Millions of investors face tax bills of hundreds of thousands of pounds following the latest
government crackdown on offshore bank accounts.

In a landmark legal ruling this week, Barclays has been forced to hand over the details of hundreds of thousands of customers’ offshore accounts. This ruling alone is expected to generate a £1.5bn windfall from savers and investors who have failed to pay tax on such accounts.

The Revenue is now expected to turn its attention to the 35 other banks that offer both offshore and UK accounts and accountants PKF calculate that there could be £4bn in unpaid tax. This is because some three million Britons are thought to have an offshore bank account and one in five offshore account holders is thought to have failed to pay the correct tax due.

“The legal battle with Barclays is the Revenue’s latest attempt to clamp down on tax evasion and the bank was used to test whether the Revenue could lawfully demand such blanket data as documents about all customers with UK addresses and non-UK bank accounts,” says John Cassidy, PKF tax investigations partner.

He said that the Revenue’s UK-based investigation work over a number of years has shown that where there is tax evasion, an offshore bank account is often involved somewhere in the chain of the evader’s arrangements. Going direct for offshore accounts is therefore an easy way to identify much larger tax frauds.

Previously, banks were able to claim customer confidentiality but following the landmark ruling the UK’s big clearing banks are braced for demands from the Revenue to turn over details of their customers’ offshore bank accounts.

Paul Tipping, director of the British Bankers Association, said: “When asked to provide information by the Revenue, customer confidentiality is the first thing that comes to mind and so they had to go through the process of the Special Commissioners’ hearing.

“But banks are not knowingly in the business of supporting tax evasion and many are already in talks with the Revenue to provide information on their customers,” he said.

Many UK residents use offshore accounts innocently, to hold income earned overseas that may already have been taxed in the country of origin, or to deal with overseas investments and transactions for family members who may live abroad.

“But a lot of self-employed plumbers and builders tend to put money offshore because they don’t want to pay tax on their profits,” said Jeanette Harwood, head of regulatory services at Walker Morris, the law firm.

“They often have the mentality that it is ‘one job for the taxman, one job for me’ and I’ve heard of cases of people going to the airport with suitcases of money to pay into their offshore accounts when they get there.”

Others believe that the victory by the Revenue in forcing Barclays and potentially all other banks to hand over details of customers with offshore accounts, is far more significant than it seems at face value.

Cassidy says: “This is massive. In the coming months, the Revenue will receive details of just about everybody in the UK who holds an offshore bank account. This will lead to demands for an enormous amount of tax on any undeclared interest earned on those accounts.

“But the Revenue will not stop there. If the source of funds deposited in the account comes from undeclared profits, the Revenue will seek tax on those amounts as well. An example referred to in the current case concerned less than £1,000 of undeclared bank interest but led to the discovery of over £576,000 of undeclared business takings going into the account,” he said.

Ronnie Ludwig, partner in the private wealth group at Saffery Champness, the accountants, believes the undeclared interest arising on offshore bank accounts to be merely the tip of the iceberg. He says many dishonest but also often poorly advised or financially unaware people have, for some time, been conducting business in the UK, particularly cash businesses, where they have been declaring little or no profits to the Revenue, but have instead been evading tax by placing cash
profits in offshore bank deposits.

“Following their victory, the Revenue will now be in a position to trace money and launch investigations into a number of businesses operating on the black market in the UK, concurrently investigating the personal financial affairs of the business owners, their families and in some cases where the amounts hidden on offshore accounts is sufficiently high, the business associates and customers of those involved,” he said.

The penalty for non-declaration is the tax due, plus interest, plus the penalty which can be up to 100 per cent again of the tax due – in effect meaning that businesses and individuals could be hit by a crippling tax double-whammy.

Customers will be required to provide evidence that tax has been paid on the capital itself. If this cannot be proved, they will be required to pay that tax as well as the penalty charges. Substantial reductions in the penalty levels can be negotiated, however, based on the level of disclosure and co-operation given to the Revenue.

The message is clear for anyone holding offshore accounts. If undeclared interest is found, the Revenue will investigate and widen its enquiries to cover the individual’s entire business life.

“Anyone with an offshore account should seek immediate help to rectify any problems with their tax affairs. Voluntarily disclosing any omissions from their tax returns will help to minimise any financial penalties that are likely to be levied,” says Reg Day, head of tax investigations at KPMG, the professional services firm.

A spokesman for the Revenue, said: “Those who have been declaring the existence of offshore accounts as the law requires have absolutely nothing to worry about. The ruling is about
fairness.”

Get alerts on Investments when a new story is published

Copyright The Financial Times Limited 2020. All rights reserved.
Reuse this content (opens in new window)

Comments have not been enabled for this article.

Follow the topics in this article