We are often been asked about the disclosure of information by the banks in UK islands and overseas territories about UK taxpayers accounts abroad. 

There is already automatic information exchange in place regarding interest earned on the account in line with EUTSD (European Union Tax Savings Directive), however UK has implemented their own version of US FATCA where accounts held or controlled by UK taxpayers will be reported from 2016 with retrospective data from 2014.

Please read article by “Out Law” in more detail below.

Source: www.out-law.com 

Financial institutions in Jersey, Guernsey and the Isle of Man (the Crown Dependencies) and the Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands (the Overseas Territories) will automatically provide information relating to the financial affairs of UK resident clients in respect of 2014 onwards. This is sometimes referred to as ‘UK FATCA’, as it is based on the US’s FATCA regime.

This guide looks at the reporting requirements under UK FATCA and the action that account holders and financial institutions, such as banks and trust companies, should be taking.

What is FATCA?

The Foreign Account Tax Compliance Act (FATCA) is a US law, designed to prevent tax evasion by US citizens using offshore banking facilities. It requires financial institutions (FIs) outside the US to provide information to the US tax authorities regarding financial accounts held by US nationals. FIs who do not agree to provide this information will suffer a 30% withholding tax on payments of US source income.  For more information see Out-law guide to FATCA.

FI is defined very widely and includes: an entity that accepts deposits in the ordinary course of a banking or similar business (Depository Institution); holds financial assets for the account of others as a substantial portion of its business (Custodial Institution); engages primarily in the business of trading in financial instruments, managing portfolios or otherwise administering or managing funds or money (Investment Entity); or conducts certain business as an insurance company (Specified Insurance Company). This will include not only banks, insurance companies and broker-dealers but will extend to trusts and trust companies, hedge funds and private equity funds.

So that FIs can comply with their FATCA obligations without breaching data protection and confidentiality laws, the UK has entered into an Intergovernmental Agreement (IGA) with the US for the information required under FATCA by UK FIs to be provided to HM Revenue & Customs (HMRC) to forward to the US.

Many other governments, including those of the Crown Dependencies and the Overseas Territories have entered, or are entering into, similar agreements with the US.  The UK has also entered into similar agreements with the Crown Dependencies and the Overseas Territories so that HMRC can find out about offshore accounts held by UK residents.

What is UK FATCA?

Following the FATCA model (and therefore referred to by many as “UK FATCA”), in Budget 2013 the UK Chancellor of the Exchequer announced enhanced automatic exchange of information agreements with the Crown Dependencies as part of a broader package of tax measures. The package that was agreed with the UK included:

  • An agreement (the IGA) providing for automatic exchange of information about UK residents with accounts in the Crown Dependencies (and residents of the Crown Dependencies with accounts in the UK)
  • An alternative reporting arrangement (in the IGA) for UK Resident Non Domiciled individuals (RNDs)
  • A tax disclosure facility to enable those with irregularities in their tax affairs to correct matters with HMRC in advance of the exchange of information

The IGAs that the UK has entered into with the Crown Dependencies (and Gibraltar) are fully reciprocal and therefore will require domestic legislation in both the UK and the Crown Dependencies to implement the agreements. For the UK, regulations implementing these IGAs, the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, came into force on 31 March 2014.

The package of measures negotiated with the Overseas Territories closely follows those negotiated with the Crown Dependencies, in particular the information to be exchanged under FATCA and the proposed reporting timelines. However, the IGAs entered into between the UK and the Overseas Territories (other than Gibraltar) are non-reciprocal, meaning that UK FIs do not have to provide data on financial accounts held by residents of those Overseas Territories. Consequently IGAs with the Overseas Territories (other than Gibraltar) do not need to be implemented by way of domestic legislation. The UK has published additional Guidance specifically for the IGAs with the Crown Dependencies and Overseas Territories.

What accounts are covered?

FIs in the Crown Dependencies and Overseas Territories will be required to undertake due diligence to identify any ‘reportable accounts’ in existence on or after 30 June 2014.

‘Reportable accounts’ are ‘financial accounts’ maintained by the FI where the ‘account holder’ is either a UK specified person (essentially a UK resident individual, partnership or unlisted company) or is a non-UK entity the ‘controlling persons’ of which include one or more UK specified persons. ‘Controlling persons’ are individuals who exercise control over an entity. In the case of a trust, this will mean the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other individual exercising ultimate effective control over the trust.

In the contexts of trusts, a trust is likely to be an FI (by virtue of it being an Investment Entity) and so the ‘financial accounts’ maintained by the FI (the trust) is the debt or equity interest in the trust. An equity interest will be held by the settlor, any mandatory beneficiary and any other person exercising effective control over the trust. Importantly a discretionary beneficiary holds an equity interest only if and when a distribution is actually made to that person.

What needs to be reported and when?

Tax authorities in the Crown Dependencies will have up to 30 September 2016 to exchange information with HMRC for the calendar years 2014 and 2015 in relation to reportable accounts although FIs will have to provide information on reportable accounts to their local tax office by 31 May 2016 or 31 June 2016 (depending on the jurisdiction that the reporting FI is located in). In the UK, information in respect of Crown Dependency and Gibraltar reportable accounts must be provided to HMRC by 31 May 2016.

In respect of 2016 onwards, the information will be exchanged by the tax authorities by 30 September following the end of the calendar year in question and FIs will provide the information on reportable accounts to their local tax office by 31 May/31 June following the end of the calendar year in question.

The information to be exchanged is set out in the IGAs and closely follows the UK/US FATCA model.

The exchange of information will be phased in with reporting deadlines and the information to be reported as follows:

Calendar years Exchange deadline Information that needs to be reported 
2014  30 September 2016 Name, address, date of birth and National Insurance Number if available of the Account HolderAccount number (or functional equivalent)Name of the reporting institution and its FATCA identification number if available

Account balance or value at end of calendar year (or if closed, immediately before closure)

2015  30 September 2016  In addition to the above:For Custodial Accounts – the total gross interest, total gross dividends and the total gross amount of other income generated with respect to the assets held in the accountFor Depository Accounts – the total gross amount of the interest paid or credited to the account

For any other account – the total gross amount paid or credited to the account holder including the aggregate amount of any redemption payments made to the account holder.

2016 30 September 2017 In addition to all the above:The total gross proceeds from the sale or redemption of property paid or credited to the account

Are there exceptions?

Certain pre-existing individual and entity accounts do not need to be reviewed, identified or reported. Accounts held by individuals with a balance or value that does not exceed $50,000 as of 30 June 2014 and any depository account with a balance or value of $50,000 or less does not need to be disclosed. For accounts held by entities (such as trusts) where the account balance or value does not exceed $250,000 at 30 June 2014, there is no requirement to review, identify or report the account until the balance exceeds $1,000,000.

What about UK Resident Non Domiciled individuals? (RNDs)

RNDs (broadly those whose permanent home is outside the UK) who are charged to tax on the remittance basis can elect for an alternative reporting regime (ARR) to apply.

Under the remittance basis of assessment, RNDs  suffer UK tax on UK source income and gains but only on foreign source income and gains that are remitted to the UK.

The reporting will be on a fiscal year basis as opposed to a calendar year basis.

In order for the ARR to apply both the FI and the RND must have elected for the regime to apply. The reporting FI must submit a one-off election to their local tax information authority by 30 May following the end of the first relevant tax year, confirming that it is offering the ARR to its RND clients. The RND must also submit an election to the reporting FI  by 30 May following the end of each relevant tax year. The election by the RND must be applied to all reportable accounts and must be an annual election.

Before applying the ARR, the FI must also obtain written and signed confirmation from the RND, no later than 28 February following the end of the relevant tax year, that their UK tax return contains:

  • A claim that they are non UK domiciled
  • A claim for the remittance basis (and the charge has been paid if relevant)

The RND must also confirm that to the best of his/her knowledge, the domicile status and claim to be taxed on the remittance basis is not being disputed by HMRC.

The reporting requirements under the ARR are different from the main reporting regime as there are two deadlines for reporting to the local tax authorities.

By 30 June following the end of the relevant tax year (ie approximately 3 months from the end of the relevant tax year) (‘Reporting Date 1’) the FI must report the following information in respect of the Account Holder of the reportable account:

  • Name
  • Address
  • Date of birth (where available)
  • National Insurance Number (where available)

Then, by 30 June in the following year  (ie approximately 15 months following the end of the relevant tax year) (‘Reporting Date 2’), the following information must be reported:

  • Name, address, date of birth and NI number of the Account Holder (again)
  • Gross payments and movements of assets into and from the reportable account in the relevant tax year,
  • The account number, name of the FI and its FATCA identifying number

Gross payments and movements of assets in the relevant tax year includes the gross payments and movements of assets from an originating UK source (or from an originating source territory or jurisdiction which cannot be determined) into the UK reportable account and the gross payments and movements of assets from the UK reportable account to an ultimate UK destination (or to an ultimate territory or jurisdiction destination which cannot be determined), during the relevant tax year.

What can account holders do now?

A disclosure facility is available for each Crown Dependency to enable those with undeclared assets to come forward and disclose any potential tax liabilities to HMRC, before the automatic exchange of information begins in September 2016.

In most cases liabilities disclosed under the disclosure facilities will carry a 10% fixed penalty for years up to and including 2007/2008 and a 20% fixed penalty for 2008/2009 onwards. Full interest on the unpaid tax will have to be paid.  Under the disclosure facilities the assessment period will be limited to accounting periods/tax years commencing on or after 1 April 1999.

In some circumstances it may be more attractive to use the Liechtenstein Disclosure Facility (LDF) to disclose the irregularities, as this carries a guaranteed immunity from prosecution. See Out-law guide to the LDF.

It is inevitable that the exchange of information will give rise to a range of enquiries from HMRC. These are often time consuming and difficult to resolve, even in cases where there are no irregularities.

Clients of offshore FIs should consider using the time available between now and September 2016 to proactively review their offshore arrangements to ensure that all relevant matters have been properly disclosed to HMRC, thereby reducing the risk of an intrusive tax enquiry in the future.  Any issues which are identified can then be discussed with HMRC on a ‘no names’ basis under the terms of current tax disclosure facilities.

The ‘no names’ basis for discussions creates a neutral environment in which to debate potential issues with HMRC.  Clients who engage with HMRC in this way retain complete control over their situation and will be able to obtain reassurance and certainty from HMRC in relation to their tax position, either in advance of a tax disclosure or the proposed exchange of information.  The current disclosure facilities offer a relatively benign environment in which to resolve matters, involving no direct contact for the client with HMRC.

What do banks need to be aware of?

Customers who contact a bank in response to a letter regarding the tax disclosure facility may either openly or inadvertently mention that there are irregularities in their tax affairs. Consequential money laundering reporting obligations for the bank will follow.

In a small number of cases the money laundering report may result in a criminal tax investigation by HMRC into the affairs of the customer and adverse publicity for the bank if the matter goes to trial.

However, in most cases a civil investigation is more likely to follow but under the terms of the tax disclosure facilities which have been announced the customer would be precluded from the beneficial terms of the facility.

At this stage it is essential for the client to seek specialist tax investigations advice to ensure that a disclosure is made to HMRC before the money laundering report is processed by HMRC.

It is recommended that banks have a panel of suitable advisers.

What do trust companies and corporate service providers need to be aware of?

Trust and corporate service providers who deal with offshore trusts and companies are likely to be FIs and will need to consider their position in respect of the financial accounts that they maintain. They are likely to find the reporting requirements under FATCA onerous adding yet another layer to existing compliance obligations.

Fiduciaries should be aware that reporting under FATCA may draw HMRC’s attention to an offshore structure for the first time which inevitably will lead to questions and potentially an intrusive tax investigation.

There are likely to be situations where old advice has been followed, mistakes have been made in interpreting advice or incorrect advice has been given. In these situations the ability to have no names discussions with HMRC through the disclosure facility offers significant opportunities. Where there are areas of uncertainty this provides the possibility to clear these points in a pragmatic and non adversarial environment. Offshore service providers and their clients can also have confidence that they retain some flexibility and control over the information flows to HMRC and pace of travel toward transparency.

Source: www.out-tax.com