HSBC letters are first shots in long-term attrition

THE TIMING of HM Revenue & Customs’ announcement that it will be investigating the accounts of 6,000 HSBC customers in Switzerland was no chance matter. It comes only one week after the agreement with Switzerland was signed, which apparently allows account holders to regularise the tax affairs of their assets in Switzerland for a series of tax charges.

HMRC obtained the HSBC data after a disgruntled former employee, Herve Falciani, passed information to French authorities, who in turn passed it on the UK under tax exchange agreements. The taxman has since put 500 people under investigation.

The 6,000 that are to be contacted are the lucky ones, having been given an opportunity to make a choice – come forward or risk prosecution. But what does the timing mean for the Swiss agreement and, importantly, perceptions of the Swiss deal?

No international amnesty

HMRC has maintained that the Swiss deal is a revenue raiser and, unlike the Liechtenstein Disclosure Facility, is not a vehicle for people to wipe the slate clean on their tax affairs. Events in the week that have passed since the signing of the agreement seem to bear this out.

First, a briefing between HMRC and advisors on the details of the agreement sent a clear message that the purpose of the agreement is not to help the account holders. John Cassidy, tax investigations partner at PKF, was involved in the briefing. “This is not a vehicle for regularising the past,” he says. “I cannot think of a single situation where they will be clean.”

The example given by HMRC officials is that, while it is true that the money in the account on 31 December 2010 will be “clean” – ie, regularised in the eyes of the Revenue – any money taken out before then will not be. This includes bank charges, if the money paid out is not replenished. Therefore, few accounts would be completely clean and HMRC will still be able to investigate.

Secondly, the letters – announced the day after the briefing – are a sign from HMRC that the 2013 implementation of the deal is not a deadline for people to choose whether to come forward. Before then, the taxman will step up its efforts to investigate Swiss-based tax evaders and not allow them to “sleep sound at night”, as the rhetoric goes.

Under the terms of the deal, the letters themselves remove the recipients from the agreement. Article 2, paragraph 1n(iii) specifically excludes individuals who are subject of “any co-ordinated, project-based enquiries by [HMRC] into multiple identified taxpayers stemming from specific third-party information”.

It could be worse than this for the recipients. HMRC has said that anyone not coming forward within 30 days will be under inquiry. If the liabilities are large, they will likely be put under Code of Practice 9 investigation, the most serious civil inquiry. It will also make them ineligible for the Liechtenstein Disclosure Facility. The message is clear – evaders do not have time to decide.

Resources issues

Of course, in the real world, the taxman’s ability to bring evaders to justice is limited by resources. HMRC’s response to the HSBC clients will be dealt with by the Offshore Co-ordination Unit, a new team that starts working at the end of this month.

It will be made up of around 25 people. HMRC has not said how many technical specialists there will be, but the 25 will comprise a “small number of support staff”.

HMRC is said to be excited by the team. But, however specialised and efficient the unit is, it is still a big ask for the Revenue to deal with up to 6,000 residents. Many recipients of the letter will choose to disclose; but there is still a strong chance that the initiative will create thousands of new cases. The taxpayers who declare themselves compliant will also still need to be checked.

The taxman is confident about the initiative. It is thought that there could be a billion pounds in tax residing in HSBC accounts and HMRC will devote resources to the cases. It has emphasised the £917m funds ring-fenced by the Treasury for tax evasion.

“This is an indication that the Revenue does not have the resources or they would have investigated the 6,000 without giving them opportunity to disclose,” says Phil Berwick, director of tax investigations at McGrigors. HMRC would not be able to open COP9 inquiries on all the individuals who do not come forward.

But Gary Ashford, national head of tax investigations at RSM Tenon, thinks the multiple investigations are feasible. As well as COP9 investigations, the enquiries will include criminal investigations, various interventions and perhaps even a blanket letter asking them to phone an HMRC office. This will all be done over a period of time, he says.

“If HMRC wants to treat something as priority, it has resource at its fingertips. The data they hold is specific and therefore this isn’t just scaremongering,” he adds.

This is only the start, according to Ashford. HMRC has invested in high class IT and this identification of the 6,000 account holders is a result of it. The taxman holds data on more banks and it will use the information over the coming year. “This is not simply a man in a room sifting through information.”

The consequences of not investigating the account holders could be long-term. “Having gone down this route, if they do not pursue the balance, it undermines any future amnesty,” says Mike Warburton, tax director at Grant Thornton.

Clock ticking for Swiss account holders

This suggests that HMRC is serious and will devote resources. The letters have been portrayed as a tax amnesty, but like the campaigns against evasion among plumbers and private tutors, the carrot is small and the stick is intimidating.

The 30-day deadline does not leave HSBC account holders with much time to think and the penalty will be severe. It does slightly depend on the quality of the data, but HSBC clients would be ill-advised to count on poor data.

The timing of the letters is no coincidence. HMRC is emphasising the punitive nature of the agreement and the lack of protection for account holders. A string of similar crackdowns, with the required resources, is likely.

On a wider level, HMRC is making moves to show that the Swiss agreement is a revenue raiser with little concessions to account holders. There is a political element to this – on the one hand, it did not want to focus on this too much before the agreement was signed in case of upsetting the Swiss; on the other hand, now it has been signed, it has to counter criticism that there is one rule for normal people, one for rich Swiss account holders.

Now HMRC is no longer restrained, all Swiss account holders can expect a letter through the door.

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