HMRC investigating offshore accounts - what banks should be aware of

United Kingdom

HMRC are likely over the next few months to put banks under pressure to release information about customers’ accounts, in an investigation that may include the accounts of deceased customers, dormant and closed accounts. Following negotiations with some major banks in 2006, HMRC will probably embark on a similar process with other banks and financial institutions in order to maximise its recovery of unpaid tax on interest earned in offshore accounts.

What do you do when you get a Section 20 notice from HMRC? Click here for a full note on the procedure that should be followed to protect the bank.

The recent investigations by HMRC have focused on taxpayers who have a UK address and an offshore account. HMRC currently has powers to apply to the Special Commissioners of the tax tribunal for permission to serve a notice on banks requiring them to supply documents in the bank’s possession relating to taxpayers, where there are reasonable grounds to believe that those taxpayers have failed, or may fail, to pay tax. HMRC also has powers to compel banks to answer relevant questions relating to investigations into tax fraud.

Banks should be aware that if HMRC do wish to investigate their customers this may include dormant and closed accounts as well as accounts of deceased customers. Banks should not destroy any documentation that may be relevant, as it is an offence punishable by a fine and up to 2 years’ imprisonment to conceal, destroy or dispose of documents that are required for inspection.

The major effects on banks which are targeted by HMRC will be the:

· administrative burden of producing the information requested;
· risk of breaching confidentiality laws in the countries where the offshore accounts are held and other conflict of laws issues; and
· risk of FSA investigations if it appears that the bank misled customers about tax payable on offshore accounts.

HMRC has recently issued a consultation paper, which proposes to extend its powers to allow it, without benefit of a court order, to order banks to freeze an amount equal to the debt owing in the accounts of taxpayers. The bank would be required to hand over the amount to HMRC after a certain time assuming other attempts to collect the debt are unsuccessful. The consultation period ends on 17 September 2007.

Law: section 20 Taxes Management Act