Blog

Unexplained wealth orders

Introduced in February 2018, it remains to be seen how popular a tool Unexplained Wealth Orders (UWOs) will prove to be with the enforcement agencies when investigating suspected criminality. There have, to date, been reports of very few UWOs being sought, and it could well prove that the mere existence of the new law is seen more useful in being a deterrent.

An UWO can be granted by the High Court upon application by an enforcement authority, being: HM Revenue & Customs; the National Crime Agency; the Financial Conduct Authority; the Serious Fraud office; or the Crown Prosecution Service.

The application can be made where it can be shown that an individual, trustee, or company, is holding property with a value of more than £50,000 in circumstances where it is suspected that the person’s known income is insufficient to have paid for the assets concerned. In this regard, it is expected that income will be construed widely and include items which are not strictly recognised as income of the person concerned, such as capital profits, inheritances, and other legitimate receipts.

The application can be made ex-parte and can, and often will be, combined with an application for an interim freezing order.

Whilst the individual who is the subject of an order, and the location of the assets involved, can both be in the UK or outside, an application can be made only where it can be shown that:

  • The individual, or an associate, is, or has been, a Politically Exposed Person (PEP) and is based outside the European Economic Area (EEA); or
  • The individual, or an associate, whether a PEP or not, is based within the EEA and has been involved in serious crime in the UK or elsewhere.

In all instances, the enforcement authority must show the court that there are reasonable grounds that the criteria are satisfied but the burden of proof is not high; being less than the balance of probabilities.

A  PEP is an individual entrusted with a prominent public function by an international organisation or a State.  A serious crime is one which, inter alia, includes the fraudulent evasion of duties or taxes, and the common law offence of cheating in relation to the public revenue.

If the court is satisfied the application has merit, the court will order the individual to respond in whatever way the court determines is appropriate. This will typically demand that the respondent provides an explanation of the wealth, it sources, and provide supporting evidence, to the enforcement authority within around two months.

If, on the balance of probabilities, the respondent gives a satisfactory explanation for the legitimacy of the wealth, the property will be unfrozen, and the enforcement authority will have gained only the information provided in satisfaction of the order.

If the respondent knowingly makes a false or misleading statement in response to the order, the respondent can be liable to both a monetary fine and a custodial sentence of up to two years.

If the respondent fails, without having a reasonable excuse, to comply with the order, the property subject to the order is presumed to be recoverable property and the enforcement authority can proceed with confiscation proceedings.

It remains to be seen how UWOs will be used by HM Revenue & Customs, and especially when, inter alia, HMRC starts receiving information via the common reporting standard? Will UWOs be used by HMRC as new tool in discovery, or as a means of refreshing an existing discovery which has gone stale? Or will HMRC favour using the new provisions for account freezing orders instead?

Freezing & forfeiture of bank accounts

The Criminal Finances Act 2017 introduced new rules for the freezing and forfeiture of bank accounts. Whilst most of the headlines have been on the new provisions for Unexplained Wealth Orders, it might prove that UWOs are rarely used and that their existence is more for symbolism.

In contrast, freezing and forfeiture are likely to involve the authorities in less effort and prove to be a more useful resource for the law enforcement agencies.

 

What can be frozen?

Any or all of the balance in the account held with a UK bank or building society. Certainly, accounts held with branches in the UK are covered but it is unclear presently whether accounts held with overseas branches of UK banks etc., are within the scope of the rules.

The balance in the account must be at least £1,000, or the non-sterling equivalent.

 

How is an account frozen?

An enforcement agency can apply to the magistrates for some, or all, of an account to be frozen. An enforcement agency will be one of the Police, the Serious Fraud Office, the National Crime Agency, or HM Revenue & Customs.

To be successful, an application must convince the magistrates that there are reasonable grounds to suspect that the contents of the account are either recoverable property or that the account-holder, or any other person, will use the money in unlawful conduct.

Recoverable property is any asset which is obtained through criminal conduct in the UK, criminal conduct overseas, or conduct which although not criminal overseas would be criminal if carried out in the UK.

Importantly, there is no need for there to be a proven crime, merely sufficient to show reasonable grounds for the suspicion. The burden of proof lies with the enforcement agency, but is not a high burden and can be satisfied by showing a degree of likelihood lower than the balance of probabilities.

The application to the magistrates needs to be authorised by a senior officer of the enforcement agency concerned, and can be made ex-parte where there is a concern, as there will be in most instances, that the monies in the account will be extracted should the account-holder be put on notice of the intention to freeze the account.

 

How much in the account will be frozen?

Any, or all, of the account to the extent that the enforcement agency can satisfy the magistrates that the amount is reasonably suspected to be recoverable property or could be used in unlawful conduct.

The magistrates can carve out, and decline to freeze, a reasonable amount to pay for any of: the legal fees in contesting the freezing order; living expenses; and trade expenses of the account holder.

 

For how long can the account be frozen?

Up to two years.

 

Can the account be unfrozen?

The account holder, or any other interested person, can apply to the magistrates for some, or all, of the contents of the bank or building society account to be released.

Where an account has been improperly frozen, the magistrates can order the relevant enforcement authority to compensate the account-holder for losses suffered in consequence.

 

When can the account be forfeited ?

If, during the freezing period of up to two years, the account holder is found guilty of a relevant criminal offence, the account can be forfeited under the confiscation laws.

Otherwise, at the end of the freezing period, the contents of the bank account can be forfeited to the enforcement agency either upon the issue of a forfeiture notice by the agency or by order of the magistrates’ court.  Forfeiture is dependent on the contents of the account still satisfying the requirement of being recoverable property or the intention to be used in unlawful activity, on the balance of probabilities.

 

Tax

Many people incorrectly think that non-tax payment is not criminal but, broadly, any wrongdoing involving a knowing act of non-declaration or under-declaration could be argued to be a criminal offence. There are additionally, the acts of concealment, falsification of invoices etc., which are, perhaps, more obviously appreciated to be criminal in nature.

With HM Revenue & Customs being primarily an agency tasked with the assessment and collection of money, it has traditionally been the case that HMRC will eschew the instigation of prosecutions for tax evasion as an administrative convenience.

Put simply, it is cheaper overall for HMRC to collect in the tax, and interest and financial penalties, whilst incurring as little expense as possible. Notwithstanding, the more egregious and higher value cases will still be prosecuted to discourage others, with some 1,000 cases considered for criminal prosecution annually.

It is unlikely that HMRC will commence a markedly greater number of criminal prosecutions in the foreseeable future. However, the ability now merely for HMRC (and other enforcement agencies such as the NCA,, in particular) to show a lay bench that there are reasonable grounds to suspect, to a relatively low standard to proof, that the content of UK bank accounts is related to non-tax payment or other tax transgressions will now enable HMRC to engage the criminal law, and to do so at little cost.

It is too early to speculate over how the new account freezing and forfeiture rules will be invoked in the years ahead, and the degree to which these new rules will be used when compared to other collection routes available to HMRC such as the direct recovery of debts provisions introduced in 2015.

With the government in need of cash, and HMRC being ever more aggressive in their management of the UK tax system, it may prove likely that magistrates’ orders for freezing, and ultimately, forfeiture, of bank accounts will become a commonly used tool.

Reasonable excuse – reliance on advice

The UK tax system provides for a penalty, often tax-geared in amount, where there has, inter alia, been a failure to notify a liability to HM Revenue & Customs, or to file a return or make a payment of tax on time.

Where the taxpayer can show that he has a reasonable excuse for the failure concerned, the penalty will not be charged. There can be many circumstances in which there is such an excuse, each of which will be dependent on the facts and will be up to the taxpayer to prove to HMRC or, on appeal, to the Tribunal.

If the failure can be shown to have arisen due to the reliance by the taxpayer on a third party, such a professional agent or adviser, and that the reliance was, in itself, reasonable in the circumstances, then the taxpayer will be able to assert he has a reasonable excuse for the failure concerned.

It is the reliance on the advice which, in the circumstances, must be shown to have been reasonable and not the quality of the advice given nor the conduct of the adviser. This will typically involve a consideration of the complexity of particular matters over which advice was sought, the qualifications and experience of the adviser, and the skill and knowledge of the taxpayer.

From 1 October 2018, reliance on certain advice will no longer be a reasonable excuse against the imposition of penalties charged for offshore tax non-compliance where the tax relates to a pre-2017 failure within the requirement to correct (RTC) provisions.

The advice will be disqualified from consideration if the advice was given to the taxpayer by an interested person or by another person acting for, or on behalf of, the interested person. An interested person is one who participated in, or was remunerated for, the offshore tax avoidance concerned.

This disqualification is aimed primarily at those who have availed themselves of tax schemes which were often sold with the supposed attraction of a counsel’s opinion which confirmed that the tax avoidance scheme in question was effective. The disqualification will also, however, apply to those taxpayers who relied on bespoke advice but where that advice was, nevertheless, given by interested persons or by persons who did not have the appropriate expertise (which HMRC has interpreted to mean persons who are not professionally qualified as accountants or lawyers).

If a reasonable excuse is now to be relevant to the avoidance of penalties under the RTC provisions, the advice must have been given directly to the taxpayer by a person who is independent of the planning arrangements, suitably expert to give such advice, and who is appraised of the particular taxpayer’s circumstances.

Where possible offshore tax non-compliance has been entered into by a taxpayer in reliance on advice which is disqualified, the opportunity exists until 30 September 2018 for the taxpayer to take further advice from a disinterested adviser. If that further advice confirms that the offshore arrangements are compliant, the taxpayer should then have a reasonable excuse against penalties should the planning or other tax avoidance arrangements subsequently be held to be ineffective.

Trust Registration Service

The Trust Registration Service (TRS) is the HM Revenue & Customs (HMRC) facility, introduced in 2017, and still in need of much refinement, which serves two purposes.  It applies to express trusts, (and to certain estates, too), whether resident in the UK or overseas.

The TRS purposes are as follows:

 

  • To provide the means by which the trustees of a trust with a liability to UK income tax or capital gains tax fulfil their obligation to register with HMRC (acting in its capacity as tax authority). To this end, the TRS has replaced the longstanding form 41G, which is no longer available; and

 

  • To provide the means by which the trustees can notify, and update as appropriate, the core details of a trust to HMRC (acting in its capacity as a supervising agency) in compliance with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (SI 3027/692 – the 4th Money Laundering Directive.

 

Of these two TRS functions, the first is a one-off event, applicable only to those trusts which are not already registered with HMRC, after which the trust is given a registration number and is entered into the UK self-assessment system. Failure to register and, thereafter, to file timeous tax returns and make tax payments, exposes the trustees to the usual civil penalties.

The second function, requiring compliance with the 4th Directive, can be more onerous for the trustees to comply with. Failures in this regard can lead to the trustees being fined or criminally prosecuted.

 

When is registration required?

The need for registration on the TRS is triggered when a UK tax liability arises in the trust in a tax year from 2016-2017 onwards.

The liability must arise to the trust, and not to a company in which the trust has ownership.

The UK liability can be to: income tax; capital gains tax; stamp duty land tax; stamp duty reserve tax; or inheritance tax (but not an inheritance tax liability through holding shares in a company owning UK residential property).

Where the trust is not already known to HMRC, the registration should be made by the trustees by not later than 5 October following the tax year in which the UK tax liability first arises.

Where the trust is known to HMRC and, therefore, already within the self-assessment system, the registration should be made by 31 January following the tax year.

 

What does registration involve?

Registration requires the notification to HMRC of a wide range of information regarding the trust.

Broadly, the information is as follows:

  • Name, date of creation of the trust, the country of residence and administration, and details of the present trustee(s);
  • The name, address, date of birth, UK national insurance number or passport number for: the settlor(s); named beneficiaries; and protector or other controlling persons;
  • Details of the assets, and their value, at the time they were settled; and
  • Details for the trust’s legal, financial, and tax advisers, where applicable.

 

Updating

Once the core information for the trust has been entered on the TRS, any subsequent changes to that information will fall to be made on the register by the 31 January following the tax year in which the change occurred if a UK tax liability also arose in that particular tax year. If no UK tax liability arose in that tax year, the changes need to be made to the register by the 31 January following the next tax year in which the trust does have such a liability. (Presently, the functionality of the TRS does not allow for changes to be notified and it is expected that trustees will not be penalised for the absence of updating until the TRS is upgraded accordingly.)

 

To whom is the trust information available?

Whilst automatically being available to HMRC, the details on the register can also be made available to: the National Crime Agency; the Serious Fraud Office; the police; and the Financial Conduct Authority.  The information can also be shared with equivalent law enforcement agencies in Europe.

Presently, the information cannot be accessed by members of the public, although there must be a possibility that this will happen in the coming years.

Requirement to Correct

Introduced in 2017, the period for the Requirement to Correct (RTC) ends on 30 September 2018.

Until 30 September 2018, those who own up to offshore tax non-compliance will be subject to the current penalty regime. From 1 October 2018, enhanced penalties apply and will, in some, if not many, instances be five or possibly ten times higher in amount than was previously the case.

As such, the RTC is not a requirement but, rather, it is an opportunity for taxpayers to avail themselves of the existing penalty regime before the penalty levels are significantly increased.

 
Why not simply keep quiet?

For those taxpayers who are non-compliant, the temptation may be to continue to be silent. This is a decision for those concerned but the choice should be taken in the context of automatic information exchange, under which over 100 countries will soon be notifying each other of financial assets held by banks and other institutions in their own countries.

The UK authorities have already been receiving information from the Crown Dependencies and will start receiving information from those countries participating in the Common Reporting Standard from 1 October 2018; hence, the opportunity to correct tax irregularities before that date.

 
Who does it apply to?

Individuals, acting in their personal capacity, as members of partnerships or, possibly, as settlors, trustees or beneficiaries of trusts.

Non-UK resident companies who are chargeable to income tax and capital gains tax (but not to NRCGT).

The location of the taxpayer is not relevant but, rather, whether there is a liability to UK tax.

 
What does it apply to?

UK liabilities to income tax, capital gains tax, or inheritance tax, which relate to offshore tax non-compliance.

The liabilities must arise from a failure to declare, or an under or incorrect declaration, the over-claiming of a relief, credit or repayment, where the non-compliance could, if known by HM Revenue & Customs, have then been assessed, under the usual time limits, on 6 April 2017. (The slightly later date, of 17 November 2017 applies for inheritance tax.)

The usual time limits are, broadly, four, six, or 20 years from the end of the tax year in which the liability to income tax or capital gains tax etc., arose. The relevant limit depends on the type of behaviour which gave rise to the non-compliance, i.e., innocent, careless, or deliberate.

Where the usual time limit for HMRC action expires without the RTC being engaged by the taxpayer before 30 September 2018, that limit is automatically extended so that assessment can continue  until at least April 2021.

 
What is covered?

The enhanced penalties from 1 October 2018 will apply to offshore matters and offshore transfers. Liabilities arising on sources of income or gains etc., which are neither, are, by default, onshore matters. (The existing penalty regime will continue to apply for non-compliance concerning onshore matters.)

An offshore matter is on where tax is due on income arising from a source outside of the UK, a gain on the disposal of an asset based outside the UK, or a trade carried on outside of the UK.

An offshore transfer is where tax is due on income, or a capital gain on an asset etc., arising in the UK, and where the receipt or proceeds was received or transferred out of the UK.

In all cases, tracing applies and, therefore, the rules apply to the reinvested proceeds etc., as much as they do the original receipt.

 
What penalty rates currently apply?

The penalty charged for offshore tax non-compliance will typically be in the range of 30% to 70% of the tax concerned. In certain circumstances, the penalty can be lower or, exceptionally, higher at 100% or 200% of the tax.  The exact level of penalty will depend upon whether the disclosure to HM Revenue & Customs is voluntary, the degree of co-operation given by the taxpayer, and other similar factors.

No penalty is charged where, in the case of innocent or careless, but not deliberate, behaviour, the taxpayer is held to have a reasonable excuse for the failure or error which gives rise to the tax liability.

Where advice has been received from advisers, and relied upon by the individual who then finds himself subject to offshore tax non-compliance, it is possible, in some circumstances, for that advice to provide the individual with a reasonable excuse; this applies even where the advisers, counsel or promoters etc., were directly involved in the non-compliance concerned.

 
What enhanced penalty rates will apply from 1 October 2018?

The standard rate of penalty will be 200% of the tax concerned. As with the present regime, reductions will be given for the nature and quality of the disclosure. However, and even with full voluntary disclosure and co-operation etc., the penalty will not be reduced to below 100% of the tax.

Where the person does not voluntarily disclose their non-compliance but, rather, is caught by HMRC, the penalty will not be reduced below 150% of the tax involved.

Again, a reasonable excuse can absolve the taxpayer from a penalty. But, and in contrast, to the pre 1 October 2018 regime, reliance on another person will be considerably more difficult to achieve successfully. In particular, the post 1 October rules hold that reliance cannot be placed on advice received from persons who are not independent of the offshore non-tax compliance avoidance on which the liability arises.

 
The Way Forward

It is possible that some persons will have taken a fully-informed decision not to disclose voluntarily their offshore irregularities ahead of 1 October 2018. Instead, they will be taking their chances over not being caught by HMRC after the receipt and processing of the financial information HMRC will now shortly be receiving from other countries.

It is, however, just, if not more, likely that many persons will be unfamiliar with the enhanced level of financial penalty to which they are exposed. Whilst there was a statutory requirement imposed on relevant institutions and advisers to inform those clients of the impending changes, that requirement expired in August 2017 and anecdotal evidence suggests the warning has been ignored by many non-compliant taxpayers.

Those to whom the new rules could be relevant but who have still yet to review their non-UK affairs in this context are therefore, advised to do so without delay.

For those persons who decide on making a disclosure, notification of the fact to HMRC will need to be made by not later than 30 September 2018, after which there will be 90 days in which to agree the detail with HMRC and the opportunity to arrange a timeframe for payment of the tax etc.