Are Offshore Tax Havens Legal?

If you’ve had first hand experience of tax havens, you may be aware of new government and HMRC approaches to this type of finance management – and it’s likely that you’re keen to know what to do next. Here, we’ll look further into tax havens and discover the legalities behind them.

What is a Tax Haven?

As the name suggests, tax havens are locations that enjoy lower rates of taxation than the country in which the account holder in question resides. A few examples of these include Gibraltar, the Isle of Man, the Cayman Islands, the British Virgin Islands, the Channel Islands (Guernsey and Jersey), Bermuda, the Bahamas, Trinidad & Tobago and Barbados. Because accounts based in these countries don’t have as high of tax rates as the UK, many individuals here have discovered means of manipulating this for tax avoidance or money laundering purposes.

Is the Use of a Tax Haven Ever Legal?

If you have an offshore bank account based in a location with a lower rate of taxation, you may have some concerns about a possible investigation by HMRC. Despite the potential for criminal use of bank accounts in so-called “tax havens”, it is completely possible – and very common – for them to be utilised in ways that are perfectly legal and legitimate.

If you reside in the country where the account exists – say, for example, you are an ex-pat or have dual citizenship – and all taxable income that enters your account is properly declared and remains abroad, then your use of it is legal. Also, if you run a business or own property in the same location that plays host to the bank account and fully declare any income from these sources or other projects to HMRC, then your behaviour is completely in line with the law.

When is Using an Offshore Tax Account Illegal?

There has been a common awareness of the abuse of offshore tax havens for a number of years, you may have heard of the Panama Papers, but the full extent of this method of tax evasion was only recently revealed.

The Paradise Papers, published in November of 2017, contained 13.4 million leaked files that were investigated by 95 media establishments worldwide, and found to contain the details of a large number of individuals and offshore companies – including high profile names – who were currently illegally utilising tax havens to avoid corporation tax.

Even in the wake of this scandal, news outlets continue to reveal the identities of people and businesses who have played the system in order to circumvent their tax obligations.

The simplest way to determine whether use of an offshore account is lawful is to investigate whether the owner of said account is utilising it for monetary gain and neglecting to properly declare income to HMRC, giving them a financial advantage over those who are paying tax correctly, and inhibiting economic cooperation and development. This behaviour amounts to tax evasion.

If you are currently taking advantage of the system in this way, you are liable to be investigated by HMRC and may be found guilty of non-compliance, resulting in a hefty penalty.

What are the Penalties for Tax Evasion Through an Offshore Tax Haven?

HMRC investigations into the illegal use of tax havens are gathering force, with new techniques regularly being employed to uncover purposeful tax-evasion.

One of the most recent steps taken by the government was the introduction of the Requirement to Correct (or RTC). The RTC required any individual who had not disclosed full information of unpaid tax on income or gains held in offshore bank accounts to HMRC before the deadline of 30th September 2018.

If those individuals failed to voluntarily update HMRC about these accounts by the date in question, they would then be liable for a new penalty known as FTC (or Failure To Correct). This would include a mandatory fine of 200% of the amount not disclosed to HMRC.

What Happens if I Voluntarily Disclose Information About Offshore Accounts to HMRC?

 Those who used an offshore tax haven to unlawfully avoid paying tax and have failed to come forward by 30th September will now face penalties from HMRC. By voluntarily disclosing their relevant accounts, those individuals may still be able to significantly reduce these fines. The amount of the reduction is based on the level of assistance a person is willing to give and how much they cooperate with HMRC to clear the matter up.

If you are thinking of voluntarily disclosing your accounts to HMRC to reduce any potential penalties for utilising an illegal tax haven, it’s important to contact a specialist in this field before you do so. The correct consultant will help you to confirm your position and discuss the most sensible next steps to take.

Should you require advice on how you should make contact with HMRC and avoid heavy fines from using an offshore tax haven, instruct Patrick Cannon today, experienced tax avoidance barrister.