Letters received in recent days will have caused a few people to choke on their Corn-Flakes. The banks in the Isle of Man are about to pass details for the first time to the UK tax people – the feared HMRC.
New clients have already come to us bearing these bank letters and wanting to come clean to HMRC. Wise move.
This comes about because the Isle of Man became the first offshore territory to implement the automatic exchange of information within the EU. This it has done to show it wants nothing to do with tax evasion. Guernsey is also passing information to HMRC. (Jersey has instead upped the tax they deduct to 35%, preserving confidentiality...for now.)
Until now if you had money in the Isle of Man or Guernsey you had two choices – let your details be passed to the UK HMRC – and get your interest paid gross, or maintain your secrecy and have some tax deducted by the IoM/Guernsey bank. Those days are gone.
The Isle of Man banks must now inform HMRC of your details and the interest you have earned. These new rules started from July 2011 and the first notification will be of interest earned in the year to 5 April 2012.
This raises an interesting point. You may be thinking that if the interest is small HMRC will leave you alone. Unlikely. The banks have recently dropped their savings interest rates to pitiful levels. 0.1% per year is not unknown. This means that even though the interest you got was tiny, it could suggest to HMRC that you are sitting on a much larger pile of cash.
For example of your Isle of Man interest was just £100, that could have been earned from a deposit of £100,000.
The other thing is that HMRC can go back 20 years. So long as they know you have money offshore, which you haven’t told them about, they will assume that the undeclared income is bigger in earlier years.
HMRC will also be very interested in the original source of the money. If it was invested in the past 20 years then you might also owe tax on that. For example if you did some consultancy work and put the money offshore. The income should have been taxed when earned and so HMRC would want their money.
Good news, though, for the typical offshore investor. Most people opened these accounts in the 1980s and 1990s. Money lodged over 20 years ago cannot be taxed by HMRC – they are too late. So the only thing to be taxed in the interest received in the past 20 years.
Don’t be worrying about going to jail. Unless HMRC has previously investigated you, and through that you continued to hide an offshore account, they will just take money off you. Tax, interest and penalties.
Our firm has been specialising in tax investigations like these for 20 years, and so can reassure you that we can help out even where the information is incomplete. We have built up a database of typical offshore interest rates. Thus the fact that you may be missing some or many bank statements will not stop us sorting out your tax.
The clock is ticking until all holders of undeclared Isle of Man and Guernsey accounts get a letter from HMRC. Now that really will make them choke on their Corn-Flakes!
Trust me - as the Tax Inspector in the Harry Redknapp case said - you will get an easier ride if you approach HMRC before they approach you. Don’t do it alone though!
Adrian Huston, a former tax inspector, is a director of Belfast tax and accountancy firm Huston & Co – www.huston.co.uk or 028 9080 6080.