Directive 2011/16/EU On Administrative Co-operation Between EU Member States’ Tax Authorities

Key points

  • From 1 January tax authorities in the EU will be able to find details of who owns every entity in the EU.
  • If the UBO is a trust of foundation outside the EU, then they will still be disclosed.
  • How many people living in the UK have undeclared benefits from offshore trusts?
  • Unprompted disclosure to HMRC reduces penalties significantly.

Directive 2011/16/EU On Administrative Co-operation Between EU Member States’ Tax Authorities

This Directive permits sharing of tax data, e.g. the price a German group company charges its British one for goods or services, and woe betide the group if they are not the same.

There is nothing particularly new in the sharing of data amongst EU member states – the original Mutual Assistance Directive was drawn up in 1977.

However, from this month, the Directive will also allow member states to exchange data on the ultimate beneficial owner of any EU established entity to another member state’s tax authority.

If HMRC shared every tax file they had with every member state and vice versa, then tax authorities would be deluged, but that is not going to happen.

If you are going to shake the tree, or knock on a door, looking for money, make it a big one.

So, who are the big trees in the UK?

Probably those who pay the big taxes.

Income tax (which is progressive) and national insurance (which due to its structure is regressive) account for £349bn out of the UK Government’s total projected receipts of £769bn, i.e. 45.38%.

There are 29.9m UK income taxpayers (down from 30m).

Of those 29.9m taxpayers, 40% do not pay income tax at all as their income is below the personal allowance threshold.

Of the remaining, 18m taxpayers, 99.9% of these contribute 59% of income tax and basically earn under £160,000 per annum.

Scarily, the top 1% of earners from 0.1%+ to 1% contribute 27% of the bill, (£94bn) and the top 0.1%, i.e. 30,000 people, an average crowd at a Derby County FC match, contribute 14% (£49bn).

If you were a business and 41% of your income tax came from 1% of your customer base, you would be very concerned; the usual maxim is 80% of revenue from 20% of your customers.

What about tax havens?

Sticking to offshore benefits received in the UK, it is fair to say that it is highly likely that only people who use tax advisers declare tax under the transfer of assets abroad, or trust gains matching rules.

When I wander around the wealthier parishes of London, I can’t help wondering how many latent matched gains there are, or s.733 benefits which the locals have but are unaware of?

Ignorance is bliss, but HMRC are now in possession of another tool which will help them fill in some more of the blanks, if they have the time and resource.

What next?

What, logically, can we expect to happen as a result of Directive 2011/16?

  1. A lot of activity on high net worth individuals, and checking who “owns” offshore structures such as foundations;
  2. Possibly migration of some entities out of the EU net, but this is harder than it looks;
  3. More time invested in examining the tax affairs of large private companies owned by families etc;
  4. A trawl for anything related to any person who has made use of a disclosure facility (just in case they
  5. have not made full disclosure, notwithstanding their adviser’s best efforts); and
  6. Harsh treatment of those who have “irregularities” within their past and have not made a voluntary disclosure to HMRC.

Conclusion

We believe HMRC will continue to use Directive 2011/16, as will the Finanzamts in Germany, AEAT in Spain, Agenzia delle Entrate in Italy and if you Google “what is the tax authority in Poland called?” you get “Tax Office in Poland is called Urząd Skarbowy. One of most disliked places in the universe, at least by some people.”

But who is on the receiving end will be those 5 categories of taxpayer mentioned above.

If you are one, or advise one, then make sure you are up to date with what you need to disclose to HMRC.

The small print

This paper s not a comprehensive review of the law and practice but a selection of items relevant to our client base, who are international, have some UK connection, and often own real estate or online businesses.

This paper is for information only, is NOT intended to be relied upon and is no substitution for advice.



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