Miscalculate tax on a holiday home or inheritance? You could soon be branded a criminal

Holiday home owners and others who inadvertantly break new tax rules could be ‘criminalised’

Holiday home owners who miscalculate tax owed, and those inheriting offshore money, face having their income wiped out entirely due to new penalties and punishments being introduced in the New Year.
HM Revenue & Customs has for years been pursuing offshore evaders in an attempt to close a “tax gap” purported to reach £34bn a year.

But it has been hampered by a lack of information.

Now (NYSE: DNOW – news) , it is closing a loophole that means anyone owing UK tax for income they have earned abroad can come forward without fear of facing criminal prosecution, or paying punitive penalties.

The ending of the so-called “Liechtenstein Disclosure Facility” (LDF) on December 31 means that HMRC will now impose penalties of at least 30pc of the tax due, whereas there is now no minimum penalty, and can look back 20 years as opposed to 16 as now.

But bigger financial sanctions will be compounded by a new law that means HMRC can automatically brand people who miscalculate overseas taxes as criminals.

If you’ve got a tax liability that’s related to offshore income or capital gains it will automatically deemed to be a criminal offence under rules planned for next year and confirmed in last week’s Autumn Statement .

“This won’t just affect serial evaders but ordinary people who make a mistake with their tax or bury their heads in the sand,” said John Cassidy, a tax investigations partner at accountancy firm, Crowe Clarke Whitehall.

“After the amnesty ends HMRC will become more vigilant and less sympathetic.”

The changes come as HMRC launches an advertising campaign to warn taxpayers that automatic information-sharing between banks across the world will from 2017 enable it to catch those illegally stashing money abroad. Crucially, the data will be shared as far back as January 2016.

Here, we explain exactly what the new rules mean for your holiday home, family money or any other overseas assets.

= The ‘Liechtenstein’ amnesty it’s actually worldwide =

Time (Xetra: 17T.DE – news) is running out on the “LDF”, an agreement set up in 2009 between HMRC and Liechtenstein that offers people a chance to sort out their tax affairs with reduced penalties and immunity from criminal prosecution.

So far this year, 500 people have registered under the amnesty and HMRC plans to raise £3bn in otherwise uncollected taxes.

“There’s a misconception that this rule benefited wealthy evaders,” said Mr Cassidy. “In fact, just 16 people who have come forward owed more than £5 million.”

Crucially, it will benefit people who unintentionally underpay taxes, partly due to labyrinthine taxation rules or simply being unaware of a liability to pay tax abroad.

Tens of thousands of Britons underpay tax due on offshore assets each year, according to experts.

MAPPED: Countries where HMRC will soon access your financial data

Under OECD ‘common reporting’ that applies to income earned from January 2016

A British taxpayer with a French holiday home, for example, could be guilty of “evasion” if they deduct their annual energy bill from their taxable rental income – if they stay just one weekend in the property.

In another scenario, a holiday home owner has underpaid tax if they deduct mortgage repayments, including capital, from income tax due on the rent, as opposed to just the mortgage interest.

People who unwittingly inherit offshore wealth can also be affected.

One 92-year-old, for instance, was encouraged to come forward after discovering her late husband’s interest-bearing Swiss bank account was liable for back-taxes. Because she was a joint holder of the account, she could be deemed a criminal under the new rules.

Mr Cassidy said: “When we first met, she was genuinely shocked there was a tax bill to pay. Unusually, HMRC agreed to meet her and they were happy to reduce penalties to zero.”

In this scenario, the amnesty prevented an offshore inheritance from being completely wiped out by penalties.

You can make a disclosure by contacting HMRC and declaring all your liabilities for UK tax due after April (LSE: 0N69.L – news) 1, 1999.

= Why it will be a ‘criminal offence’ if it’s offshore =

Under draft legislation confirmed in George Osborne’s Spending Review, errant taxpayers with millions of pounds in offshore bank accounts will be automatically criminalised – but so will people who forget to file a tax return.

It (Other OTC: ITGL – news) will be a criminal offence to fail to notify HMRC about any income tax or capital gains tax that has been earned offshore, whether this relates to income, assets or activities.

Under current laws, a taxpayer can only be guilty of a criminal offence if HMRC can prove that the failure was “deliberate”.

But the “strict liability offence” laws planned for mid-2016 could also catch middle-class taxpayers who fail to properly understand how much overseas tax they should pay.

The maximum penalty is a six-month prison sentence and applies to anyone whose unpaid taxes exceed £5,000.

Take the following examples, where one of the two taxpayers would be deemed to have committed a criminal offence.

The first is a British businessman who has for many years falsified documents to extract funds and deposit them in a non-interest bearing overseas account.

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The second is an elderly person who receives interest in an offshore bank account, and pays local taxes on this income.

This person would be deemed a criminal.

Because the rules apply to income tax and capital gains tax only, the businessman would not be caught.

The legislation, which Telegraph Money understands has received widespread opposition among the major accountancy firms, appeared in the “Emergency Budget” in July, but HMRC appeared to drop the proposals.

However, draft legislation for the 2016 Finance Bill was confirmed by the Chancellor, George Osborne. He said: “The Government will introduce a new criminal offence that removes the need to prove intent for the most serious cases of failing to declare offshore income and gains”.

“Tax experts were up in arms about it,” said Mr Cassidy. “But HMRC went quiet so we assumed they weren’t taking it forward but all of a sudden it’s come back.”

He added: “It cannot be right that a person is automatically guilty of a criminal offence even if they genuinely didn’t realise that tax was underpaid – just because undeclared bank interest arose overseas rather than in Britain.”

• How HMRC ‘taskforces’ raked in an extra £109m this year

= New (KOSDAQ: 160550.KQ – news) powers to grab details from foreign banks =

Automatic information-sharing between banks across the world means HMRC will soon be able to catch evaders almost anywhere in the world.

“There’s not really anywhere for people to shelter as more and more countries begin automatic information exchanges,” said Mr Morley.

Historically-secretive Switzerland has pledged to end its committment to banking secrecy by incorporating common reporting standards by 2018.

And from January 2017, countries including France and the US will begin sharing the exact bank balances and savings interest received by UK residents – crucially, the data will be shared as far back as January 2016.

• HMRC declares an end to ‘hiding money in another country’ from January

And HMRC’s advanced computer systems mean it will be able to produce lists of individuals it considers as hig-risk within a matter of seconds.

New technology means the work of identifying high-risk taxpayers previously undertaken by inspectors can now be done via its sophisticated “connect” computer system, that processes billions of items of data, according to Richard Morley, who manages complex tax inquiries for BDO, a rival firm.

“HMRC will let the computers do the legwork and, using the new criminal offence laws, will make an example of somebody to show a bit of teeth,” he said.

“It remains to be seen how they will use their new intelligence and powers, although the rules are hardly intended to imprison unwitting taxpayers who make an innocent error or forget to declare their inherited wealth.”