Helping friends can damage your wealth

Speed read: The UK’s Register of Overseas Entities is only the start. Governments are joining the dots, both domestically and internationally. The non-compliant will suffer confiscations, travel restrictions etc. Those who assist their friends by accepting funds from the non-tax compliant, are engaged in laundering the proceeds of tax evasion, a crime in almost every country. Ultimately, the end of the road is to come clean, or face the consequences.

There has been recent press about the requirement for non-UK companies owning land in the UK to disclose their ‘ultimate beneficial owners’ known as UBOs, or I suppose in this case UUBOs, unidentified ultimate beneficial owners.

Companies House say 13,000 overseas entities have failed to comply by last January’s deadline.¹ Why could that be?

Why?

There could be many reasons for this. It might surprise you, but some of these people have no idea what they have and who or what owns it. I have had people ask me to register an overseas company which, it turns out, was incorporated at Companies House, Cardiff; or they are properties owned by other entities; and believe it or not, some people forget that they have an apartment in London. I should say that these people have staff to look after these things, but still. It is a bit like staying in a hotel, telling your aide that you like it and would like to buy it, only to be told, you already own it.

So forgetfulness, could be, and I suspect is, a significant reason.

Some owners could be dead (surely a reasonable excuse?), or otherwise unavailable and I suspect a large number will say, so what? If this is your pied-a-terre in London², you are not going to care; that is a problem for when you are dead and not even HMRC or Companies House can get at you then (but they can still get your assets).

Large corporate groups may have thought that seeing as they are occupying the property, the non-UK owner doesn’t need to be registered.

Or it could be as simple as an English spelling on the Land Register being different from the English spelling at Companies House. E.g. Rua Libertada at Companies House, Liberation Street at the Land Registry.

However, the sting in the tail is that unless and until the overseas entity is registered at Companies House, the owner cannot sell, mortgage or lease the property.

Tax authority collection of data

Much as many corporations and governments would love to have a detailed minute by minute breakdown of everyone’s financial affairs, we are a long way from that. And hopefully a right to a private life will not be eroded any further, notwithstanding³ the overriding of personal data rights because of “Covid” including the creation of a new body to hold NHS data, Public Health England.

To an ever decreasing extent, an Englishman’s home is still his castle (albeit subject to mortgage) and what goes on in there is no one else’s business. But the exclusion in the ECHR from seizure of personal property, which permits taxation, means you have to pay taxes.

And in order to collect tax, the government needs a mechanism. In the UK the mechanism is that if you have a liability to UK taxation, you must give notice to HMRC. With more and more UK taxes applying to people all over the globe, HMRC’s response is, you should know, we put it on the internet. A response which the courts have found insufficient⁴. But if you live in the UK, then you should know this. Failure to give notice, or having given notice, to send in a return, could leave you exposed to the risk of 20 years of risk to whatever taxes you should be paying but have not declared (plus interest and penalties).

And without wishing to name, shame or defame, investing overseas in non-disclosable arrangements has been a sizeable business sector.

At a practical level for advisers, explaining what is reportable (anything to do with the country) or is not reportable (very little), and to whom, is not straightforward. In the UK we have in addition to the usual SA, VAT, PAYE RTI, SARS, DOTAS, TRS etc., and in the area of international taxation we also have DTT passports, CRS, FATCA, MDR, DAC6, SARs etc.; all there for different reasons, asking different questions, requiring different data, at different times. At least we no longer have EU DAC6, EU DOTAS etc. and if any of these acronyms are new to you, then that is why we have Google (other search engines are available but Bing only appears to cover the USA and Apple products are, in my view, pretty toys).

The start of the modern regime on tracking money across borders started in 2012 with FATCA. Notwithstanding information sharing provisions in double tax treaties, that mechanism was not an automatic exchange, was non-electronic and was of limited effect. Tax authorities’ powers effectively stopped at their national border.

FATCA

The USA has always taken the view that it can chase wrongdoers wherever they are and from wherever they come. Use the US dollar, or their ‘wire’ (telephony / internet) network, and you are within US jurisdiction. For example in 2015 the FBI, turned up in Switzerland, around the Caribbean and other countries, to arrest various FIFA executives on corruption and bribery charges, as allegedly, they had used US dollars to do this.

So to catch US citizens who had undisclosed funds outside the USA, (US citizens are liable to US tax regardless of where they live), FATCA was introduced. Countries were obliged to comply or risk being frozen out of the dollar economy, i.e. oil, gas, etc., and in turn the banks of those countries were required to comply or else be frozen out of using the US dollar (the unofficial currency of many fast growing economies), and so it came to pass that a one side reporting regime was introduced.

The World recoiled in horror, but not having enough naval or military might to tell the USA, no thank you, realised that maybe this wasn’t a bad idea after all. The UK adopted FATCA to make UK FACTA for its CDOTs⁵. The OECD got in on the act promoting its TIEAs (Tax Information Exchange Agreements, pronounced “Tears” which ironically was a huge hit song for the self-proclaimed inventor of self-assessment taxation, Mr Ken Dodd). Meanwhile the EU did its impersonation of Emperor Nero.

And ultimately, the OECD, G7, G20, G21 etc came up with the Common Reporting System, a mutual FATCA where information would be automatically exchanged between the Financial Institutions (FIs) of every country to its tax authorities, which would then share with other countries’ tax authorities, the information on the finances of the FI’s customers. This required checks, and in theory annual updates, of each customer’s tax residence, i.e. its tax identification number (TIN) for his country of residence. In the case of FATCA, the W8 BENE, became famous worldwide as banks asked their clients to supply the relevant W8 Form.

The sanction under FATCA, if you cannot show that you were

• positively tax resident outside the USA, and
• NOT a US citizen,

is a 30% tax withholding from any payment; in the short term more effective than freezing an asset that the (non)-taxpayer has no plans to sell.

Nowadays, both under FATCA and CRS, FIs report annually to their customer’s tax authority various details, who is the UBO, whether the account is of a company or trust, how much was in the account, how much came in and came out in the year, and where it went to. If you are energetic and slightly paranoid about taxmen, then you could move country every year and your banks might always be one year behind. But life is not like that, with IP addresses, mobile phones (aka your personal identification and location tracker which you offer to pay for and carry voluntarily at all times), and more.

Practical Example

For example, a family who were born in country X but were all US citizens, might have a historic bank account in Switzerland. For a perfect illustration of how this works, see the film The Wolf of Wall Street scene in the Swiss Bank6, a must for every course on revenue law in the World.

At that time, tax evasion, proper criminal evasion, was not illegal in Switzerland. And why should it be? Sone might say, surely anyone who gives the tax man his full due when he can hide it must be mad? But then by the same token in Switzerland at that time, a husband accused of murdering his wife was entitled to say anything in his defence without penalty⁷. E.g. she is alive, I was out of the country, I was never married, I was on Apollo 13, I was handballing a football past Peter Shilton in the World Cup, and more. More irony given that the handballing footballer concerned was convicted of tax fraud, but later acquitted four months after his death. Then again, which global footballing superstar hasn’t? Answers on a postcard, although the list of who have, rather than have not, is shorter and messy⁸.

The bank holding our example family’s account should have, and probably would have, told the local tax authority directly about how much it has and whose account it is.

The local tax authority knows that there is money in an account. If 12 months later the amount reported to the local tax authority is lower, they will enquire as to where the money was sent, another bank? Payment for something real or on a false invoice? Hidden away? Wherever it has gone, whatever the answer, the local tax authority will find out and that will extend their net to include those recipients involved. And so on.

What can the account holder do? Any movement out of the account will be reportable to his local tax authority, including details of to whom the money was paid. He could resort to other techniques, but short of withdrawing millions in cash, which will probably in itself get him arrested, and then tying it to the feet of homing pigeons who fly to a remote island where he can bury the cash, (X, made from guano, marks the spot), where it will be useless, unbankable and unspendable. And good luck with the pigeons, they are not the most trustworthy of creatures; they are anyone’s for a handful of corn.

In the 21st century, the cash and its recipient is highly likely to be found, and the obvious consequences follow.

Remember Al Capone is alleged to have ordered the killing of, or killed, many people, most famously on Valentine’s day. But he went to prison for tax fraud.

Further, an extraordinarily brave inspector in the German Bundes-Finanzamt investigated Chancellor Hitler for undeclared earnings, i.e. where did he get the money from to build his Bavarian mountain home? Until Hitler had a law passed in 1943 exempting him from prosecution for tax fraud (as did Tony Blair’s mate, Silvio ‘Bunga Bunga’ Berlusconi). Nothing changes but the names.

Of course, to be effective in the fight against money laundering, all of this reporting needs to followed up with effective policing of money-laundering all over the world. But while the FATF lists Pakistan, and Afghanistan, and many other as compliant and Gibraltar in the grey list, the credibility of how effective the FATF’s efforts are, must remain under doubt.

Those foreign companies owning land in the UK will have their day of reckoning sometime, for example, when they try and realise their assets. No doubt the UK’s next step will be to confiscate UK property which appears to be unused etc. for a period of time, say 5 years back dated to 31 January 2023. That is my Budget prediction for Spring 2028.

Which brings me to a small post script, and perhaps even a concern or two about …

The EU, CRS / AEOI and ATAD4

First, the Directive⁹, which takes effect on January 1st 2024, and is aimed at attacking conduit companies, i.e. brass plates with no substance other than the benefit of a tax treaty or EU Directives, requires that as a minimum, that the company has an EU bank account, independent premises and people. People can include a director who is resident in the same member state as the alleged “conduit company”. That appear to me to be very un-EU, as if the EU was supposed to have internal barriers, notwithstanding Schengen, thousands of court cases, hundreds of them tax cases, saying such rules are discriminatory. Someone will be forced to take a case and win it. A provision in the legislation which breaches a fundamental pillar of the TFEU, can be struck down¹⁰.

My second concern is, what incentive does a country in the EU harbouring an alleged conduit company have to respond to questions?

Consider this example, a group of EU individuals in higher taxed countries, Ireland, Sweden, Denmark etc wish to invest in a business in Poland. As they are all in different countries, they see an advantage in using a Luxembourg holding company as this makes one point of investment, return, limitation of liability etc., and of all of the places they considered in the EU, Luxembourg was ideal for them.

The Polish tax authority suspects treaty abuse and a lack of substance as set out in the minimum requirements of ATAD4. Accordingly, it sends an information request to Luxembourg.

Now we all have tasks which are urgent and not so urgent in the middle of our ever perpetuating case list and in this example the Luxembourg authorities might be collecting from that company €12,000 in corporate income tax, and personal income tax on €60,000 of earnings of salaried employees. If they answer this enquiry they will not receive more tax.

Indeed, under ATAD4 Luxembourg risks losing the tax either to Poland, by way of withholding, and/or the shareholders becoming liable to tax on the Luxembourg company’s income but in Ireland, Sweden and Denmark. Luxembourg loses. Hardly an incentive for a Luxembourg tax department to deal with the request, especially if they prioritise on a cost benefit basis.

The EU infractions team can huff and puff but they cannot force Luxembourg to expedite the matter unless time limits are imposed. They can claim that Luxembourg is not playing the EU game, but they are no different from other tax authorities. They have so many priorities and so few resources.

Footnotes

1. https://www.bbc.co.uk/news/uk-64536926   Numbers seem to vary from 11,000 to 15,000.  Again understandable, I know some accounts departments who think any company with “Limited” at the end of its name must be British.  And some clients who thought that notwithstanding the use of “Limited” thought their clients were not in the UK.
2. As Del Boy would say, “That’s the trouble with the French, they haven’t got a word for pied-a-terre”.
3. See https://www.gov.uk/government/speeches/data-sharing-during-this-public-health-emergency; https://www.gov.uk/government/publications/nhs-test-and-trace-privacy-information/test-and-trace-overarching-privacy-notice; https://www.gov.uk/government/publications/nhs-test-and-trace-privacy-information/test-and-trace-overarching-privacy-notice#appendix1; and https://www.gov.uk/government/publications/phe-privacy-information/covid-19-privacy-information.
4. Most famously in the enjoyable and amusing decision of McGreevy…
5. Crown Dependencies (i.e. Isle of Man and the Channel Islands) and Overseas Territories (e.g. BVI, Gibraltar etc).
6. https://www.youtube.com/watch?v=ndTbiDQjbiE
7. In the USA, the famous Fifth Amendment, the rule against self-incrimination, allows those accused to refuse to answer questions on the basis that it might incriminate them, of the offence in question or other offences.  The Supreme Court has stated that the use of the Fifth Amendment is not to be treated as an inference of guilt of having done something, criminal or otherwise.
8. https://www.bbc.co.uk/news/world-europe-40534761
9. ATAD4
10. An example from the world of VAT – see Ampafrance SA v Directeur des services fiscaux de Maine-et-Loire (C-177/99).