Are you prepared for the UK’s new corporate criminal offence?

HandcuffsSTEP advised members earlier this year that the Criminal Finances Act 2017 received Royal Assent on 27 April 2017. The Act contains the new corporate criminal offence of ‘failure to prevent the facilitation of tax evasion’, which is anticipated to take effect in September 2017.

Even though tax evasion and facilitation of tax-related crimes are already criminal offences, it has previously been difficult to pin these offences on a corporation or partnership such as a law firm. The new legislation will create a liability on the employer for the actions of its employees and ‘associated persons’ who knowingly facilitate any tax evasion. The definition of ‘associated person’ is very wide in scope and will include employees, partners, consultants and also agents and anyone performing services for or on behalf of the company or partnership.

The Act applies to LLPs and partnerships as well as companies. It does not alter what is criminal but who should be liable for the criminal act.

There are three elements to the new offence:

1. The criminal UK or non-UK tax evasion by a taxpayer under the current law.

2. The criminal facilitation of this offence by an associated person acting on behalf of the company.

3. The company failed to prevent the associated person from committing the criminal act at stage two.

The legislation creates two new offences – a UK offence and an overseas offence. If a UK tax offence is committed then it is irrelevant if the company or associated persons are not UK-based. In accordance with the new legislation, the offence will have been committed and can be tried in the UK courts. This stance reinforces the UK’s position that any individual can be guilty of a UK tax evasion offence, regardless of their location, if they assist someone else to evade UK tax.

If non-UK tax is evaded then the company will be liable for the offence if they have a place of business in the UK, or if any of the facilitation took place in the UK.

Defence

There will be a defence available if the employer put in place reasonable prevention measures, but otherwise the offence is strict liability, and the employer may face criminal prosecution, financial penalties and reputational damage. A reasonable prevention procedure is one that ‘identifies and mitigates its tax evasion facilitation risks’ which will make prosecution more unlikely.

Advice for members

HMRC’s draft guidance dated October 2016 provides six guiding principles that companies should consider when interpreting the new legislation:

Risk assessment

Companies should assess their own risk exposure level in relation to their employees engaging in the facilitation of tax evasion in the course of business. The guidance notes that the bodies most affected by the new offence will be those in financial services, including the legal and accounting sectors. These bodies are advised to review the following additional guidance: The Financial Conduct Authority’s (FCA) guide for firms on preventing Financial Crime, the Law Society’s Anti Money Laundering Guidance, particularly Chapter 2 and the Joint Money Steering Group (JMLSG) guidance.

Proportionality of risk-based prevention procedures

It is anticipated that relying upon existing in house anti-money laundering procedures will not be sufficient to satisfy the defence of having prevention procedures in place. The guidance explores some of the varying common elements that would be considered to be reasonable prevention procedures.

Top level commitment

The top level management of each company should be committed to raising awareness and establishing safeguards intended to prevent the facilitation of tax evasion amongst its employees. Procedures include communication and endorsement of the new legislation within the company, as well as development and review of prevention procedures.

Due diligence

The company should mitigate any risks that it identifies by way of applying advanced due diligence procedures. The guidance notes that bespoke financial or tax related service companies will face the greatest risk, and that merely applying existing procedures will not be an adequate response to mitigating their exposure. New procedures are expected to be applied clearly in conjunction with the new legislation.

Communication (including training)

The company must ensure that its new prevention procedures are widely communicated and understood through internal and external communication with all employees. This communication may vary depending upon the size of the company, however training must be provided, and a zero tolerance policy for facilitation of tax evasion and its consequences must be properly communicated.

Monitoring and review

The company must put in place ongoing monitoring mechanisms and reviews to ensure that the system is effective, and it must make improvements where necessary. The company may choose to have reviews conducted by internal or external parties.

While HMRC’s guidance contains some useful terminology and case studies, it is recognised that further guidance is needed in this area. We understand that HMRC is working with industry bodies to support them in producing more specific guidance and STEP will keep you updated accordingly.

Emily Deane TEP is STEP Technical Counsel

Information exchange reporting FAQs

Emily Deane TEPWith reporting now underway in the UK for both FATCA and the Common Reporting Standard (CRS), STEP has been liaising with HMRC on some of the finer points of reporting.

Can I still submit CRS amendments?

There is some time available following the 31 May 2017 deadline for submission of amendments or corrections. If you need to submit an amendment within the first few weeks of filing then HMRC should be able to include the amendments in the first exchange scheduled for 30 September and the information will be sent to the relevant jurisdiction.

What are the penalties for late CRS reporting?

HMRC has confirmed that they will take a soft approach towards penalties in the early stages of CRS (like FATCA, the US Foreign Account Tax Compliance Act ) – particularly if there are CRS system errors that incur late filing. However, a harder approach may be taken towards people who are deliberately negligent with their filing.

FATCA: what do I do if a US TIN is unavailable?

It has previously been identified that in some cases a nine-zero approach will be accepted when a TIN (Taxpayer Identification Number) is unavailable. Some accounts are being filed with missing TINs which causes difficulties because the system will respond that it has been submitted in an incorrect format. The ‘missing TIN’ cases are inevitably causing issues for users and HMRC and HMRC is waiting for feedback from the IRS later this year on how to resolve it. It may be deemed acceptable that the nine-zero approach continues in the short term.

I have received a FATCA renewal message, what do I do?

If you have received a FATCA renewal message for an FI (Financial Institution) from the IRS then you will need to login, check that renewal is not required and confirm that. For further information see p 84 of FATCA Online Registration, which says ‘FIs notified of the potential need to renew their agreement should login to the FATCA Online Registration System and view the ‘Renewal of FFI Agreement’ page … FIs must determine if they need to renew their agreement and then must submit their determination … All FIs should follow steps 1 through 4 below to determine if they must renew their agreement’.

What is the deadline for client notification?

The UK Client Notification Regulations came into force on 30 September 2016. The obligation for practitioners to notify any clients with offshore accounts and assets that HMRC will soon begin to automatically receive data from over 100 jurisdictions relating to UK tax residents and their offshore accounts, in accordance with the UK’s automatic exchange of information agreements, must be met by 31 August 2017. See this STEP blog for more information.

STEP will continue to consult with HMRC on ongoing technical issues.

Resources:

Emily Deane TEP is STEP Technical Counsel

CRS reporting update, June 2017

Emily Deane TEPSTEP attended the most recent CRS Business Advisory Group hosted by HMRC and discussed the following issues:

FAQs

HMRC advised that new documents on the OECD portal have been published along with some additional FAQs.

Anti-avoidance

Members were interested to know when the OECD will publish its loophole paper which will review loophole reporting strategies.

HMRC advised it does not expect imminent changes to the OECD’s anti-avoidance strategy but does expect a review prior to that planned in 2019.

In the meantime, the OECD has launched a facility for parties to disclose CRS schemes which are potentially used to circumvent CRS reporting.

US TINs – invalid format

The number of the US Taxpayer Identification Number (TIN) to be submitted has to be in a certain format, otherwise the return will be rejected.

In some cases a nine-zero approach will be accepted but some accounts with missing TINs are causing difficulties having been submitted in an incorrect format. The ‘missing TIN’ cases are inevitably causing issues for users and HMRC. Members agreed that there will be problems next year when the nine-zero approach will no longer be accepted.

HMRC recognises these difficulties and has been liaising with the IRS regarding the TIN issues. A member also mentioned that the issue was being raised by industry groups in EU circles.

Invalid self-certifications

Members agreed that HMRC’s guidance is ambiguous if a self-certification is returned to the financial institution but contains errors. For example, would HMRC accept a self cert that had been returned, but not signed, in a time sensitive case?

HMRC declined to generalise on self-certification issues, stating that each example has to be judged on its own specific issues. It confirmed that it is up to the financial institution to decide whether it is satisfied that a person is non reportable. The financial institution should apply due diligence procedures based on guidance and common sense.

The mediation period and the cut off timing were also discussed. HMRC stated that it is up to the individual financial institution’s procedures as to the cut off. It was agreed that it can be a grey area with some contradictions, and in some cases the financial institution may need to decide whether a person is reportable, whilst the validation is undertaken. More clarity on this issue was requested from HMRC.

HMRC customer support

HMRC has been receiving increasing numbers of calls from clients of financial institutions, rather than the financial institutions themselves. This is causing problems, particularly when close to filing dates. As a result, HMRC has asked financial institutions to omit its contact details from notes that accompany the self-certifications, stating these are not relevant to clients and it does not have the resources to deal with additional queries.

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC.

Resources:

STEP Guidance Note: CRS and trusts
Live STEP webinar on ‘CRS and Trustees’ with John Riches TEP and Samantha Morgan TEP, 13 June

 

Emily Deane TEP is STEP Technical Counsel

HMRC consultation on 4AML implementation

Emily Deane TEPHMRC invited STEP to attend a consultation on 30 March regarding the UK’s implementation of the EU Fourth Anti-Money Laundering Directive (4AML), in particular in relation to the requirement to implement a central register of trusts.

The consultation was hosted by HMRC’s Policy Specialist, Tony Zagara, and focused on Article 31 – trust beneficial ownership. The UK trust register will be implemented on 26 June 2017 and will register trusts anywhere in the world with UK assets that generate tax consequences.

Information about the settlors, beneficiaries and trustees will be required to be reported in an annual submission and the information could be exchanged with law enforcement and competent authorities, but not the public. The focus group discussed the following key issues:

New registration system

The old paper registration system will be replaced with an online service for registration, which will be introduced in two tranches in June and September. The June online service will replace Form 41G for registering new trusts. Form 41G will be removed from HMRC’s website later this month.

The second online service will be introduced in September, which will allow users to make amendments to existing trusts online, further replacing the paper system.

Annual reporting

The trustees will need to report on the trust on an annual basis, but only if it generates tax in that tax year. HMRC was unable to clarify whether, once a trust has been registered with a tax consequence, it is still necessary to submit annual updates in the following years if it has been dormant and has not generated any further tax consequences.

The panel agreed that annual reporting would probably not be necessary if there have been no changes since the first registration, however they agreed to check and revert back on this point.

Bare trusts will be excluded from reporting and new guidance will be produced on HMRC’s landing page in due course.

Letters of wishes

HMRC said trustees should report the identities of beneficiaries who are named in letters of wishes. Every person named in a letter of wishes would need to be identified, regardless of whether they have received a payment, unless they are included as a ‘class’ of beneficiary.

Practitioners were quick to point out that this could be an impossible task for trustees.

They explained to the HMRC panel that if beneficiaries have not received payments they cannot be associated with money laundering, and if they do receive a payment they will be reported anyway under the regulations. Letters of wishes can also be changed frequently and, more often than not, without the advisor’s knowledge.

HMRC defended the reporting obligation by suggesting that letters of wishes could be used as a loophole for criminals if they were excluded from the regulations.

The general consensus of the attendees was that the word ‘vested’ should be incorporated into the definition so that default beneficiaries in letter of wishes are excluded from being reported on unless they receive a payment.

HMRC will be feeding back the discussions from the consultation to its legal team to redraft the regulations.

Consultation deadline

HMRC’s consultation paper was published on its website (see below) and the consultation closes on 12 April. HMRC is requesting responses as soon as possible since there is a short time frame following the closing date. If you have any drafting points to be incorporated in STEP’s consultation response, please email Emily.Deane@step.org by 10 April.

Emily Deane TEP is STEP Technical Counsel

New probate fees: FAQ

UPDATE 21/04/2017: the Ministry of Justice has conceded that the new fee regime has been abandoned due to lack of parliamentary time. See more information.

 

Newcastle District Probate Registry has supplied the following FAQs to help practitioners implement the new probate fees.

Q. What happens in cases where there is a need for an HMRC Assessment will any delay mean I incur the higher fee?

In cases where you are required to submit an IHT 400 or any IHT document for assessment by HMRC for Inheritance tax purposes then it is possible for you to submit the appropriate forms to both HMRC and HMCTS Probate simultaneously. We will not issue your grant until the approved IHT 421 is received but we will mark your application as lodged. To assist us in not raising this as a query it would be advisable to clearly mark your application that the IHT document will follow after assessment.

Q. Do we have the actual date of implementation?

No we do not have the actual date of commencement yet. However we can assure you that on receiving that date a mail shot will be released immediately informing you of that date. HMCTS Probate would however like to work with you now to ensure that we reduce as much as possible the added burden on applications nearer that date. You can assist us in doing this by following the steps in the mail shot sent to you on Monday 6th March.

Q. How do I calculate the estate value that the fee will be charged upon?

The fee is calculated from the net value of the estate after deducting liabilities or debts from the total of assets and gifts – you can do this using the appropriate Inheritance Tax form.

  • On an Inheritance Tax Summary Online application this figure will be the figure noted in the net estate value box
  • On form IHT 205 the net estate value for fees purposes can be found at Box F
  • On form IHT 207 the net estate value for fees purposes can be found at Box H
  • On form IHT 421 the net estate value for fees purposes can be found at Box 5

Q. What is considered as a full application?

A full application for Probate purposes and therefore to qualify for the appropriate fee is defined as the following. It must include:

  • An full oath sworn by all deponents and commissioners
  • An original will and codicil(where appropriate) endorsed by all commissioners and deponents
  • The appropriate number of correct copy wills an codicils
  • An Inland Revenue account (with the exception of IHT 400’s/421’s where assessment is ongoing and it has been noted on the covering letter that it will follow)
  • All associated documents including any affidavit evidence required at the time of submission, renunciations, Powers of attorneys
  • The appropriate fee.

Upon receipt of an application in this form prior to commencement then the existing fee will be charged.

Settlers and Prelodgements are not considered as full applications and therefore submission of an oath for settling prior to commencement and a subsequent oath after commencement will result in the new fee being applied.

Q: When will the new fees be implemented – at date of death or date of application?

The new fees will apply to all applications received by the probate service on or after the implementation date of the new fees irrespective of the date of death. Any application received within working hours of the Probate Registry before the implementation date will be charged the current fee. Subject to approval of the necessary legislation by Parliament, we expect the new fees to take effect from May 2017, but the exact date will be confirmed nearer the time.

Q Is there to be any equivalent of the IHT instalment option for an asset rich / cash poor estates?

There will not be an instalment option available to pay fees. If the estate does not have enough cash to pay the fee, executors will be able to apply to the Probate Service to access a particular asset for the sole purpose of paying the fee.

Q. How does the new fee affect property held between cohabitating couples?

The law remains the same. Any jointly owned assets (e.g. property held as joint tenants) will not require probate, regardless of whether couples are married, in a civil partnership or neither. All couples are free to choose how they hold their property, and they can change to a joint ownership arrangement via the Land Registry.

HMRC: no more safe havens

Treasure chestThis week STEP hosted a seminar to update members on HMRC’s latest moves to tackle tax evasion and avoidance.

Entitled, ‘An essential update on HMRC’s activity to tackle tax evasion and avoidance, including information exchange, new powers and its impact on professional advisors,’ the seminar took place at BDO LLP’s office in London. Speakers included John Shuker from the HMRC International & Offshore Evasion Team, and Dawn Register TEP of BDO LLP.

The introduction of the Common Reporting Standard (CRS) this year follows a raft of governmental efforts including the Foreign Account Tax Compliance Act (FATCA) and the EU Directive 2003/48/EC (the EU Savings Directive) to improve cross-border tax compliance. The Offshore Evasion Team has focused on clamping down on UK tax evaders, in particular:

• Moving UK gains, income or assets offshore to conceal them from HMRC
• Not declaring taxable income from overseas, or taxable assets kept overseas
• Using complex offshore structures to hide beneficial ownership of assets.

The tax gap for 2014-2015 is estimated to be GBP36 billion, with GBP 5.2 billion attributed to tax evasion.

HMRC launched the campaign ‘No Safe Havens’ in 2013 with the objective of ensuring that there are no jurisdictions where UK taxpayers can hide their income and assets. It also implemented a number of disclosure facilities to give people the incentive to come forward and pay tax voluntarily, before they are detected and sanctioned.

In the last two years, HMRC has vigorously escalated its tax evasion strategy. The Worldwide Disclosure Facility opened last September, in addition to a new requirement for all financial institutions and tax advisers to notify their customers about new automatic exchange of information agreements.

The following further measures are due to be implemented in 2017:

Corporate Criminal Offences of Failure to Prevent Facilitation of Evasion
This will apply to corporations who fail to prevent their agents from criminally facilitating tax evasion (facilitating evasion is already considered a criminal offence). The offences will apply to domestic or overseas corporations whose agents facilitate the evasion of UK taxes, or a domestic corporation which facilitates the evasion of tax overseas.

Tackling Offshore Tax Evasion: A Requirement to Correct
Taxpayers will be obliged to disclose any outstanding UK tax related to offshore investments or assets, or face ‘failure to correct’ penalties. These penalties will be significantly higher than for those who voluntarily put their affairs in order, and will be a minimum of 100%.

STEP’s Technical Committee has submitted responses to a variety of HMRC’s consultation papers relating to tax evasion below:

 

Emily Deane TEP is STEP Technical Counsel

CRS and Charities: January 2017 update

Donations boxHMRC hosted another Charities CRS working group on 16 January. The following issues were on the agenda for discussion:

Anti-Avoidance Rules

HMRC would like to refine its currently broad regulation regarding anti-avoidance. It is scheduled to discuss it with the compliance team shortly. It will also be reviewing the anti-avoidance issues surrounding donations channelled through other charites and some more detailed guidance is expected to be issued shortly thereafter.

Trust Guidance

HMRC is in the process of preparing some guidance with the OECD focusing on some of the grey areas surrounding trusts. STEP has produced a memorandum on the issues of concern on how the CRS is intended to apply to trusts, persons connected with trusts and trust assets. The memorandum sets out our understanding of the application of the CRS in certain circumstances and highlights points of uncertainty in the reporting framework. We have submitted the paper to HMRC and the OECD and hope that it will form part of the additional new OECD guidance.

Human Rights

HMRC has issued new guidance, Charities: Protection on Human Rights Grounds, which will assist charities concerned about the human rights implications associated with information they are required to report under the automatic exchange of information (AEOI) agreements. HMRC recognises that there may be cases where the threat to an individual’s human rights as a result of his or her information being exchanged may justify information being redacted from that transmitted. The guidance covers the redaction of information on human rights grounds; threats to human rights, and safeguards already in place; and how to apply for redaction of information, including the HMRC process and the documentation required.

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC.

 

Emily Deane TEP is STEP Technical Counsel

Are you a Trust or Company Service Provider under Schedule 23?

UK Emily Deane TEPHMRC has confirmed today that firms that advise their clients on the establishment of offshore companies or trusts may receive pre-Notice letters this month.

The letter requests that advisors come forward and volunteer the following information to HMRC: name and address of the client, the entity details (name, jurisdiction, date of registration) and details of persons with beneficial ownership or interest in the entity. Following the issue of the pre-Notice letters the formal Notices will be issued under Schedule 23 of the UK Finance Act 2011 in February 2017.

STEP and the Law Society of England & Wales have been in protracted talks with HMRC about this issue over the last year. There are concerns about the potential breach of legal professional privilege, access difficulties to the relevant data and the definition of Trust or Company Service Providers (TCSPs).

HMRC has launched this initiative in order to gather information on the beneficial ownership of offshore companies and beneficial interest in offshore partnerships, trusts and other entities from UK-based TCSPs or their overseas subsidiaries. However, the definition of a TCSP in this connection is a little uncertain. The Money Laundering Regulations 2007 (MLR) incorporate the meaning of a TCSP within regulation 3:

’10) “Trust or company service provider” means a firm or sole practitioner who by way of business provides any of the following services to other persons—

(a) forming companies or other legal persons;

(b) acting, or arranging for another person to act—

      (i) as a director or secretary of a company;

      (ii) as a partner of a partnership; or

      (iii) in a similar position in relation to other legal persons;

(c) providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or any other legal person or arrangement;

(d) acting, or arranging for another person to act, as—

      (i) a trustee of an express trust or similar legal arrangement; or

      (ii) a nominee shareholder for a person other than a company whose securities are listed on a regulated market,

when providing such services.’

We believe that the most likely scenario whereby a UK practitioner will be classed as a TCSP is under section 10(d) when the UK practitioner arranges for another person to set up the entity offshore. It is not entirely clear whether this would  be a formal referral to another firm, involving a transaction fee, or whether an informal recommendation of an offshore firm is sufficient to trigger the classification as a TCSP.

Regulation 6 of the MLR sets out in detail which persons should be treated as though they are beneficial owners for the purpose of Anti-Money Laundering. Those categories are:

  • any individual who is entitled to a specified interest in at least 25 per cent of the capital of the trust property
  • any trust, other than one which is set up or operates entirely for the benefit of individuals, falling within sub-paragraph (a) the class of persons in whose main interest the trust is set up or operates
  • any individual who has control over the trust.

There is a £300 penalty for initial non-compliance, followed by daily penalties of up to £60 if the non-compliance continues. The TCSP will have 90 days to respond with the requisite information.

We understand that the Notices are only being sent to a select number of firms in February and HMRC has not issued any guidance at this time, therefore please contact emily.deane@step.org if you have any queries.

Emily Deane TEP is STEP Technical Counsel

The UK Client Notification Regulations – what is your obligation?

The UK Client Notification Regulations came into force on 30 September 2016 and the obligation for practitioners to notify any clients with offshore accounts and assets must be met by 31 August 2017.

The objective of the Regulations is to ensure that clients have advance warning that HMRC will soon begin to automatically receive data from over 100 jurisdictions relating to UK tax residents and their offshore accounts, in accordance with the UK’s Automatic Exchange of Information (AEOI) agreements.

Financial institutions that provide offshore advice (‘Specified Financial Institutions’ – SFIs) and practitioners who provide clients with advice or services relating to offshore income or assets (‘Specified Relevant Persons’ – SRPs) that is not disclosed in their clients’ tax returns are required to send each of their clients a Client Notification Letter advising them that their offshore tax information will be shared with HMRC under the Common Reporting Standard (CRS).

The notifications are only applicable to individuals and there is no obligation to notify companies or trusts.

There is a flat-rate penalty of GBP3,000 per SRP or SFI for not complying with the notification requirements.

SRP obligations

HMRC advises that if you are an SRP there are two options that you may wish to consider when identifying the relevant clients:

  1. To notify all of your clients for whom you have not submitted a return, or
  2. To specifically target the clients to whom you have provided offshore advice or services or referred offshore advice or services.

SFI obligations

If you are a financial institution that maintains an offshore account for an individual or have referred clients to a financial institution, wherever located, for the purpose of opening an offshore account you will need to send notifications. The two options in this connection are:

  1. Notify all account holders who have an account balance in excess of USD1 million in the UK, or
  2. Notify all account holders who are tax resident in the UK for whom the SFI maintains a financial account overseas, or who they refer to another financial institution to provide an overseas account.

Further information and guidance on what needs to be included with your notification letter is available here.

The HMRC-branded Client Notification Letter is available here.

We have been informed that the HMRC team will be happy to take queries in this connection at elinor.crockford@hmrc.gsi.gov.uk and mark.scott4@hmrc.gsi.gov.uk.

See my earlier Blog of 14 September 2016 for further information on the International Tax Compliance (Client Notification) Regulations.

Emily Deane TEP, STEP Technical Counsel

CRS and Charities October update

Emily Deane TEPHMRC hosted another Charities CRS working group on 12 October. The following issues were on the agenda for discussion:

Human Rights Guidance

  • HMRC has been collecting examples from the working group to increase transparency and address concerns where the exchange of information could put individuals at risk. Its new guidance has addressed some of these concerns.
  • It was pointed out that HMRC has highlighted the absolute rights within the Human Rights Act, but it does not refer to the qualified rights of individuals, and these should also be considered.

Discretionary Management

  • Some discretionary management scenarios were discussed by the group and it was suggested that HMRC provide examples of these in its guidance.

    HMRC noted that it was difficult to provide examples to cover every scenario, because the facts of each individual case will determine whether or not it falls within the scope of CRS. However, it agreed to continue to refine its guidance where possible.

  • HMRC confirmed that simply setting parameters for an investment manager (for example that he/she may only invest in ethical investments) does not mean that discretion is retained by charity trustees.

Communications

  • HMRC will be producing a webinar for charities setting out a basic introduction to CRS, which should be available before December.
  • HMRC was asked to produce a proforma for charities to use when completing the self-certification process. It advised that while this was not possible, some examples on the OECD automatic exchange portal might be useful instead.
  • HMRC has been hosting some CRS Charity events in conjunction with STEP. If you would like more information please contact Emily.Deane@step.org

STEP will continue to attend the periodic working group to discuss ongoing technical issues with HMRC. The next meeting is in January.

 

Emily Deane TEP, STEP Technical Counsel