Hunt is on for undeclared income

Tax investigators have vowed to extend the search for undeclared offshore income to all corners of the banking system.

Dave Hartnett, the director-general of Revenue & Customs, said that the battle to prise open secret offshore accounts of British taxpayers would affect all 550 banks in the UK, not just the five high-street banks that have been forced to divulge their offshore customers’ account details.

“It is very important to have a level playing field. We are not going to roll up our tent and go away.”

Barclays, HSBC, HBOS, Royal Bank of Scotland and Lloyds TSB have been forced to give details of about 400,000 customers’ offshore bank accounts. Revenue & Customs has estimated that it is owed £1.75bn of unpaid tax from these accounts.

But Revenue & Customs believes that the amnesty, which requires taxpayers to give information on all their offshore accounts, will give it leads about offshore accounts held with other banks. Armed with this evidence it could persuade the special commissioners, who hear and determine appeals concerning Revenue decisions, to grant it power to demand information on other banks’ offshore accounts.

Mr Hartnett said: “We are uncovering new offshore bank accounts all the time.”

Revenue & Customs has already approached other banks, seeking their co-operation. Mr Hartnett said: “We have opened up discussions with the British Bankers’ Association and we have met other banks both individually and in groups.” He said that “one or two smaller banks” that had not received notices had chosen to write to their clients to inform them of the offshore disclosure facility.

But Mr Harnett acknowledged that the structure of some banks would make it hard to unearth information on offshore account holders. For example, about half the banks on the Isle of Man are subsidiaries, rather than branches. Even though customers are not explicitly protected by banking secrecy laws, as they are in Switzerland, Manx law prohibits subsidiaries from divulging confidential details except in specific circumstances.

Mr Hartnett said a subsidiary in the Isle of Man would be outside the Revenue’s scope. But he questioned whether it was in the banks’ interests to take a defiantly unco-operative approach.

The prospect of being forced to divulge confidential details about clients’ bank accounts is a hugely sensitive issue for banks. Under the disclosure notices, they can be required to hand over information on offshore accounts that is in their “power or possession”.

The Revenue’s success in obtaining information has largely been due to some UK banks having physical possession of the data on offshore accounts, either through IT functions based in the UK or because customer relationship managers have access to offshore details. Credit cards linked to offshore accounts may also be processed in the UK, allowing the Revenue access.

But lawyers say it is questionable whether banks that did not hold information physically in the UK would have the power to force a foreign offshoot to hand over information. They argue the issue has yet to be adequately tested in the courts.

The banks that have been subject to disclosure notices failed to persuade the special commissioners that they were prevented by confidentiality constraints from divulging information.

John Avery Jones, the special commissioner who ruled in favour of Revenue & Customs in the cases involving the five high-street banks, said “it is not obvious to me that such a law [making it a crime in some foreign jurisdictions to disclose documents relating to bank accounts] is relevant to a notice given to a UK company to make available documents situated in the UK”.

The risk for banks is that the disclosure of information relating to bank accounts would, in many jurisdictions, expose them to civil claims for the breach of duty of confidentiality. In some places, such as Switzerland, criminal penalties may be incurred, making it unlikely that information on account holders is available in other jurisdictions.

Lawyers say that customers who have evaded tax may have a claim for breach of confidentiality law, but it is unlikely that a court would have much sympathy. There is a fear, however, that law-abiding customers who find themselves investigated by the Revenue might be sufficiently aggrieved to start legal proceedings.

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