Press Room

9 Aug 2022

Why HMRC can’t estimate the offshore tax gap – Andrew Park

Tax Investigations Partner, Andrew Park, examines the reasons why, despite enhanced international co-operation and reduced offshore secrecy in recent decades, HMRC is unable to estimate the offshore tax gap, in International Adviser.

Andrew’s article was published in International Adviser, 9 August 2022, and can be found here.

Never have HMRC had so much information about the overseas interests of UK residents.  The offshore secrecy that still prevailed at the turn of the century has all but evaporated.

What began some 15 years ago with a series of data leaks from offshore financial institutions soon made the traditional high secrecy private client business model of established offshore financial centres untenable, as too often it confirmed some of the worst suspicions of international tax authorities about the then scale of offshore tax abuse and fuelled concerted efforts to usher in a new age of global cooperation and international financial data transparency.

Under the Common Reporting Standard (“CRS”) alone now, the UK and over 100 other signatory countries – including almost every major onshore jurisdiction and almost every so-called “tax haven” from Anguilla to Vanatu – automatically annually exchange financial information about each other’s residents.  The UK also has close bilateral exchange agreements with many countries like the United States, and data leaks such as the so-called “Pandora Papers” continue.

One might assume that an HMRC now so awash with data about the overseas interests of hundreds of thousands of UK residents would be better placed than ever not just to more effectively police offshore tax abuse, but also to be able to estimate the scale of the remaining problem.  However, when put on the spot by a recent Freedom of Information request from non-profit organisation Tax Policy Associates, HMRC were forced to admit that they have made no formal attempt to estimate what proportion of the offshore financial assets they know UK residents to hold overseas are not properly disclosed on their tax returns.  HMRC are aware of c. £850bn held by UK residents overseas – of which, c. £570bn is held in traditional tax havens which levy little or no tax of their own on the holdings of non-residents.  However, HMRC presently have no clear idea how much of that is not tax compliant and what level of UK taxes are still going uncollected.

HMRC initially reaped a UK tax bonanza – as offshore secrecy fell and people who had previously wrongfully diverted funds offshore and failed to disclose the investment returns in their offshore investment accounts rushed to come forward and voluntarily disclose before they faced seemingly inevitable investigation.  HMRC’s flagship Liechtenstein Disclosure Facility amnesty – which equally applied to accounts in places like Switzerland – encouraged c. 6,000 people to come forward and pay well over £1bn in outstanding tax.

The difficulties HMRC face now are that:

  • most of the “low hanging fruit” is gone i.e. the large, blatantly undisclosed investment accounts of many UK resident and UK domiciled people have been regularised and there will be no return to them because of CRS;
  • what remains of the offshore tax gap tends not be such crude evasion but more a question of technical interpretation or advertent errors – or else, if actually deliberate, then much more cunningly orchestrated;
  • HMRC is swimming in more data than ever but has no more people and has other pressing priorities – including chasing down Covid-19 support fraud.

Faced with the deluge of offshore financial information and short of human resource, HMRC’s offshore strategy has relied heavily since 2017 on using its sophisticated CONNECT computer system – developed for it by BAE Systems – to trawl through the offshore data and cross-compare it to UK residents’ tax returns, looking for potential anomalies.  Where such anomalies have been found, that has then resulted in computer generated “nudge letters” going out to the individuals concerned suggesting that they might have something to voluntarily disclose.  HMRC has sent c. 200,000 such letters – however, they are very hit and miss.

Often, individuals receiving nudge letters are actually tax compliant, or else they’re inadvertently not compliant for complex technical reasons and still fail to appreciate that even when HMRC tries to “nudge” them to review their arrangements.  Sometimes, people who are knowingly non-compliant will choose to ignore the letters and chance a potential investigation that might never happen.  Meanwhile, the computer algorithms often fail to identify major sophisticated non-compliance because of the complexity and nuance of some of the offshore anti-avoidance rules and the need for detailed multi-factorial analysis of broader qualitative information that still isn’t readily available.  HMRC know all of this but in the absence of enough human resource to actively investigate individuals, engage with them and their advisors and scrutinise their arrangements in detail, HMRC will never know how many people are fully tax compliant.

For all of the above, the answer for HMRC is an obvious one, but it relies on it having and deploying enough human resource.  Were HMRC to open enough random compliance checks into people with known offshore connections, they would have a statistically significant sample base from which to extrapolate a reliable estimate of the remaining extent of the offshore tax gap.  It then stands to reason that were HMRC to find huge sums are still going unpaid, that would then give HMRC a business case to go to HM Treasury seeking more funding to scale up the level of compliance checks still further.  HMRC seem to be caught in a chicken and egg situation where only more compliance checks will reveal the true scale of the problem, but without being sure a major problem remains, the necessary resource cannot easily be committed – least of all, now, wholesale Covid support fraud has attracted so much public attention.  Of course, the ongoing Covid saga also demonstrates what happens when HMRC and HM Treasury produce multi-billion pound estimates of abuse and are then found wanting in their recovery statistics.  Little wonder that HMRC doesn’t presently want to create another rod for its own back where offshore is concerned.   However, that’s no excuse.  One cannot tackle a problem with one’s head in the sand.

Andrew Park

Andrew is the Tax Investigations Partner at Andersen LLP. He specialises in providing solutions to tax problems and resolving investigations and voluntary disclosures with HMRC.

Email: Andrew Park