The so-called tax amnesty announced this week by HM Revenue & Customs could raise as much as £5bn from up to 1m Britons with undeclared income held offshore, according to experts.

A similar initiative aimed at the several million people with undeclared income in the UK could raise billions more.

The Revenue’s “Offshore Disclosure Facility” (OFD) – the first initiative of this kind in the UK – is aimed at people with undisclosed offshore accounts. While many of these accounts could have been opened specifically to earn gross interest and in the hope of putting monies beyond the reach of the taxman, many others are held by Britons with overseas properties to pay local bills or for banking rents.

“Most people are guilty of neglect rather than fraud: we think the biggest group could be people with properties abroad,” says Paul Roberts, tax investigations partner at accountants Grant Thornton.

“There is a misconception that money that isn’t remitted to the UK isn’t taxable, but so long as you are UK resident and domiciled you are liable [and expected to declare the interest earned on annual tax returns].”

The Revenue’s deal offers individuals an incentive for coming clean about undeclared income in the form of a maximum 10 per cent penalty of the tax owed. Normal penalties charged on undisclosed liabilities are 25 to 30 per cent but can be as high as 100 per cent of the amount owed.

Roberts says the fact that individuals still stand to be penalised for voluntarily disclosing income means describing the deal as an “amnesty” is misleading. Disclosers will also still have to pay the owed tax as well as interest on that money.

People with overseas properties that have been let out could face liabilities of thousands of pounds. But Roberts adds that for people whose undisclosed income amounts to no more than £2,500 gross, there will be no penalty at all – just the tax and interest.

Most experts argue that, especially for people with relatively straightforward situations, the initiative is worth taking advantage of. “This opportunity for reduced penalties is very unlikely to be repeated,” says Stephen Camm, tax partner at accountants PricewaterhouseCooper.

Chas Roy-Chowdhury of the Association of Chartered Certified Accountants describes it as the “nearest to a tax amnesty individuals will get”. It will offer individuals “peace of mind”, according to tax adviser Chiltern.

The Revenue has indicated that most cases will be accepted without further questioning and by April 2008 individuals will know whether or not any further action will be taken.

The initiative follows legal rulings forcing the big five high street banks – Barclays, HSBC, HBoS, Lloyds TSB and Royal Bank of Scotland – to disclose details to the Revenue of customers with offshore accounts.

The recent introduction of the EU Savings Directive also requires overseas banks to inform the UK taxman when interest has been paid gross to a Briton. “Taxpayers need to understand that if they have an undisclosed offshore bank account it will be discovered,” says PwC’s Camm.

The Revenue says that it will be targeting individuals with offshore accounts who don’t come clean, and that penalties will be at least 30 per cent of the tax due and could be 100 per cent. Individuals could even face prosecution.

To take advantage of the 10 per cent penalty deal, individuals must register an intention to make a disclosure with the Revenue by June 22 2007. They must then submit their disclosure and make payment by November 26 2007. Full details of how to do this are on the Revenue’s website at www.hmrc.gov.uk.

However experts warn that individuals are expected to provide an accurate disclosure going back 20 years. Getting together the paperwork for this could be difficult before the November deadline. The Revenue also retains the right to make further inquiries into the disclosure and offers no guarantee that individuals won’t be prosecuted. For individuals with more complex situations, its existing voluntary disclosure system may offer more protection.

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