By Lorna Bourke -
LONDON (Citywire) - You can run but you cannot hide from the tax man, even abroad, especially after new EU rules come into effect this Friday.
Anyone with money in an overseas bank account who hasn't been declaring the interest and has been evading tax, should be aware that new EU rules come into effect on 1 July and you will either have tax deducted at source by the offshore bank, or your details will be given to HM Revenue & Customs.
And subtle changes to the rules on inheritance tax could give the tax man even more information about you and your family's assets.
If details are sent to the taxman there will inevitably be a back tax investigation and will almost certainly result in severe fines and penalties. There can be only one reason why UK residents do not declare interest from offshore bank accounts and the taxman takes a dim view of deliberate tax evasion. Arguing that you didn't know that it had to be declared is not likely to be accepted as an excuse.
The EU Savings Tax Directive requires banks throughout the EU, the Channel Islands, the Isle of Man, Gibraltar and a number of other territories, including the Cayman Islands, to either deduct a withholding tax from depositors, or disclose their identity to their home tax authority.
And it is no use thinking you can simply move your money to another country - unless you are prepared to take risks. Because all the safe tax havens, Switzerland, Andorra, Liechtenstein, Monaco and San Marino have all agreed to deduct withholding tax from accounts, even though they have not signed up to the directive.
The directive also extends far beyond European shores to the Caribbean dependent territories of the United Kingdom and the Netherlands including Anguilla, Aruba, British Virgin Islands, the Cayman Islands, the Netherlands Antilles and Turks & Caicos. Curiously, Hong Kong and the Bahamas appear to have been left out.
The options are not good and could result in basic rate taxpayers having more tax deducted at source than if they declared the interest in the UK. The overseas bank will not reveal a customer's identity without their consent, so there will be some warning of impending tax investigation. But the effective rate of withholding tax will rise from 15 percent for the first year, to 35 percent by 2011 - more than the 22 percent liability in the UK.
The EU Savings Tax Directive only covers individuals, not companies, as the EU believes companies are already subject to close scrutiny by the tax authorities. Trusts are also excluded. But this may prompt many individuals to set up an offshore company or trust in order to continue to evade tax.
The minimum amount of information that 'paying agents', banks and other financial institutions, will be required to pass on to the tax man will consist of: identity and residence of the beneficial owner, name and address of the paying agent, account number of the beneficial owner, including the amount of interest income earned, plus information regarding any proceeds from sale, redemption or refunds. According to the directive, communication of this information will be 'automatic and take place at least once a year'.
Austria, Belgium and Luxembourg have opted to apply withholding tax but the other EU member states will operate an exchange of information, supplying details of accounts held to the individual's home tax authority. Accountants are calling for a tax amnesty to encourage individuals to bring their money back onshore. But Revenue & Customs is not likely to agree to this. When the then Inland Revenue tried to encourage people working in the black economy to become legitimate taxpayers some years ago, the Revenue refused to waive any back tax owing.
Rather provocatively a spokesperson for HM Revenue & Customs has said that anyone, "with any concerns should not hesitate to get in touch with us. We have sophisticated processes to target those in the hidden economy. We work closely with other agencies, including sharing intelligence to uncover tax avoidance. Those who cheat the system will be subject to our scrutiny sooner rather than later".
And the newly merged HM Revenue & Customs is using its increased powers to get tough on all fronts. It recently admitted that there has been a quiet change in the rules on Inheritance Tax, requiring executors to file details of the estates of deceased individuals - even when the estate has no liability to IHT. This even applies to transfers on death between husbands and wives where there is absolutely no liability to IHT however large the estate.
Up until now, only estates falling between the 'excepted estate' threshold of 240,000 pounds and the nil-rate band - currently 275,000 pounds, and those over the IHT threshold - would have to file a full return, known as IHT200. Any estate worth less than 240,000 pounds would not have needed to file a Revenue return. In the past solicitors would swear an oath that the estate was not liable to pay IHT if it was below the 240,000 pounds.
Accountants believe that the Revenue's intention is to see whether an individual had been paying the right amount of income tax during their lifetime and to recover any unpaid tax from the estate. The Revenue is likely to look carefully at any estate with, say 100,000 pounds in a deposit account, if the individual had only been declaring the basic state pension.
The Revenue describes the changes as a simplified regime. Executors will have to give details of all assets, including bank and building society accounts, shareholdings, bonds, and the tax district involved. Around 6 percent of estates are liable to IHT and have assets in excess of 275,000 pounds. This number is set to grow fast as the value of houses has more than doubled since 1998. Government statistics show that 294,545 estates were granted probate last year which means that if the new requirements were in place today, 246,872 extra estates would now need to file a return.
All executors winding up an estate for probate - that is any estate worth more than 5,000 pounds - will have to tell the Revenue exactly what assets have been left, even if the assets fall below the 275,000 pounds threshold above which IHT is payable. The new form is four pages long, and has a 28 page booklet on how to complete the form with, 16 pages of notes.
Accountants have described the changes as a fishing expedition and they are concerned that the Revenue is compiling a databank of assets held. This would allow them to spot immediately if assets declared on the death of, say, the husband, did not appear on the declaration of assets on the death of the wife. They would then mount an investigation to check where the assets had gone. Over time the Revenue will be able to build up a comprehensive inventory of all assets held privately.
(c)2005 citywire.co.uk
Source: Reuters
