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What happened with the Panama papers

15th Nov 2016
Head of Insight AccountingWEB
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National Audit Office
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National Audit Office reports on HMRC high net worth unit

A recent NAO study into the workings of HMRC’s high net worth unit offered the first public account of how HMRC responded to the release of thousands of files on offshore asset-holders.

The progress report on the papers leaked from Panamanian law firm Mossack Fonseca is just one excerpt from a deeper study into the workings and effectiveness of HMRC’s high net worth team, which claimed a yield of £416m in 2016, up from £200m in 2011-12.

Where high net worth individuals are suspected of tax fraud, their cases are handled by a specialist team set up in 2009. In the past five years, this group investigated and closed 72 cases. The vast majority, 70, were pursued using civil powers and yielded £80m. Two criminal cases were investigated and passed to the Crown Prosecution Service.

Following the avalanche of publicity that accompanied the Mossack Fonseca leak in February, the government set up a multi-agency taskforce led by the National Crime Agency. HMRC staff from the high net worth unit worked with the taskforce, alongside specialist investigators and data analysts.

The attention devoted by the Treasury and HMRC to the scandal was big enough to delay plans to issue consultation documents on the Making Tax Digital initiative.

What the taskforce found

After sifting through the papers, the taskforce identified 40 high net worth individuals who could be in the frame for further investigation. “HMRC may find that it has already been told about the offshore assets in the leaked data, but has yet to complete the work necessary to verify this in every case,” the NAO reported.

HMRC is under pressure to demonstrate that it is getting tough with offshore tax evaders. So the number of prosecutions related to the Panama papers is likely to be higher than the 2010 HSBC Swiss account leak. HMRC’s sole conviction for evasion since the unit opened was one of the 120 high net worth individuals identified from the HSBC list. The evader was given a £400,000 fine.

Aside from that case only 16 other, less wealthy individuals have been prosecuted for offshore evasion since 2010.

The relatively small returns from these incidents have drawn criticism from tax justice campaigners and MPs on the Public Accounts Committee, but the NAO noted the difficulties HMRC faces collecting evidence to prove assets have been deliberately concealed offshore.

“HMRC told us that proving that the taxpayer had not acted in error is a challenge, particularly where the individuals have been professionally advised,” the NAO said.

These difficulties prompted a string of voluntary disclosure initiatives such as the Liechtenstein disclosure facility (LDF) that allow HMRC to collect evaded tax without having to prove that a criminal offence has been committed. The LDF yielded £141m in settlements from high net worth individuals at an average of just over £1m a piece - 11% of the total £1.26bn collected under the facility.

Tougher approach on the way

Plans are in hand to take a tougher approach to offshore evasion, the report noted with the arrival of a common reporting standard between national tax authorities and stiffer penalties for tax evaders and their advisers introduced in Finance Act 2016.

While waving a bigger stick, HMRC is also leaving the door open for further voluntary disclosures via a new worldwide disclosure facility, billed as “a final opportunity for people to bring their tax affairs into line”.

The department also restructured its fraud investigation service to focus on evasion risks in three key areas: offshore, corporate entities and wealthy individuals. The new group’s target is to bring criminal prosecutions against 100 corporate entities and wealthy individuals by 2020. Currently 120 people are being investigated for criminal offences connected with offshore evasion, 10 of whom are high net worth individuals.

While the yields from HMRC’s work in this area have increased it needs to evaluate what approaches are the most effective and to understand the outcomes it achieves” - NAO head Amyas Morse

The NAO study noted that the pool of high net worth individuals stood at 6,500 at the beginning of the 2015-16 tax year. The numbers can fluctuate, but in 2014-15 they paid more than £4.3bn in tax. Their contribution was made of up £3.5bn in income tax and national insurance (1.3% of the total revenue) and £880m in capital gains tax (15% of all CGT).

HMRC estimates the amount of tax at risk from this group is around £1.9bn of which £1.1bn arising from marketed avoidance schemes; around 15% of high net worth individuals have used at least one scheme. The biggest source of risk to its revenues, according to HMRC, comes from tax avoidance and the legal interpretation of complex tax issues, rather than tax evasion.

The NAO gave HMRC credit for developing a better understanding of this group since it set up the high net worth unit, but could carry out more analysis to look at what works and why in its current approach. 

Replies (7)

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By AndrewV12
16th Nov 2016 12:01

Tougher approach on the way

About time to, HMRc up to now has been very reactive, at last they are becoming more proactive. Even if it did take a leaking of the papers. HMRC are proposing the fines for such wrong doing should be the same as the tax saved, they could give a lot of people a lot of sleepless nights.

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By AndrewV12
16th Nov 2016 12:01

Tougher approach on the way

About time to, HMRc up to now has been very reactive, at last they are becoming more proactive. Even if it did take a leaking of the papers. HMRC are proposing the fines for such wrong doing should be the same as the tax saved, they could give a lot of people a lot of sleepless nights.

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By AndrewV12
16th Nov 2016 12:06

Extract from above
the government set up a multi-agency taskforce led by the National Crime Agency. HMRC staff from the high net worth unit worked with the taskforce, alongside specialist investigators and data analysts.

Oh here we go, the Government cannot do anything without hiring in 10, 000 civil servants and loads of consultants.

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Replying to AndrewV12:
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By Tromdo
16th Nov 2016 12:32

Where does it say they hired 10000 people? I say they redeployed staff. Prove otherwise.

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By C.Y.Nical
16th Nov 2016 12:43

'The biggest source of risk to its revenues, according to HMRC, comes from tax avoidance and the legal interpretation of complex tax issues, rather than tax evasion.'
Here we go again. I predict that tax avoidance is going to be outlawed. I further predict that within a year we will hear an announcement from government that they are reviewing the distinction between avoidance and evasion with a view to taking action to prevent high net worth individuals and corporate entities benefiting from avoidance.

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By mydoghasfleas
16th Nov 2016 14:03

Toying with a calculator. There are 51,000,000 adults in the UK. Office of National Statistics 12/2012. HMRC collected approximately £537,000,000,000 income tax, NIC and Bank Payroll Tax last year HMRC receipts 21 July 2016. That is an average of a little over £10,500 per adult. 6,500 individuals (0.013% of the total adults) paid £4,300,000,000 (0.800% of the total receipts), that is 50 times more than the average. It makes me feel HMRC are treating the HWNI's as its dairy herd but over-milking produces lower returns.

Has Donald Trump not realised it's the presidency not another edition of the The Apprentice (USA) "I am the only one who know who the finalists are!"?

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Replying to mydoghasfleas:
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By Tromdo
17th Nov 2016 14:32

Whilst I take your point, "ordinary" people want to know that the rich are paying at least their share (and usually much more).

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