Offshore Disclosures Facility

Time is running out

The world is changing. Offshore investments are becoming more transparent. We are already changing the way we tackle offshore evasion, taking advantage of access to more information than ever before, and shining the spotlight on hidden assets.

The way we tackle offshore tax evasion is evolving in line with HMRC’s overall approach to compliance. This maximises voluntary compliance and aims to promote good compliance, prevent non-compliance and respond to non-compliance. For the majority of our customers we will provide services that help them comply so that we reduce error and encourage accuracy. For those customers who are unwilling to comply we will use the information we have alongside information available elsewhere to find those people and take appropriate countermeasures.

Exploiting offshore account data

From this summer, financial institutions in the Crown Dependencies and Overseas Territories will be collecting data on UK residents to share with HMRC. Banks in a further 30 countries will follow suit shortly after.

HMRC will get huge amounts of personal information on offshore investments (see box). This data will allow us to:

  • Promote good compliance by designing it into systems and processes. Promote is about ensuring customers have the information they need to understand the risks they face through non-compliance; designing out and stopping careless errors; looking for risk; and helping customers to get it right first time by intervening before they interact with us (registration, filing) or we make repayments.
  • Prevent non-compliance at or near the time of filing by blocking mistakes and personalising returns. Prevent is about exploiting our digital channels, using what we know about individuals and companies to identify risks as they arise and giving customers the opportunity to correct their mistakes before they reach HMRC.
  • Respond to non-compliance by personalising HMRC’s response, enabling customers to self-correct and self-serve. Respond is about tailoring our activity when we have to intervene to address compliance risks. It means looking for ways we can automate tasks; using compliance centres to best effect; and using data to target risk more effectively so we can focus our face-to-face interventions on tackling those who bend or break the rules.

This will lead to a data-driven approach to offshore compliance, with HMRC’s activities focused on encouraging people to get it right, designing out opportunities to get it wrong, and intervening early to ensure they comply. Those who don’t tell HMRC about their taxable offshore income will be quickly caught and investigated, and may face tough sanctions.

Our high-tech data analysis system, Connect, has already made four billion connections across customer tax records and information from numerous other sources to identify areas where tax collection is at risk. We are building the data analysis capabilities that HMRC will need to hit the ground running as soon as the first data reaches the UK. We are improving our detection of risk and making greater use of customer insight to better identify and target potential tax evaders before they get things wrong.

Turning the spotlight on hidden investments

We are investing in new digital capabilities to better exploit the information we receive, including a new data capture facility to allow better analysis of information submitted through our disclosure facilities. This will help us to spot hidden patterns and better understand how people evade taxes.

We will work with partner tax administrations — including Australia, France, Germany, Spain and Italy — to build our understanding of emerging offshore threats and to develop capabilities to exploit offshore data. We will build our capabilities to tackle offshore evasion where we suspect it, ensuring our people have the skills and tools necessary to carry out investigations. For example, this year we will launch improved, up-to-the-minute training in detecting and closing down offshore evasion schemes, and on using international exchange of information agreements to track down evaders.

How we exploit data on hidden offshore assets

We are investing in new digital capabilities to better exploit the information we receive, including a new data capture facility to allow better analysis of information submitted through our disclosure facilities. This will help us to spot hidden patterns and better understand how people evade taxes.

We will work with partner tax administrations — including Australia, France, Germany, Spain and Italy — to build our understanding of emerging offshore threats and to develop capabilities to exploit offshore data.

We will build our capabilities to tackle offshore evasion where we suspect it, ensuring our people have the skills and tools necessary to carry out investigations. For example, this year we will launch improved, up-to-the-minute training in detecting and closing down offshore evasion schemes, and on using international exchange of information agreements to track down evaders.

Tough sanctions for those who fail to clear things up now

Time is running out for offshore tax evaders. Those who do not clear things up now will face a suite of tough new sanctions, specifically designed to tackle those who don’t come forward.

A new criminal offence
HMRC will consult on a new strict liability criminal offence of failing to declare taxable offshore income. If you don’t declare offshore income, you could face an unlimited penalty, and a prison sentence. We will consult on the detail of this new offence, and the appropriate safeguards, later this year. It will only apply to offshore income which is taxable and must be reported to HMRC. Our published criminal investigation policy will still apply, meaning criminal investigation will be pursued where there is a need to send a strong deterrent message or where the conduct is so serious that only a criminal sanction is appropriate.

This new criminal offence will complement our approach of increasing the number of criminal investigations for tax offences, and we will continue to investigate cases under the existing offences. As the chart below shows, we have committed to increase the number of prosecutions fivefold. This will result in over 1,000 additional prosecutions for tax evasion by the end of the 2014-15 financial year. Offshore evaders have been caught, sentenced to prison terms and the proceeds of their evasion confiscated.

Enhanced civil sanctions
Failure to declare income and gains arising offshore can already be met with tough, higher penalties worth up to 200 per cent of tax evaded. The 2013 Autumn Statement announced that HMRC would consult on strengthening the civil sanctions available for tackling offshore non-compliance.

A consultation document will be published shortly which explores a number of options for:

  • extending the scope of the offshore penalties regime to align across personal taxes and deter the use of offshore accounts to hide the proceeds of domestic evasion
  • deterring the deliberate movement of assets to avoid international agreements which tackle offshore non-compliance
  • updating the offshore penalties regime to reflect the new global standard of automatic exchange of tax information.

Changing the behaviour of offshore evaders

Our aim is that the minority who choose to evade tax offshore change their behaviour, come forward and then stay on track.The effectiveness of traditional intervention methods and financial deterrents can be limited. More cost-effective ways of influencing behaviour through public policy are being explored across Government. In HMRC, we are applying behavioural insights in new areas and learning what works well to influence taxpayers to voluntarily meet their obligations. By drawing on insight about customers and the reasons why some people evade tax, we can test and apply innovative approaches to tackle offshore tax evasion.

Using behavioural insight to deliver the new approach

We have identified four areas (see below) where we may be able to draw on behavioural insight to influence offshore tax evaders to move towards compliance.

Communications can be used to make people aware of the risks they run by evading tax offshore, especially when messages are targeted at those most likely to have offshore accounts and designed to encourage them to disclose.

We can promote voluntary compliance by focusing on interactions we can influence, such as the tax return cycle. We can draw on different insights to encourage voluntary compliance, such as:

  • Norms — highlighting positive behaviour of others
    Evidence suggests that people are more likely to comply if they know that the majority of people, and especially people they believe are similar to them, have already done so.
  • Simplification — messages and processes
    Various trials and studies have shown that simple, clear messages and streamlined, assisted processes can make it easier for customers and significantly increase the number, quality and accuracy of people’s responses.
  • Honesty — active declarations
    According to research, people are more likely to lie if they can do this by omitting information, rather than actively providing false information. There is some evidence to suggest that upfront declarations may increase honesty, though UK evidence is mixed.
  • Raising awareness — impacts and consequences
    People may not be aware of the risks and consequences for themselves and the impacts of tax evasion on public services.

Financial and criminal penalties have an important role to play in deterring offshore tax evasion. However, we know that there are other factors that are important and influence behaviour in a way which rational models of decision-making would not predict. We will use insights gained from behavioural sciences to evaluate the sanctions available for tackling offshore tax evasion, and explore whether non-financial sanctions offer a viable addition to these sanctions.

We have not yet developed firm proposals for new non-financial sanctions. However, we have indentified three ways in which a new sanction could, given further consideration and development, help influence the behaviour of potential offshore evaders.

We have identified a number of principles which will underpin the next phase of this work. Non-financial sanctions must:

  • Be evidence-based, developed out of customer insight and an understanding of human behaviour
  • Make it the default option to get things right — reserving tough sanctions for those who choose not to
  • Incentivise compliant behaviour and deter
  • non-compliant behaviour — impact on the behaviour of the non-compliant without implying that minority behaviour is more widespread
  • Sustain positive behaviour change
  • Be tested and evaluated through pilots or randomised controlled trials. As this work develops, we will seek opportunities to test our ideas with stakeholders and obtain further insight and understanding.