LEGAL BRIEFING FROM THE REGULATORY GROUP AND THE TAX GROUP
20 FEBRUARY 2009
In 2005, HM Revenue & Customs (HMRC) stepped up its campaign to tackle the use of offshore accounts by UK residents as a means of avoiding UK income tax.
In April 2006, HMRC obtained permission from the Special Commissioners and required Barclays Bank to provide information about any bank account which was associated in any way with an offshore account . HMRC did not stop there; it obtained the same information from four other UK leading banks; this exercise is said to have generated up to one million items of information.
THE FIRST ODF
The information received would have taken the HMRC many years to process using the standard formal enquiry procedure for each individual. So, billed as a 'once-in-a-lifetime' offer, HMRC created the Offshore Disclosure Facility (ODF) to allow holders of offshore bank accounts to self-assess and report any previously undeclared income  in return for certainty of treatment and a lower fixed penalty. It thus enabled the HMRC to focus on those individuals who hold, or have held, offshore bank accounts but chose not to disclose any previously undeclared income through the ODF.
In standard cases, the cooperative tax payer who used the ODF correctly within the requisite time frame received no more than a standard penalty of ten per cent of the tax due .
The ODF was a relatively small window of opportunity. Announced in April 2007, taxpayers had until 22 June 2007 to register their intention to make a disclosure and then a further five months (until 26 November) to make a detailed disclosure, which required statements of offshore bank accounts and assets held at 5 April 2006, a formal letter to pay, a declaration that the disclosure was correct and payment or, at the very least, proposals for payment.
It may be that the short time frame caused difficulties for some individuals. In addition, ODF disclosure required details of the original source of the capital which generated the income and, if HMRC identified that it had been moved abroad to avoid UK tax and the income not repatriated, the individual was not immune from further prosecution. Perhaps some individuals thought it worth the risk of not disclosing and receiving a higher penalty if found to be guilty of tax evasion through HMRC formal investigation channels.
Nevertheless, 62,000 investors made initial notifications and approximately 45,000 of those made full disclosure and payment by the deadline of 26 November 2007 . The scheme is reported to have recovered around £400 million in unpaid revenue.
A considerable amount, but perhaps disappointing for HMRC, who forecast a possible tax yield from Barclays customers alone of £1.5 billion. Either HMRC overestimated the number of individuals with offshore accounts or the amount being held in those accounts or the attractiveness of a ten per cent fixed penalty, or all of the above. Whatever the reasons, the ODF did not generate the kind of revenue HMRC had hoped, certainly not the billions it forecast.
A SECOND ODF
When it introduced the ODF, HMRC made it clear that any disclosures made after 26 November 2007 would not be accepted and there would be no further opportunity to benefit from the 'amnesty' . Taxpayers were left under no illusion that failure to follow the exact ODF procedure would prevent them from benefiting from the reduced penalty and would leave them exposed to a full scale formal enquiry by HMRC.
And yet HMRC has announced it will implement a second ODF in 2009. Why is this? In the same way as it was successful in obtaining access to bank customer details in 2006, HMRC is in the process of targeting 150 other financial institutions and expects this to be sufficient impetus to encourage further tax evaders to take advantage of the second ODF.
There are no further details about the second ODF (specifically, the time frame for disclosure and the level of fixed penalty) other than that it is expected to be implemented this year.
So what does this mean in practice?
If you have already paid the tax due on all monies in your offshore account(s), there is, of course, nothing you need do.
If however, you, or indeed any of your clients, have undeclared tax to pay and did not take advantage of the first ODF in 2007, you should reconsider and obtain legal advice with respect to the second ODF. Remember, if your UK bank has any record of your offshore dealings, you can be sure that it has been or will be passed to HMRC who will investigate whether the funds have been declared for tax. This will now be the case with all records held by all banks trading in the UK including branches of foreign banks and many other financial institutions such as mortgage companies and credit card companies.
Any customer whose accounts show any transactions with offshore accounts or investments will come under HMRC scrutiny. If the HMRC does investigate and fraud is suspected, criminal prosecutions are likely. Anyone at risk should take advice immediately on how to minimise interest, penalties and risks of further investigation and prosecution.
For more advice contact Jeanette Burgess (nee Harwood), Head of our Regulatory Group or Simon Concannon, Head of our Tax Department.
 In accordance with section 20(8A) of the Taxes Management Act 1970
 HMRC invited evaders to disclose any non-offshore irregularities to their local tax office using the same facility within the same strict time limits and receive the same treatment.
 No penalty was charged on disclosable income under £2,500 or on pre-death liabilities of a deceased taxpayer.
 HMRC statement to the Compliance Reform Forum, November 2008
 Although not strictly an 'amnesty' - the ODF neither allowed taxpayers to declare without receiving a penalty nor did it provide them with immunity from prosecution by the tax or other authorities.