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Last Updated: Wednesday, 18 April 2007, 23:01 GMT 00:01 UK
Coming clean on offshore bank accounts
By Ronnie Ludwig
Accountants Saffery Champness

Ronnie Ludwig
Ronnie Ludwig of Saffery Champness

Hundreds of thousands of people with offshore bank accounts could soon be in for a very nasty shock.

HM Revenue & Customs (HMRC) has given them a short space of time to 'come clean' about any interest they may have earned on their money abroad, but on which they have, so far, failed to pay tax to the Revenue.

It follows on from the successful ruling obtained by HMRC last year against Barclays Bank, which means it can demand full details of UK resident customers with offshore bank accounts.

However this is not a tax 'amnesty' and involves both a carrot and a stick.

If a full disclosure is made then greatly restricted penalties will be levied - although both full tax and interest must still be paid.

But if no disclosure is made and the Revenue tracks offenders down, they can expect to be dealt with much more severely.

Criminal or legitimate?

So, what sort of people is HMRC after and what practical steps can be taken?

They may have been unaware that the interest arising on those accounts must be declared in their UK tax returns

The Revenue has made it clear that anyone who has been involved in organised crime will not be accepted under this 'offer', nor will those who are already being investigated.

But many thousands of people have offshore bank accounts for perfectly legitimate reasons.

The most common situation is likely to arise where those who previously worked abroad - and have subsequently returned to the UK - have maintained their offshore bank accounts.

They may have been unaware that the interest arising on those accounts must be declared in their UK tax returns.

Also, many thousands of people now own foreign holiday homes, many of which are let out.

For practical reasons these individuals may operate offshore bank accounts to collect rents and pay expenses.

Where these accounts have attracted interest, this too must be declared in a UK tax return.


In other cases the problem could be more extensive, particularly where the source of the original money in the offshore bank account should itself have been taxed in the UK, and not just the interest generated by that sum.

Barclays headquarters in Guernsey
Barclays bank in Guernsey was the target of a Revenue ruling last year

Examples would be where people have been trading abroad and effectively generating profits from a business which has not been declared in their UK tax returns.

One of the largest markets is Ebay where people can sell on a global basis.

Where individuals are simply disposing of the odd unwanted item or gift, there will be no tax liability.

However, a number of people are now trading on Ebay by holding a stock of items which they sell at a profit.

Where the proceeds of sales are banked in an offshore bank account, the Revenue will wish to tax both the interest earned on the account and the profits stemming from the trade.

Whilst the Revenue does not actually say so, it is reasonable to assume that its temporary concession will apply to these situations also.

What to do?

In terms of the practical way forward, anyone who is affected and who wishes to take advantage of the disclosure opportunity should write to their tax inspector.

They should give formal notification of an intention to disclose and that letter should be with their tax inspector by not later than 22 June this year.

Thereafter they should collate the information which is necessary to make the full disclosure - obtain bank statements and so on - as quickly as possible.

They should then calculate the tax, interest and penalties due, using the Inland Revenue website, or get professional advice if the situation is more complicated.

HMRC has said that in the absence of full information they will accept a 'best estimate' of tax due, although clearly some sort of evidence of how that best estimate has been calculated should be available.

Compound interest

It must be remembered that the Revenue levies interest on any unpaid tax - and at a compound rate.

1,000 of tax that should have been paid 20 years ago will - including interest and a 10% penalty - lead to 4,100 being paid under the 'amnesty'

Tax that should have been paid 20 years ago rolls up to around four times what it would have been, when you include the interest that will be due.

Adding a penalty at 100% for not declaring under the amnesty would lead to the total amount ultimately due being five times what should have been paid originally.

For example, 1,000 of tax that should have been paid 20 years ago will - including interest and a 10% penalty - lead to 4,100 being paid under the 'amnesty'.

Ignoring the amnesty would make that figure 5,000.

In some cases taxpayers may feel that they simply cannot afford to own up, which begs the question as to whether HMRC has provided enough of an incentive to do so.

The terms offered by the Revenue are much less generous than those offered by the Irish Republic in its 1993 amnesty, which encouraged thousands of taxpayers to come clean by paying tax at a reduced rate of 15%.


It is not in every case that interest from offshore accounts needs to be declared to the UK authorities.

For example, those UK residents who have a non-UK domicile of origin (ie were born and brought up in a foreign country) do not need to declare any interest arising on an offshore bank account - providing they have not imported the interest into the UK and have made the appropriate notification to HMRC.

Another is those people on full-time contracts of employment abroad, who are temporarily non-resident in the UK.

They may have opened offshore bank accounts for normal practical reasons, but they do not require to declare interest or income in the UK whilst they continue to be non-resident.

Overall though, whilst 'doing nothing' is an option, it is highly inadvisable.

Even if it is not caught by the Revenue in your lifetime, the problem of untaxed income lurking abroad will raise its head in a much more ugly form - on death.

Those who inherit the money will also inherit the problem of dealing with HMRC, often with absolutely no background information or records to assist.

There are many examples of numbered Swiss bank accounts, collectively containing many millions of pounds, being left unclaimed by deceased owners who, in the end, suffered a 100% loss for the sake of avoiding a 40% tax liability in their lifetimes.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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