UK Amendment Expands HMRC Investigative Powers and Liability Risk

In a move that creates increased liability and risk for non-compliant institutions and individuals in the United Kingdom, HM Treasury recently published an Amendment to the International Tax Compliance Regulations. In summary, the Amendment grants HM Revenue and Customs (HMRC) additional power to police AEOI compliance and expands potential liability to both financial institutions and their employees.

HMRC’s New Powers To Gather Information and Penalize Individuals

While the Amendment does provide some necessary clarity on a number of FATCA, CRS and DAC requirements, the provisions detailing HMRC’s new information gathering powers and expanded individual liability should be of immediate concern. The Amendment — and the debate leading to its enactment — shows the UK is determined to pursue both tax cheats and the individuals and institutions who facilitate these illegal activities. Previously, HMRC’s information gathering powers were limited by Schedule 36 to the 2008 Finance Act, which allowed the UK to review documents to determine a taxpayer’s “tax position.” In the AEOI context, HMRC could review documentation — like a self-certification — necessary to determine whether an individual’s tax return is correct. While third parties could also be required to provide documentation, this individual-centric approach left HMRC little power to police those financial institutions charged with reporting the information. Now, HMRC can go one step further and request information allowing them to evaluate if the reporting financial institution is also in compliance. Leaders of financial institutions need to be specifically concerned as the Amendment imposes individual liability for those who facilitate tax evasion. Partners, trustees, and managers of investment schemes will be subject to penalty for any breach of their obligations to accurately report payments or failing to meet their due diligence standards –  amongst other requirements.

What Else Can We Expect from the HMRC?

As part of its goal to expand its ability to investigate, review, and prosecute both financial institutions and individuals, the UK government has been working on passing the Criminal Finances Bill. Upon enactment, it creates corporate criminal liability for institutions failing to affirmatively prevent the facilitation of tax evasion. UK Financial Secretary Jane Ellison stated that her office now has the ability to fine and even publish the names of those who are caught facilitating tax evasion, including individual employees within the financial institution involved as well as accountants, lawyers, and other advisors. Under the old rules, the Government needed to demonstrate the complicity of the institution’s Board of Directors before imposing individual liability. Under the new rules, HMRC has the power to investigate and penalize employees, regardless of Board involvement. This broad expansion of HMRC’s regulatory authority gives UK financial institutions significant cause to review their AEOI compliance program. The Amendment allows the HMRC to gather any information related to AEOI compliance and Financial Institutions need to be ready to meet this requirement. Likewise, under the Criminal Finance Bill, an institution can avoid liability by demonstrating it employs reasonable tax evasion “prevention procedures.” To best avoid these liabilities, organizations should document these procedures and demonstrate their persistent use. The Bottom Line: The UK has demonstrated a clear commitment to enforcing their information reporting rules and rooting out tax evasion. As legal requirements expand and the risk of both financial and criminal liability expands, a robust compliance solution can go a long way in providing peace of mind.