Amnesty for offshore bank account holders

On 17th April HM Revenue & Customs (HMRC) announced a form of amnesty for holders of offshore bank accounts not previously disclosed to them. This follows Court action by HMRC to force banks to divulge details of accounts held outside the UK. With some limited exceptions (for example, people who are not domiciled in the UK), individuals who live in the UK are taxable here on all interest arising on offshore accounts, but it seems that many account holders have not been declaring the interest on their UK tax returns. The amnesty is HMRC’s latest move in the campaign to bring about full disclosure.

Anyone holding a previously undeclared offshore account has until 22nd June 2007 to tell HMRC that they intend to make a disclosure. They then have until 23rd November 2007 to calculate and pay over the tax.

Calculating the tax can be more complicated than you might think. Take the example of a taxpayer whose total income for the tax year ended 5th April 2005 was £36,145, just touching the higher rate threshold. If the undeclared interest income is £10,000, you might expect that this would be taxed at 40%, giving a tax liability of £4,000. However, if the previously declared income includes gross dividends of £10,000, it is these dividends that are shifted into the higher rate tax band, increasing the total tax liability by £4,250.

The taxpayer will still be liable for interest on the late payment of this tax. Interest on unpaid tax currently runs at 7.5% a year, though the rate has fluctuated and was as low as 5.5% for the period from August to December 2003.

In addition to the interest, however, any disclosure would need to address the question of where the money in the undeclared account came from. If that was, for example, from undeclared profits etc, then the taxpayer will need specialist advice on making a disclosure of those sources. However, as long as full disclosure is made, the amnesty terms will be available.

The benefit of the amnesty comes in the calculation of penalties. If the undeclared interest is below £2,500 in total, there will be no penalty. For higher amounts, there will be a fixed penalty of 10% of the unpaid tax. This compares with a likely penalty of 50% or more that HMRC could apply for continued non-disclosure.

The amnesty terms will also be extended to previously undisclosed UK accounts. HMRC has for many years had information on UK accounts from the banks, and so it should be less likely that an account has escaped their notice. However, anyone who holds a UK account, where the interest has been missed off his or her tax return, would be well advised to also take advantage of the amnesty. Once again, the taxpayer will need to ensure that the source of the funds has also been declared.

HMRC has not ruled out the possibility of criminal prosecution in the worst cases. However, we would expect prosecution to be considered only in particularly large and high profile situations, for example where professionals are involved.

Anyone needing advice in this difficult area should contact our specialist Ray Cadman, who has many years of experience in helping clients to deal with HMRC on these matters.