Tax authorities around the world have been granted powers to automatically exchange data with financial institutions in order to clamp down on tax evasion. An Automatic Exchange of Information Portal has been setup to share such data.
UK residents with off-shore investments in tax havens, and non-resident investors receiving rent from property in the UK have nowhere to hide. Investors are obligated to declare income to the relevant tax authorities or face harsh penalties.
The revised jurisdictions were introduced by the Organization for Economic Co-operation and Development (OECD). The agreement is an extension of Common Reporting Standards (CRS) around the globe.
Under the new rules, the Automatic Exchange of Information (AEOI) orders financial institutions to report account holders with evidence of overseas activity.
Tax authorities have been given extended powers to obtain reports on investments and account balances of non-residents and residents or businesses with offshore bank accounts.
The agreement intends to target individuals, businesses, trusts and foundations that are attempting to evade tax liabilities in their country of residence, or where they earn an income from property, investments or wages.
What is the Automatic Exchange of Information (AEOI)?
The AEOI means financial institutions are obliged to establish the tax residency of their account holders and report client’s living in another country of residence to the tax authorities.
If you are a UK resident and receive an income from outside the UK, this will also be reported under the AEOI.
Financial institutions includes banks, insurance companies, trusts and investment vehicles.
Among the reported income types are:
- Interest from offshore bank accounts
- Dividends from overseas companies
- Rent from overseas property
- Income from services or pensions outside your country of residence.
Reportable accounts are defined as:
- Accounts held by non-residents
- Accounts held by individuals that are classed as “undocumented” e.g. in the care of addresses or “hold mail”.
- A Non-Financial Entity where one or more of the controlling owners are reportable persons
How does this affect UK residents and investors?
If you’re a UK resident, you are obligated to inform HM Revenues and Customs (HMRC) about any taxable income you receive from overseas sources.
Failing to do so will result in tough penalties, or a potential 6-month imprisonment.
HMRC has warned anyone with offshore assets to declare their income before tougher penalties are introduced on 1 October 2018.
Residents of the British Isles and businesses registered in the UK are obligated to declare taxable income on properties abroad, or offshore bank accounts.
The authorities are keen to prevent people from evading tax by hiding earnings in former tax safe haven accounts in tax-free territories such as the Cayman Islands and British Virgin Islands.
British citizens that do not reside in the UK are not obligated to report to HMRC. However, you must still register and declare income with the tax authorities in your country of residence.
Providing their is a tax agreement between the country you live in and the United Kingdom, you will not be subjected to double taxation. You can check taxation agreements between the UK and other countries here.
Even if you live overseas and have a UK bank account, the tax office will still acquire information about your income under the terms of the AEOI.
You should be paying tax liabilities in your country of residence regardless.
What are the penalties under the AEOI?
Tax evasion penalties imposed by HMRC can range between 10% and 200% depending on the severity of the case.
Mistakes and misinterpretations on your tax return are also subject to penalties. If you are not confident about filing your tax returns yourself, it is advisable to hire a qualified professional.
A careless mistake is considered a moderate discretion and could attract a fine of up to 30% of the tax you are due to pay. A deliberate understatement on the other hand will incur a 70% penalty.
Serious offenders, on the other hand, will be hit hard. Anyone found to be deliberately misleading HMRC in an attempt to hide tax obligations could incur a 200% penalty on top of your tax obligations.
The government has also introduced a “strict liability” criminal offence which targets offshore tax evasion. Taxpayers will commit a criminal offence for any of the following reasons:
- Failure to declare taxable income or Corporate Gains Tax (CGT)
- Failure to deliver a return which discloses full liability of income or CGT
- Submit an inaccurate return in which a greater amount of income tax is payable
It is worth noting again that making an accidental error on your tax return will still result in a penalty. The only way to avoid financial penalties under the strict liability offence is if you fall under one of the following exemptions or defenses:
- It is not considered a strict offence if tax evasion is less than £25
- Taxpayers that can prove they have a reasonable excuse for failing to submit a tax return
- If you are acting in the capacity of Trustee or Executor at the time tax obligations were due for submission
Financial institutions and other agencies can also be issued with a penalty if they do not comply with Common Reporting Standards. Entities that knowingly aide and abet tax evaders could be culpable under civil and criminal legislation.
Voluntary Disclosure Scheme
British taxpayers are presented with the opportunity to admit previously undeclared tax liabilities under a voluntary disclosure scheme.
The Liechtenstein Disclosure Facility or the Crown Dependencies Disclosure Facility is considered to be the least aggressive route to coming clean.
However, under the new regulations imposed by the OECD, penalties for voluntary disclosure will still be stricter than previous legislation. Fines will start at 30% on top of what you owe plus interest.
Whilst this article is intended to advise British citizens and businesses that have tax obligations in the UK, together with foreign nationals that rent property in the UK, the AEIO extends to the majority of countries in the world.
To date, 101 countries have signed up to the tax evasion agreement – a full list of which you can find here.
Whilst there is nothing illegal with having investments overseas, everyone has an obligation to declare tax on income and capital gains.
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