The introduction of FATCA on 1 July 2014 and the Common Reporting Standard (“CRS”) from 1 January 2016 marks a seismic change in the way countries exchange tax information. Whilst FATCA is confined to the US and UK, CRS is global. There are over 50 countries in the early adopters group with another 25 countries committed to joining in 2017. As the number of countries continues to grow, pressure will build on the remaining countries to sign up. Both Jersey and Guernsey will implement CRS with effect from 1 January 2016, thereby committing to multi-lateral exchange of tax information.
From the Islands’ perspective, UK FATCA is a major development requiring significant changes to business models. By 30 June 2016, businesses will have to report information on their UK clients to the local tax authorities for onward submission to HMRC by 30 September next year.
Whilst HMRC has openly stated that it will review the data, the announcement of the investment in data analytics in the March 2015 Budget makes it clear that they intend to use the data to target enquiries into offshore structures and overseas businesses with a significant UK client base. Coupled with this, HMRC announced an end to the Tax Disclosure facility with the Crown Dependencies on 31 December 2015 together with increased penalties for non-payment of tax and the prospect of a new criminal offence for advisors and promoters of tax avoidance schemes.
Overall, the message from the UK is very clear. Tax evasion and aggressive tax avoidance will not be tolerated and the penalties for non-disclosure will be severe. There is also the reputational risk to the business resulting from an HMRC enquiry which experience suggests will not remain private.
Unfortunately for business, the definition of what is currently viewed as aggressive tax planning has become a moral issue with both the media and politicians entering the debate. This makes it difficult for business to assess and manage their risk but it doesn’t mean the issue should be ignored because what was acceptable a few years ago is not necessarily considered acceptable today.
From a business perspective, the risks are both to your own business and the underlying clients that you advise. For businesses on the Islands, the historic operating models which ensure that they are not subject to UK tax as a result of their staff visiting the UK need to be reviewed, particularly in the light of the introduction of diverted profits tax with effect from 1 April 2015 and the OECD review of the definition of permanent establishment. Both of these are in response to the business models operated in Europe by US high tech companies but the diverted profits in particular can have unintended consequences. In addition, the reporting of account holders to the UK in 2016 will enable HMRC to understand which businesses on the Islands have a significant UK client base and therefore could have a UK tax liability. We can expect HMRC to choose some businesses for review which, irrespective of the outcome, will require significant management time to be spent dealing with the issue and therefore disruption to the business if you have not already considered the risks, taken steps to mitigate them and clearly documented your conclusions.
The position for the underlying clients, particularly in the fiduciary sector, is also clear. In the current environment, tax planning is coming under increasing scrutiny so you need to ensure that any required UK reporting is being undertaken and that you have identified any structures which HMRC could view as aggressive. Failure to do this could result in some difficult conversations with HMRC and, looking further ahead, with other tax authorities around the globe.
Overall, the message is clear. Action needs to be taken now to review your business, identify the risks and ensure that you have a robust tax risk policy in place so that you are properly prepared to face the upcoming challenges from overseas tax authorities.
With the reporting deadline looming, protect both your business and reputation by contacting Debbie Payne in Jersey or David Waldron in Guernsey.