The New UK Disclosure Opportunity - The Truth

Following a previous attempt by the UK's Revenue and Customs (HMRC)  in 2007 to persuade tax evaders to reveal undisclosed offshore assets and pay tax on them, the NDO ("New Disclosure Opportunity") was launched this summer and finally closed on 4 January 2010.

Many have been bombarded by leaflets, e-mails, postcards, webcasts and other elaborate marketing tools explaining why it is such a good idea to come forward and go into the new NDO not just by HMRC but by Accountants and
Solicitors!

There are many practical reasons why this second NDO is unlikely to be a success.

Indeed HMRC have now announced (11 January 2009) that some 10,000 account holders have come forwaed whereas their own intelligence suggests that some 40,000 UK residents have offshore accounts.

Why is a second facility necessary? 

In the original facility 45,000 people came forward and paid outstanding tax liabilities and a fixed 10% penalty facility recovering approximately £400m in unpaid tax.

Sadly, the economic environment we live in today is far different from that of 2007 when the first facility was operated. It is exactly those economic conditions which prompted HMRC to launch the new NDO. 

The threat of large penalties and possible criminal prosecution are being wielded against those tax evaders who did not come forward in the first NDO. However, the first NDO has not produced a large number of criminal prosecutions (although it has certainly produced some) and the reality is that many tax evaders go around their normal lives unaffected by HMRC's threats.

As with anyone who has got away with something for a long time, when
they do not feel it directly or hear of people getting caught, it gives them renewed confidence.

There are four key reasons why the NDO is not attractive to many tax evaders.

Reason 1- Illiquidity

Many of thr evaders in question no longer have the liquid resources to pay HMRC. Or if they do, they have no other capital assets because their businesses, property investments, shares are either not producing income, standing at a loss, or are unsalable.

They cannot let go of their one remaining asset and security whatever the risks.

Reason 2 - Potential Tax Penalties on Undisclosed Income/Gains

Their Offshore bank deposit, property or investments are the proceeds
of long-standing UK tax evasion and entering the NDO would not help as
they are likely to be rejected and subject to a lengthy full scale tax
Enquiry with large penalties and a tax bill dwarfing the NDO figure.

Reason 3-Interest Chargeable

If the tax evasion has been going on for 20 years or more the HMRC offer of a reduced 10% (or 20% penalty rate) will be swamped by the interest bill, that will usually be around two and half times the tax owed and will make up the majority of any sum owed!

Reason 4- Many Evaders will Leave UK

Most tax evaders have a firm belief that if they are caught they will simply leave the UK, even if that means abandoning their home! 

The favourite destination of choice, is Spain! (Many are devastated to learn that the EU MARD Treaty of 2002 and the OECD Mutual Administrative Assistance in Tax Matters Treaty 2008 means that in all EU Countries and some further 19 Countries local Tax Authorities can simply be asked by HMRC to collect the tax owed! So, they will have to run far further to more remote unknown and possibly unattractive destinations to achieve their solution).

Conclusion

The combined effect of these reasons is that in spite of heavy, elaborate marketing by HMRC and Accountants and Solicitors, the practical reality is that most NDO prospects will not be coming forward.

The Liechtenstein facility holds more hope for a solution, especially
as its lengthy timescale ( now until 2016) offers a chance for tax evaders to be in a better financial position to pay up. 

However, to enter it, assets need transferring to Liechtenstein and that is not be so easy.