High Court’s health and safety ruling in IWGB case has ‘important whistleblowing implications’
Out-Law Guide | 01 Apr 2016 | 4:50 pm | 11 min. read
Financial Institutions (FIs) in the British Crown Dependencies and Overseas Territories (together, the CDOTs) will automatically provide information relating to the financial affairs of UK resident clients in respect of 2014 and 2015. This is sometimes referred to as 'UK FATCA', as it is based on the US's FATCA regime. The Crown Dependencies include the Jersey, Guernsey and the Isle of Man (together the Crown Dependencies). The Overseas Territories include Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands (together the Overseas Territories).
This guide looks at the reporting requirements under UK FATCA and the action that account holders and financial institutions, such as banks and trust companies, should be taking.
What is FATCA?
The Foreign Account Tax Compliance Act (FATCA) is a US law, designed to prevent tax evasion by US citizens using offshore banking facilities. It requires FIs outside the US to provide information to the US tax authorities regarding financial accounts held by US nationals. FIs who do not agree to provide this information will suffer a 30% withholding tax on payments of US source income. For more information see Out-law guide to Foreign Account Tax Compliance Act (FATCA).
FI is defined very widely and includes: an entity that accepts deposits in the ordinary course of a banking or similar business (Depository Institution); holds financial assets for the account of others as a substantial portion of its business (Custodial Institution); engages primarily in the business of trading in financial instruments, managing portfolios or otherwise administering or managing funds or money (Investment Entity); or conducts certain business as an insurance company (Specified Insurance Company). This includes not only banks, insurance companies and broker-dealers but also extends to trusts and trust companies, hedge funds and private equity funds.
So that FIs can comply with their FATCA obligations without breaching data protection and confidentiality laws, the UK has entered into an Intergovernmental Agreement (IGA) with the US, which enables UK FIs to provide information required to be reported under FATCA directly to HM Revenue & Customs (HMRC), which then reports the information to the US Internal Revenue Service.
Many other governments, including those of the CDOTs have entered, or are entering into, similar agreements with the US. The UK has also entered into similar agreements with the CDOTs so that HMRC can find out about offshore accounts held by UK residents.
What is UK FATCA?
Following the FATCA model (and therefore referred to by many as “UK FATCA”), in Budget 2013 the UK Chancellor of the Exchequer announced enhanced automatic exchange of information agreements with the Crown Dependencies as part of a broader package of tax measures. The package that was agreed with the UK included:
The IGAs that the UK has entered into with the Crown Dependencies (and Gibraltar) are fully reciprocal and therefore require domestic legislation in both the UK and the Crown Dependencies to implement the agreements. For the UK, regulations implementing these IGAs, the International Tax Compliance (Crown Dependencies and Gibraltar) Regulations 2014, came into force on 31 March 2014, the regulations have since been amended (SI 2015/873).
The package of measures negotiated with the Overseas Territories closely follows those negotiated with the Crown Dependencies, in particular the information to be exchanged under FATCA and the proposed reporting timelines. However, the IGAs entered into between the UK and the Overseas Territories (other than Gibraltar) are non-reciprocal, meaning that UK FIs do not have to provide data on financial accounts held by residents of those Overseas Territories. Consequently IGAs with the Overseas Territories (other than Gibraltar) do not need to be implemented by way of domestic legislation. The UK has published additional Guidance specifically for the reciprocal IGAs with the Crown Dependencies and Gibraltar. This Guidance was last updated in September 2015.
UK FATCA was originally intended to operate from 2014 onwards with no specific end date envisaged. However, following the full implementation of the Common Reporting Standard (CRS) – a multilateral automatic exchange of information regime developed by the Organisation for Economic Cooperation and Development (OECD), UK FATCA will become obsolete. The CRS is a much broader information reporting regime, which is similar but not identical to the FATCA regime. Broadly, the CRS provides a framework for jurisdictions to obtain information from their FIs and automatically exchange that information with other jurisdictions on an annual basis. Currently over 90 jurisdictions have committed to exchanging information under the CRS. The CRS has been incorporated into EU law by the European Directive on Administrative Cooperation (DAC) and into UK law by the International Tax Compliance Regulations 2015. Reporting under the CRS is being introduced from 2016 with different countries adopting the regime at different times. In the UK, reporting requirements have been introduced for financial accounts in existence from 1 January 2016 and FIs will need to report specified information to HMRC by 31 May 2017. HMRC will then exchange the relevant information with participating jurisdictions by 30 September 2017.
UK FATCA will be phased out as the CRS is introduced. Further discussion of the CRS is outside the scope of this guide.
What accounts are covered?
FIs in the CDOTs are required to undertake due diligence to identify any 'reportable accounts' in existence on or after 30 June 2014.
'Reportable accounts' are 'financial accounts' maintained by the FI where the 'account holder' is either a UK specified person (essentially a UK resident individual, partnership or unlisted company) or is a non-UK entity the 'controlling persons' of which include one or more UK specified persons. 'Controlling persons' are individuals who exercise control over an entity. In the case of a trust, this will mean the settlor, the trustees, the protector (if any), the beneficiaries or class of beneficiaries, and any other individual exercising ultimate effective control over the trust.
In the contexts of trusts, a trust is likely to be an FI (by virtue of it being an Investment Entity) and so the 'financial accounts' maintained by the FI (the trust) is the debt or equity interest in the trust. An equity interest will be held by the settlor, any mandatory beneficiary and any other person exercising effective control over the trust. Importantly a discretionary beneficiary holds an equity interest only if and when a distribution is actually made to that person.
What needs to be reported and when?
Tax authorities in the Crown Dependencies (and FIs in Bermuda) will have up to 30 September 2016 to exchange information with HMRC for the calendar years 2014 and 2015 in relation to reportable accounts. FIs will have to provide information on reportable accounts to their local tax office (except in Bermuda) by 31 May 2016 or 30 June 2016 (depending on the CDOT jurisdiction that the reporting FI is located in). In the UK, information in respect of Crown Dependency and Gibraltar reportable accounts must be provided to HMRC by 31 May 2016 in respect of calendar years 2014 and 2015.
The information to be exchanged is set out in the IGAs and closely follows the UK/US FATCA model.
The exchange of information will be phased in with reporting deadlines and the information to be reported as follows:
Information that needs to be reported
30 September 2016
Name, address, date of birth and National Insurance Number if available of the Account Holder
Account number (or functional equivalent)
Name of the reporting institution and its FATCA identification number if available
Account balance or value at end of calendar year (or if closed, immediately before closure)
30 September 2016
In addition to the above:
For Custodial Accounts - the total gross interest, total gross dividends and the total gross amount of other income generated with respect to the assets held in the account
For Depository Accounts - the total gross amount of the interest paid or credited to the account
For any other account - the total gross amount paid or credited to the account holder including the aggregate amount of any redemption payments made to the account holder.
30 September 2017
In addition to all the above:
For Custodial Accounts - the total gross proceeds from the sale or redemption of property paid or credited to the account
Are there exceptions?
Certain pre-existing individual and entity accounts do not need to be reviewed, identified or reported. Accounts held by individuals with a balance or value that does not exceed $50,000 as of 30 June 2014 and any depository account with a balance or value of $50,000 or less does not need to be disclosed. For accounts held by entities (such as trusts) where the account balance or value does not exceed $250,000 at 30 June 2014, there is no requirement to review, identify or report the account until the balance exceeds $1,000,000.
What about UK Resident Non Domiciled individuals? (RNDs)
RNDs (broadly those whose permanent home is outside the UK) who are charged to tax on the remittance basis can elect for an alternative reporting regime (ARR) to apply.
Under the remittance basis of assessment, RNDs suffer UK tax on UK source income and gains but only on foreign source income and gains that are remitted to the UK.
The reporting will be on a fiscal year basis as opposed to a calendar year basis.
In order for the ARR to apply both the FI and the RND must have elected for the regime to apply. The reporting FI must submit a one-off election to their local tax information authority by 30 May following the end of the first relevant tax year, confirming that it is offering the ARR to its RND clients. The RND must also submit an election to the reporting FI by 30 May following the end of each relevant tax year. The election by the RND must be applied to all reportable accounts and must be an annual election.
Before applying the ARR, the FI must also obtain written and signed confirmation from the RND, no later than 28 February following the end of the relevant tax year that their UK tax return contains:
The RND must also confirm that to the best of his/her knowledge, the domicile status and claim to be taxed on the remittance basis is not being disputed by HMRC.
The reporting requirements under the ARR are different from the main reporting regime as there are two deadlines for reporting to the local tax authorities.
By 30 June following the end of the relevant tax year (ie approximately 3 months from the end of the relevant tax year) ('Reporting Date 1') the FI must report the following information in respect of the Account Holder of the reportable account:
Then, by 30 June in the following year (ie approximately 15 months following the end of the relevant tax year) ('Reporting Date 2'), the following information must be reported:
Gross payments and movements of assets in the relevant tax year includes the gross payments and movements of assets from an originating UK source (or from an originating source territory or jurisdiction which cannot be determined) into the UK reportable account and the gross payments and movements of assets from the UK reportable account to an ultimate UK destination (or to an ultimate territory or jurisdiction destination which cannot be determined), during the relevant tax year.
What can account holders do now?
Up to 31 December 2015, account holders could use both the Crown Dependency and Liechtenstein Disclosure Facilities (LDF) to disclose any potential tax liabilities to HMRC in respect of undeclared offshore assets. However, these have now expired.
The government has announced that a new disclosure facility will be available from April 2016. Full details of the facility are not yet available but it will be a temporary facility expected to be available until September 2018. The terms of the facility will be much less generous than the LDF and Crown Dependency facilities.
It is inevitable that the exchange of information will give rise to a range of enquiries from HMRC. These are often time consuming and difficult to resolve, even in cases where there are no irregularities.
Clients of offshore FIs should review their offshore arrangements to ensure that all relevant matters have been properly disclosed. If they have not, then affected account holders should obtain professional advice about using the new disclosure facility (once it becomes operational) to make the necessary disclosures to HMRC, to reduce their exposure to penalties and the risk of an intrusive tax enquiry.
What do banks need to be aware of?
Customers who contact a bank in response to a letter regarding the tax disclosure facility may either openly or inadvertently mention that there are irregularities in their tax affairs. Consequential money laundering reporting obligations for the bank will follow.
In a small number of cases the money laundering report may result in a criminal tax investigation by HMRC into the affairs of the customer and adverse publicity for the bank if the matter goes to trial.
However, in most cases a civil investigation is more likely to follow. Under the terms of the previous tax disclosure facilities, the customer would have been precluded from the beneficial terms of those facilities. This is also likely to be the case under the new final disclosure facility, if an investigation arises whilst it is operational.
At this stage it is essential for the client to seek specialist tax investigations advice to ensure that a disclosure is made to HMRC before the money laundering report is processed by HMRC.
It is recommended that banks have a panel of suitable advisers.
What do trust companies and corporate service providers need to be aware of?
Trust and corporate service providers who deal with offshore trusts and companies are likely to be FIs and will need to consider their position in respect of the financial accounts that they maintain. They are likely to find the reporting requirements under FATCA onerous, adding yet another layer to existing compliance obligations.
Fiduciaries should be aware that reporting under FATCA may draw HMRC’s attention to an offshore structure for the first time which inevitably will lead to questions and potentially an intrusive tax investigation.
There are likely to be situations where old advice has been followed, mistakes have been made in interpreting advice or incorrect advice has been given. In these situations, professional tax advice should be sought as soon as possible.
High Court’s health and safety ruling in IWGB case has ‘important whistleblowing implications’