible that in some cases the extension of their information powers relating to foreign taxes will increase their ability to do exactly that.
- It should also be noted that there is nothing in the proposed new rules – or the existing rules in Schedule 36 – to prevent HMRC from requesting information from a data-holder who is not resident in the UK. Banks, trustees, nominees etc. are within the scope of the rules regardless of where they are resident.
Increased maximum penalties
__Although the proposed standard penalties for failure to comply with a notice are relatively modest (an initial fixed penalty of £300 plus a daily penalty of up to £60 for continuing failure to comply), HMRC will have power to apply to the tribunal to increase the maximum daily penalty to £1,000 where the default continues beyond 30 days. The draft legislation also inserts a corresponding provision into Schedule 36.
Right of appeal
For the first time, the draft legislation includes a right of appeal against a data-holder notice on specified grounds. However, the right to appeal is disapplied in cases where HMRC have obtained advance approval from the tribunal before issuing the notice (which they are entitled but not required to do).
HMRC are currently consulting on the proposals. Subject to the outcome of the consultation, the intention is that the draft legislation will be included in the Finance Bill 2011 and will take effect on 1 April 2012. The existing rules will continue to apply in relation to notices issued before that date.
The extension of HMRC’s powers to seek information, if enacted, will increase their ability to obtain data regarding UK (and potentially non-UK) taxpayers and their assets. Given EU developments and the UK’s wide network of double tax treaties, we can expect the collection and exchange of information to come even higher up the agenda than in the past.