OpinionJun 14 2022

What is behind HMRC’s unwillingness to estimate the offshore tax gap? 

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What is behind HMRC’s unwillingness to estimate the offshore tax gap? 
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Most major overseas onshore and offshore jurisdictions – including most traditional offshore tax havens – now annually send HMRC information about all financial accounts held by UK residents under the common reporting standard. 

From that information alone, HMRC is aware of about £850bn held by UK residents overseas – of which about £570bn is held in participant offshore financial centres.

However, there are limitations to the CRS. Not all countries are part of the CRS, including the US. What's more, where data is obtained under the CRS, it tends not to automatically cross compare with UK returns in the way many people imagine. 

The fact remains that HMRC does have access to vast and unprecedented amounts of data.

CRS data is provided in the usual international calendar year format rather than for UK tax years ending April 5. Taxpayers also often make use of various annual allowances or exemptions – such as non-domicile status – not to disclose income, which, although generally valid, are not necessarily obvious to HMRC’s computer systems, particularly if the people concerned conclude they do not need to file UK tax returns.

There is also an inherent risk that reliance on simplistic assumptions to form estimates could result in wildly inaccurate and misleading statistics. 

For example, the Tax Justice Network recently estimated the scale of the UK’s overseas tax abuse problem at £19.2bn a year, but did so by assuming all historic outward flows of capital from UK residents were leaving the UK to yield a 5 per cent annual investment return that was wrongly completely outside the UK tax net when it should all have been taxed at a flat maximum rate of tax of 45 per cent. 

It is understandable that HMRC are not prepared to indulge in such wild and easily discounted guesswork.

A lot of data

However, the fact remains that HMRC does have access to vast and unprecedented amounts of data about the offshore holdings of UK residents – not just from CRS, but also from bilateral information sharing agreements with countries like the US and from data leaks from offshore financial institutions. 

HMRC is also no stranger to complex data analysis and had a sophisticated computer system developed for it some years ago by defence contractor BAE Systems to trawl through multiple data sources to identify potential tax anomalies. Why then is HMRC so reticent about forming a view it can publicly admit to on the scale of the offshore tax gap?

Surely, the major underlying issue is a fundamental lack of resources at HMRC to confirm and quantify the scale of tax underpaid. It is one thing to identify potential anomalies, but quite another to confirm those potential anomalies as tax irregularities and to quantify the level of underpaid tax resulting. 

The vast amount of data at HMRC’s disposal has become a problem of sorts in that it has completely overwhelmed HMRC’s human resources. 

HMRC’s self-professed cluelessness underscores the highly resource-constrained level of HMRC’s traditional enquiries and investigations into people holding offshore assets.

This has resulted in HMRC increasingly relying on computers to identify potential anomalies, and relying on computers to automatically generate tens of thousands of so-called “nudge letters” to taxpayers suggesting they might have something to disclose, and then relying in the main on taxpayers to voluntarily disclose anything they might have deliberately or accidentally got wrong. 

Not all taxpayers who have underpaid their taxes will opt to make a disclosure – either because they want to continue to believe they have got everything right even when revisiting would show they have not or because, increasingly, they do not expect HMRC to have the resources to investigate them.

If HMRC had the resources to open investigations into a statistically significant proportion of offshore account holders – including a fair number of purely random enquiries – it stands to reason that HMRC would have a reliable idea what the average level of offshore non-compliance is. 

Surely, HMRC’s self-professed cluelessness of the scale of the problem underscores both the very limited and highly resource-constrained level of HMRC’s traditional enquiries and investigations into people holding offshore assets, as well as HMRC’s own lack of belief that predominantly relying on computerised data trawling and nudging is anything other than inherently limited in what it can uncover.

Andrew Park is tax investigations partner at Andersen