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A cartoon illustration of a desert island with bags of money on the beach - all to symbolise the concept of tax havens
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Pandora Papers bring trouble for taxpayers

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HMRC is writing to around 600 taxpayers who it believes have not fully declared their offshore income or gains, based on information gleaned from the Pandora Papers.  

16th Jun 2023
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The Pandora Papers consisted of 11.9 million leaked documents from 14 offshore financial service providers. The data contains details of many shell companies, often based in tax havens, which have been used by many rich individuals, including world leaders, to hide transactions from prying eyes.

Opening the box

The Pandora Papers were gradually released by the International Consortium of Investigative Journalists from October 2021 to May 2022, and include more than 750,000 names of people and companies with links to more than 200 countries and territories.

HMRC has been reviewing the details relevant to UK taxpayers, and this month has written to around 600 people named in those papers. This is likely to be only the first tranche of the total population who will be contacted as a result of this huge haul of financial data coming to light.

Stiff warning

The HMRC letter asks the taxpayer to review their disclosure of offshore income or gains and warns that if there is an under-declaration the penalties could amount to 200% of the unpaid tax. The individual could also face criminal prosecution if they make a dishonest disclosure.

HMRC asks the taxpayer to respond within 30 days from the date of the letter and helpfully recommends that the recipient should seek professional tax advice.

How to react

Where the taxpayer has an authorised tax agent, that agent should also receive a copy of the HMRC Pandora Papers letter.

Although the HMRC letter says the taxpayer doesn’t have to take any action if they think their tax affairs are correct, that would be unwise. A prudent approach would be to check with HMRC that the correct taxpayer has been identified, to avoid it launching an investigation into the wrong person. 

The CIOT reports that HMRC has set up a dedicated team to handle queries directed to the telephone number provided in the letter. The HMRC call handlers should be able to assist taxpayers and agents in identifying what the letter relates to, so at least the taxpayer is not left guessing what transactions or bank accounts they have apparently omitted from their tax returns.

How to disclose

There are two possible ways to disclose tax underpayments relating to offshore matters:

  • Contractual disclosure facility (CDF) under Code of Practice 9 (COP 9); or
  • Worldwide Disclosure Facility (WDF).

The COP9 route will allow HMRC to recover tax, interest and associated penalties as far back as 20 years. The CIOT recommends that CDF should be used where deliberate behaviour or fraud is suspected.

Adam Craggs (Partner and Head of Tax, Regulatory and Financial Crime) at RPC explained: "The COP9 procedure permits individuals to admit to fraudulent conduct in return for confirmation from HMRC that, provided there has been full disclosure, the individual will not face a criminal investigation. In using the Contractual Disclosure Facility and admitting to deliberate conduct and disclosing the resulting tax loss, individuals can then accept a financial penalty and avoid a criminal investigation.”

Where the disclosure is of a careless error the Worldwide Disclosure Facility (WDF) could be used. Craggs commented: “Under the Worldwide Disclosure Facility under there is no requirement for the taxpayer to admit fraudulent behaviour”.

Care is needed

Making either type of disclosure is a complicated process.  

The CIOT warns its member they must comply with the fundamental principles of professional competence and due care as set out in Professional Conduct in Relation to Taxation (PCRT). This means that tax advisers should not undertake professional work which they are not competent to perform unless they obtain appropriate assistance from a suitably qualified specialist.

If a tax adviser does not have the necessary expertise to handle a disclosure or investigation themselves, they must seek advice from a specialist.

The PCRT applies to members, affiliates and students of seven professional bodies: ICAEW, CIOT, ATT, ACCA, ATT, ICAS and STEP.

Replies (1)

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By Hugo Fair
16th Jun 2023 17:52

"Although the HMRC letter says the taxpayer doesn’t have to take any action if they think their tax affairs are correct, that would be unwise. A prudent approach would be to check with HMRC that the correct taxpayer has been identified, to avoid it launching an investigation into the wrong person."

I follow the logic, but it does feel a mite topsy-turvy ... having to formally declare your innocence in response to a mere 'fishing enquiry' (not even an accusation let alone charge)?

Can you imagine a hot, busy high street where a PCSO spots a sweet wrapper on the ground and ... gets a colleague to hand out a form to random pedestrians - with the form saying 'I confirm that I didn't drop anything in the street .. (if you don't sign this we may open a prosecution').

What sounds fair enough when properly researched/targeted, becomes a potential imposition on the innocent through sheer laziness.

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