Financial institutions in Jersey, Guernsey and the Isle of Man (the Crown Dependencies) will soon be obliged to automatically provide information to the tax authorities relating to the financial affairs of UK resident clients in respect of 2014 onwards. This is sometimes referred to as ‘UK FATCA’, as it is based on the US’s FATCA regime.
This guide looks at the proposed 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?
1. The Foreign Account Tax Compliance Act (FATCA) is a US law, designed to prevent tax evasion by US citizens using offshore banking facilities.
2. It requires financial institutions outside the US to provide information to the US tax authorities regarding accounts held by US nationals.
3. Financial institutions who do not agree to provide this information will suffer a 30% withholding tax on payments of US source income.
4. So that financial institutions 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 for the information required under FATCA by UK financial institutions to be provided to HM Revenue & Customs (HMRC) to forward to the US.
5. Many other governments, including those of the Crown Dependencies, are entering into similar agreements with the US.
6. However, the UK is also entering into similar agreements with the Crown Dependencies so that HMRC can find out about offshore accounts held by UK residents.
What is UK FATCA?
1. Under UK FATCA, financial institutions in the Crown Dependencies will automatically provide information relating to the financial affairs of UK resident clients in respect of 2014 onwards.
2. The Overseas Territories of Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands have also committed to exchange information with the UK and other G5 countries. However, the agreements with these territories are not as far advanced as those with the Crown Dependencies.
3. HMRC has stated that the UK will aim for maximum consistency between the UK/US agreements and those being negotiated with the Crown Dependencies and Overseas Territories. Accordingly, it is expected that the package of measures to be negotiated with the Overseas Territories will closely follow those negotiated with the Crown Dependencies, in particular the information to be exchanged and the proposed reporting timelines.
4. However, while based on the same model agreement, the agreements with the Overseas Territories will not be reciprocal; information will only flow from the Overseas Territories to the UK and not also from the UK to the Overseas Territories.
The UK FATCA system will include the following:-
1. an agreement providing for automatic exchange of information about UK residents with accounts in the Crown Dependencies (and residents of the Crown Dependencies with accounts in the UK);
2. an alternative reporting regime for UK resident non-domiciled individuals; and
3. a tax disclosure facility to enable those with irregularities in their tax affairs to correct matters with HMRC in advance of the exchange of information. Financial institutions are required to tell their customers about the disclosure facility.
4. What accounts are covered?
5. The new reporting requirements will apply to offshore bank accounts in existence on or after 30 June 2014 which are held by UK resident individuals. The rules also apply to accounts held by offshore trusts and companies to the extent that there are UK resident settlors, beneficiaries or beneficial owners. Special rules apply to UK resident non domiciled individuals.
6. Financial institutions in the Crown Dependencies will be required to automatically provide information in relation to reportable accounts of UK specified persons. The information to be exchanged will be set out in Intergovernmental Agreements (IGAs) which are currently being negotiated but will closely follow the UK/US FATCA model.
7. ‘Financial institution’ is defined very widely as an entity that accepts deposits in the ordinary course of a banking or similar business, holds financial assets for the account of others as a substantial portion of its business, engages primarily in the business of investing, reinvesting, or trading in securities, partnership interests or commodities, or conducts certain business as an insurance company. This will include not only banks, insurance companies and broker-dealers but will extend to clearing organisations, trust companies, hedge funds, private equity funds and property funds.
8. The disclosure obligation applies to ‘reportable accounts’, which are accounts held by one or more specified UK persons or by a non-UK person, trust or other entity with one or more controlling persons that is a specified UK person.
9. An ‘entity’ is defined as a legal person or legal arrangement such as a trust.
10. ‘Specified UK persons’ are defined as UK resident individuals, partnerships or UK resident companies excluding public companies and certain government bodies.
11. ‘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.
What can account holders do now?
1. A disclosure facility is available for each Crown Dependency to enable those with undeclared assets to come forward and disclose any potential tax liabilities to HMRC, before the automatic exchange of information begins in September 2016.
2. In most cases liabilities disclosed under the disclosure facilities will carry a 10% fixed penalty for years up to and including 2007/2008 and a 20% fixed penalty for 2008/2009 onwards. Full interest on the unpaid tax will have to be paid. Under the disclosure facilities the assessment period will be limited to accounting periods/tax years commencing on or after 1 April 1999.
3. In some circumstances it may be more attractive to use the Liechtenstein Disclosure Facility (LDF) to disclose the irregularities, as this carries a guaranteed immunity from prosecution.
4. 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.
5. Clients of offshore financial institutions should consider using the time available between now and 30 June 2014 to proactively review their offshore arrangements to ensure that all relevant matters have been properly disclosed to HMRC, thereby reducing the risk of an intrusive tax enquiry in the future. Any issues which are identified can then be discussed with HMRC on a ‘no names’ basis under the terms of current tax disclosure facilities.
6. The ‘no names’ basis for discussions creates a neutral environment in which to debate potential issues with HMRC. Clients who engage with HMRC in this way retain complete control over their situation and will be able to obtain reassurance and certainty from HMRC in relation to their tax position, either in advance of a tax disclosure or the proposed exchange of information.
7. The current disclosure facilities offer a relatively benign environment in which to resolve matters, involving no direct contact for the client with HMRC.
What are the reporting requirements?
1. As previously mentioned, financial institutions in the Crown Dependencies and Overseas Territories will be required to automatically exchange information with the UK in relation to reportable accounts of UK specified persons. Financial institutions will have to carry out due diligence to identify relevant accounts.
2. Financial intermediaries in the Crown Dependencies, including banks, trust companies and corporate service providers, will be required to write to their UK clients before 31 December 2013 to make them aware of a disclosure facility to enable those with tax irregularities to make a disclosure to HMRC before financial intermediaries are obliged to provide information about those with offshore accounts. Financial intermediaries are also obliged to remind their UK clients again about the disclosure facility during the 6 month period ending 30 September 2016.
3. Tax authorities in the Crown Dependencies will have up to 30 September 2016 to exchange information for the calendar year 2014 in relation to reportable accounts. It is likely that financial institutions will have to provide information to their local tax authorities before this time.
The exchange of information will be phased in with reporting deadlines as follows:
a. 2014 – 30 September 2016
i. Name, address, date of birth and National Insurance Number if available.
ii. Account number (or functional equivalent)
iii. Name of the reporting institution and its FATCA identification number if available
iv. Account balance or value at end of calendar year (or if closed, immediately before closure)
b. 2015 – 30 September 2016
i. In addition to the above:
ii. 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.
iii. For Depository Accounts – the total gross amount of the interest paid or credited to the Account
iv. For any other account – the total gross amount paid or credited to the account including the aggregate amount of any redemption payments made to the account holder.
c. 2016 – 30 September 2017
i. In addition to all the above:
ii. The total gross proceeds from the sale or redemption of property paid or credited to the account
Are there exceptions?
1. 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.
2. What about non-UK domiciled individuals (non-doms)?
UK resident non domiciled individuals who are charged to tax on the remittance basis can elect for an alternative reporting regime to apply.
1. Under the remittance basis of assessment, UK resident but non-UK domiciled individuals (broadly those whose permanent home is outside the UK) suffer UK tax on UK source income and gains but only on foreign source income and gains that are remitted to the UK.
2. The reporting will be on a fiscal year basis as opposed to a calendar year basis. The timeline for the exchange of information under the alternative reporting regime has not yet been made available. However, it is expected that information relating to the period 6 April 2014 to 5 April 2015 will have to be exchanged by the tax authorities no later than 30 September 2016. It is likely that financial institutions will have to provide information to their local tax authorities before this time.
3. In order for the alternative reporting regime to apply, the financial institution must have elected to operate the regime and the UK resident account holder must have elected for the regime to apply for the calendar year in question.
Under the alternative reporting regime the following information will need to be reported as opposed to the balance and income of any reportable accounts under the terms of the main reporting regime:
1. Information that needs to be reported
- Name, address, date of birth and National Insurance number, if available.
2. For each UK tax year (this is different to other IGA reporting which will be on a calendar year basis) where there are payments and movements of assets to or from the reportable account. It is understood that the reporting will not be restricted to taxable remittances.
- The gross payments and movements of assets from an originating UK source into the offshore account during the relevant tax year
- The gross payments and movements of assets from an originating source territory or jurisdiction which cannot be determined, into the offshore account during the relevant tax year
- The gross payments and movements of assets from the offshore account to an ultimate UK destination, during the relevant tax year; and
- The gross payments and movements of assets to an ultimate territory or jurisdiction destination which cannot be determined, during the relevant tax year.
1. Where there are reportable payments and movements of assets to or from the reportable account the Financial Institution must also report
a.The account number, name of the Financial Institution and its FATCA identifying number
What do banks need to be aware of?
1. 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.
a. Consequential money laundering reporting obligations for the bank will follow.
2. 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.
a. However, in most cases a civil investigation is more likely to follow but under the terms of the tax disclosure facilities which have been announced the customer would be precluded from the beneficial terms of the facility.
b. 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.
c. It is recommended that banks have a panel of suitable advisers.
What do trust companies and corporate service providers need to be aware of?
1. Trust and corporate service providers are likely to find the reporting requirements under FATCA onerous adding yet another layer to existing compliance obligations.
2. In circumstances where there may be dual reporting requirements e.g. where there is a trust company and banking relationship, the reporting responsibility is likely to fall on the trust company.
3. The requirement to write to all relevant persons regarding the disclosure facility will need to be handled carefully, particularly in relation to UK resident non domiciled clients where they are already compliant or have nothing to report to HMRC.
4. Such clients may regard reporting under FATCA as a gross intrusion into their privacy. 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.
5. 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.
a. In these situations the ability to have no names discussions with HMRC through the disclosure facility offers significant opportunities.
b. Where there are areas of uncertainty this provides the possibility to clear these points in a pragmatic and non adversarial environment.
c. Offshore service providers and their clients can also have confidence that they retain some flexibility and control over the information flows to HMRC and pace of travel toward transparency.
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