On 15 July 2015 HMRC published a research report on behavioral factors influencing the use of offshore disclosure facilities. The research was conducted by interviews with agents handling offshore disclosure cases; in this case those involved with the helping clients use the Liechtenstein Disclosure Facility.

The agents indicated that their clients using the disclosure facilities often did not consider themselves to be non-compliant with tax rules. In the view of HMRC these clients must reach a point where they realize that they need to disclose. They must become aware that by not disclosing their offshore funds they are not compliant with their tax obligations. This involves realizing that by merely doing nothing they are contravening the law.

HMRC suggests that these clients need to understand that there is a credible risk in remaining non-compliant as there is a realistic likelihood that the offshore accounts will be detected and there will be severe consequences. They also need to understand the benefit of using the disclosure facilities in terms of reduced penalties and peace of mind. Another factor inducing clients to act immediately to disclose their offshore income and assets is the realization that the disclosure facilities will only be available for a limited period of time.

Types of non-compliant activity

The research revealed different types of client with different types of non-compliant activity. People who inherited offshore funds and had not been involved in setting them up often did not know the legal position or were apprehensive of the consequences of disclosure. There might also be family pressure not to disclose as other family members were in a similar position. People who have just inherited funds could however be motivated to act quickly to disclose them.

Non-domiciled individuals or others with international business affairs were often given poor advice by overseas agents and did not understand the complex UK law. Some of this group might however deliberately ignore the need to disclose as their non-compliance would be perceived as unintentional. Also legacy evaders who had acquired funds some decades ago may have believed then that it was acceptable not to disclose them and were now reluctant to discuss the issue even though they might want to put their tax affairs in order. They did not necessarily see themselves as tax evaders.

In a minority of cases people were using offshore accounts and structures to actively evade tax. These people would go to an agent if they began to understand that the risks of continuing to evade tax were outweighed by the benefits of disclosing the offshore fund. They took a rational decision to disclose on the basis that this was the best way of sorting out their tax affairs.

The decision to disclose

HMRC considers that triggers to taking action can include a review by people of their financial affairs in response to a need to fund retirement or a large purchasing decision. Direct letters from HMRC, referred to as “nudge” letters, could also prompt disclosure. Communications from agents highlighting benefits of disclosure could also prompt clients to act.

A potential problem for HMRC is that international tax evaders may put off disclosing their tax affairs if they consider that other disclosure facilities will be introduced in the future; or if they believe that HMRC does not have sufficient resources to target tax evaders, even with the help of automatic information exchange with other tax authorities.

HMRC considers that it should encourage people to review the whole of their tax affairs rather than merely targeting non-disclosure. People can be persuaded that they are responsible for their own tax affairs and ensuring that they are compliant with tax obligations. They could be urged to seek specialist tax advice. HMRC considers that the tax agents have an important role to play in informing their clients that they are not compliant with their tax obligations and that the risk of detection and punishment is real.