What is the Tax Gap and how might it affect Barristers?
Heather Taylor, Senior Manager, and Paul Roberts, Partner, of Grant Thornton's National Tax Investigation's team look at what the Government is doing to tighten up on tax compliance by those in the professional classes.
The Government's Money Problems
The Coalition Government is faced with a budget deficit of, depending on which measure you read, over £150 billion with a so called annual 'Tax Gap' of £42 billion between what HM Revenue & Customs (HMRC) believes it should collect and what actually rolls into the coffers of the Treasury. Of this figure, billions purportedly relate to tax avoidance schemes and tax evasion. The balance is just caught up in the cogs of late payment and general delay.
What can HM Government do to close that gap?
The 2010 Emergency Budget addressed the issue of money not collected by bringing in commercial debt collection agencies to work alongside the HMRC collection service. The 'Time to Pay' arrangements brought in by the previous Government were restricted and are now being more rigorously enforced, with those in genuine difficulty, 'the can't pay' taxpayers, being more closely managed to ensure that their debts are collected.
That leaves the 'won't pay' category of taxpayers who have either not registered for tax at all, or who have under-declared their true income to the UK taxman. For this category, the answer lies in a number of carrot and stick initiatives and in quasi 'amnesties' offered both generally to the tax paying public and to specific sectors of the taxpayer community.
During their term in office, the previous Government launched a series of both general and targeted 'disclosure facilities' with reduced penalties to enable non-payers to come forward and pay up. This meant that the Government was able to recoup tax on assets previously out of its reach whilst allowing those wanting to declare offshore assets and deposits a method of coming forward without hefty recriminations
Once such disclosure facility was the limited penalty amnesty for the medical profession announced earlier this year. The decision to launch the amnesty in this sector followed an investigation into payments made to medical professionals from pharmaceutical companies, insurers, and health authorities matched with those declared to HMRC. The results of this targeted exercise are believed to be good from the point of view of HMRC, as many high flying medical professionals are believed to have made disclosures of offshore assets and deposits arising from undeclared UK income.
It is now understood that HMRC is planning further targeted initiatives on other sectors of the professions, viewed by HMRC to have the appetite for tax evasion. It is rumoured that the legal profession, and barristers in particular, are high on this list of potential targets. This is because HMRC believes there may have been the scope for some in the legal profession to divert income to offshore investments without being subject to UK taxation. HMRC also has experience of finding some barristers who have practiced for many years but never actually 'joined the club' by registering for tax purposes with HMRC.
The possibility of a targeted amnesty for the legal profession should not be taken lightly. As a result, tax problems of legal professionals should be declared to HMRC by a voluntary disclosure or using any targeted 'amnesty' to avoid substantial penalties. Any future enquiries by HMRC identifying undisclosed income, particularly in offshore accounts, will carry very high levels of tax penalty, the threat of public identification and even potential prosecution.
Regarding resource, in September and October 2010 the Coalition Government announced an investment of £900 million to beef up the investigative efforts of HMRC aimed at combating evasion and harmful avoidance. There is clear evidence that this money is about to be spent on doing just that as many accountants have seen long running enquiry cases closed down by HMRC, a sure sign that seasoned investigators are being freed up to take on new work.
As well as the carrot of the amnesties, in recent years HMRC has also been equipped with a more formidable armoury of sticks with which to beat those taxpayers who have not regularised their affairs. The 2007, 2008 and 2009 Finance Acts brought in new information powers entitling HMRC to obtain information from taxpayers without reference to any particular year if a loss of tax is suspected. It also has much stronger powers to obtain information from third parties about payments to individuals.
These new powers have been coupled with a new system of penalties for tax offences which significantly ratchets up the consequences due for non disclosure. For tax periods commencing on or after 1 April 2010, there is a 'naming and shaming' regime of non disclosers owing more than £25,000 in undeclared tax. This means the publishing of the defaulter's name, details and home address on the HMRC website for a period of 12 months. The UK press are sure to have great sport with that information, if the example of similar provisions in the Irish Republic is followed, as many prominent political and professional figures have been dissected in the press when their details have been published as tax evaders by the Irish revenue authorities.
What can Legal Professionals do to protect themselves from unwelcome attention by HMRC ?
First and foremost, identify any problems in your present or previous tax history. If you are consciously understating your income to HMRC, stop doing so immediately so at least your next VAT and tax return are correct. The new HMRC penalty regime makes irregularities on returns filed from April 2009 liable to far higher penalties than before. It will be much easier to sort out the past if the problem has ceased going forwards.
Secondly, do not panic. If any income has not been declared to HMRC then decide to make a managed voluntary disclosure without delay. A voluntary disclosure will protect you from the 'name and shame' regime and will therefore protect your public professional profile.
Thirdly, contact a specialist tax investigations professional who will guide you through the most appropriate route of safely making a disclosure of any irregularities to the tax authorities to your best advantage. The specialist will identify if there is a suitable 'amnesty' or other protected route for you to make your disclosure. They will also advise you on the documentation needed to back up the disclosure you are about to make and how to frame that disclosure.
The world has become a much smaller place and information is constantly being provided to regulatory authorities by both internal institutions, external governments and overseas institutions. HMRC has been given an injection of money to feed the coming increase in enquiries and professional sectors are perceived as low hanging fruit for whom there will be little public sympathy in their pursuit by the taxman. As such, the case for making a voluntary and managed disclosure of any irregularities before the advent of higher penalties and the 'name and shame' regime is compelling.
HMRC's Tax Evasion Time-Line
2007: The Offshore Disclosure Facility followed HMRC successfully obtained details of offshore bank accounts held by UK resident customers of the then 5 UK main High Street banks. This initiative produced 45,000 disclosures and collected £450 million of tax for an outlay of about £10 million.
2008: An employee of a Liechtenstein bank allegedly took details of foreign account holders from his employers and sold the data to the German tax authorities. The Germans passed on details of around 100 UK taxpayers who were detailed in the information obtained from the renegade Liechtenstein banker. The UK tax authorities were reputedly amazed by the sums in Liechtenstein and set about registering the non disclosers for enquiry.
2009: Autumn 2009 the Liechtenstein Disclosure Facility (LDF) was launched. This offered exceptional terms to bring non disclosed offshore deposits into legitimacy, provided they have not had a UK footprint, enabling the UK Treasury to recover money of which it had no previous inkling and the Liechtenstein banking industry to retain commercial credibility. The LDF will run until 2015 and gives a real opportunity for undeclared funds to be legitimised under very favourable terms.
At the same time the 'son of the Offshore Disclosure Facility' was spawned ‑ the so-called New Disclosure Opportunity. This has yielded £82 million in undeclared tax from 5,500 disclosures.
2010: Limited penalty amnesty for the medical profession was announced following the collection of information about payments made to medical professionals from pharmaceutical companies, insurers, and health authorities. HMRC has stated such targeted 'campaigns' will be used again in the future.