Why the UK isn’t really losing £19.2bn a year to offshore tax abuse – Andrew Park

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Tax Investigations Partner, Andrew Park, explains that the UK has some of the most sophisticated anti-tax avoidance measures in the world, in Accountancy Daily.

Andrew’s article was published in Accountancy Daily, 31 May 2022, and can be found here.

For the last 20 years, successive UK governments have clamped down relentlessly on the offshore tax gap.  The UK now has some of the most far reaching and sophisticated offshore anti-avoidance legislation and some of the most draconian financial penalties for offshore related wrongdoing.

The days when UK citizens could avoid tax using contrived offshore arrangements are over.  What is more, with global information exchange agreements such as the Common Reporting Standard the days when UK residents could simply hide income generating wealth from the taxman with impunity in numbered offshore investment accounts are long over too.

Under HMRC’s Liechtenstein Disclosure Facility amnesty ending in 2015 thousands of UK residents came forward to disclose and regularise offshore investments previously hidden from the UK taxman before it was too late.  Few such people are left now and those who are face heavy financial punishments when they’re detected – depending upon the circumstances and the behaviours involved, UK civil penalties for unpaid offshore related tax can be 200% or more of the tax belatedly paid even without deliberate behaviour – a level of civil sanction seemingly unparalleled anywhere else in the world.

However, figures quoted in The State of Tax Justice 2021 – a publication released at the end of 2021 by campaigning group Tax Justice Network (“TJN”) – continue to attract press attention in suggesting that Britain loses over £19bn/ $25.5bn per annum in taxes from offshore tax abuse (not including corporate profit shifting).  How can that be?  Well, the answer is in the assumptions . . .

The TJN:

• estimates the total offshore wealth of UK citizens at c. £854bn / $ 1,133bn based on crude aggregated net capital outflows over time;
• assumes a 5% investment yield on the estimated £854bn – none of which is assumed to have been subject to UK tax or disclosed to the UK taxman;
• assumes all of its estimated c. £42.7bn of untaxed offshore income should have been taxed to UK Income Tax at the UK’s (exc. Scotland) highest 45% Additional Rate applying to annual income over £150,000.

Clearly, those assumptions are way off the mark for a whole host of reasons, not least:

• in reality, much overseas held wealth held by UK residents is actually subject to UK taxation and is declared as such – be that, for instance, on a simple arising basis or attributable under transfer of assets abroad legislation, on a matched to income and gains basis upon distributions to UK resident beneficiaries from overseas trusts or on a realisation basis upon the sale of investments or the encashment of offshore insurance bonds;
• many of us invest large proportions of our pensions overseas for, instance in US tracker funds – on which we get no additional relief and are still subject to UK tax in the end when we retire;
• holding overseas investments isn’t just restricted to those lucky enough to have UK income at or above £150,000 – the UK is a globalised and mass affluent society where in reality lots of people of modest means hold overseas investments – in my own work regularising omissions it is rare that all income gets taxed at a flat 45%;
• the report conflates “offshore” with “overseas” – much of the international wealth held by UK residents is held in other mainstream “onshore” jurisdictions with similar tax regimes to the UK and to the extent that it generates investment returns it is taxed there or in the UK – depending on the terms of the respective international treaty;
• much of the overseas wealth of British residents is not income generating – for instance, the holiday homes so many people now have in France or Spain.

Far from being one of the biggest victims of offshore tax abuse, the UK is extremely sophisticated by world standards in addressing it.  HMRC’s expertise is recognised and respected by other tax collection authorities around the world.  The UK plays a leading role in the OECD and in cooperative initiatives like the Joint Chiefs of Global Tax (“J5”) with counterparts such as the US Internal Revenue Service and the UK sends HMRC training teams to tax authorities in emergent countries to bring them up to speed with best practice as their economies become more advanced and their tax systems develop apace.

None of this means that the UK doesn’t have an offshore tax gap.  As with all tax compliance, there is always a gap between the full amount all UK residents should pay under the UK’s often complex tax laws and the collective amount that we all do.  A lot of inadvertent errors occur and there will also always be some deliberate wrongdoing.  However, the TJN’s UK estimate clearly does not bear scrutiny and misinforms the public debate here about the scale of the remaining problem.

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