As of June 2023, taxpayers who were named in the leaked Pandora Papers are being given a final chance to set their tax affairs straight.
The leak in October 2021 revealed through almost twelve million documents that some taxpayers were using shell companies to hide wealth, avoiding tax charges on property and luxury items like yachts.
After reviewing the papers, HMRC has identified UK residents who may have untaxed assets in offshore havens and is now writing to warn them of potential penalties.
The letters inform recipients that if they do not report their overseas income correctly, they could face financial penalties or prosecution.
If you have received a HMRC Pandora Papers letter, here is what you should know about the situation and what you should do next.
What are the Pandora Papers?
Almost two years ago, the ICIJ (International Consortium of Investigative Journalists) published over 11.9 million records from 14 offshore service providers.
Known as the Pandora Papers, the 2.9 terabyte
release is the largest ever leak of financial documents, surpassing the Panama Papers back in 2016.
The ICIJ leaked these papers with the aim of prompting governments around the world to take action against the named individuals and recover unpaid taxes.
Following the release, HMRC began to review the data, comparing the information to the details they already had on their Connect database and through Common Reporting Standard (CRS) reports from overseas jurisdictions.
Rather than launching formal inquiries right away, HMRC is sending ‘nudge’ letters to those identified as having irregularities in their tax returns.
These letters will notify the recipient that they have a limited period to make any necessary disclosures about overseas income before the authorities will take further action against them – which is usually 30 days from receipt of the letter.
Why make a voluntary disclosure?
Have you received a letter from HMRC identifying you as an individual of interest relating to the Pandora Papers? If so, then you should act on the letter as soon as possible, especially if you have undisclosed taxable wealth.
It is best to speak to your financial adviser to determine what you need to declare and which type of disclosure you should make.
Even if you haven’t received a letter – yet, as HMRC is likely to send more – then you should still speak to a professional tax adviser about making a voluntary disclosure.
The last thing you should do is ignore such letters or decide not to disclose. This could force HMRC to open a formal tax investigation against you, increasing the time and financial cost taken to resolve the issue, and potentially increasing penalties.
By disclosing voluntarily, you will have more control over the disclosure process. This could help to resolve matters faster on more favourable terms for you, as your proactivity could mitigate penalties enforced by HMRC.
A ‘wait and see’ approach could lead to an even deeper dive into your finances over the last few decades, with months or years of uncertainty during HMRC’s investigation concluding in severe penalties or criminal prosecution.
HMRC’s penalty system is notoriously complicated, but the maximum penalty for this type of tax avoidance is usually up to 200% of the tax balance owed.
As it is a criminal offence, prosecution for tax fraud is a possibility if HMRC considers your behaviour dishonest. Taking advantage of the voluntary disclosure facility and complying with its obligations could give you immunity against prosecution.
If you fail to disclose and pay taxes owed, and are named by HMRC, the long-term reputational damage could also be severe.
How to disclose undeclared income
There are several options for disclosing omissions in your tax returns to HMRC, depending on whether the failure was intentional or a genuine mistake.
The first option is the Worldwide Disclosure Facility (WDF), which can be used by anyone disclosing a UK tax liability relating to offshore matters.
This may be more appropriate for non-deliberate non-compliance – the WDF does not provide protection from prosecution for deliberate fraud.
Those who knowingly committed tax evasion can come clean using the second option, which is the Contractual Disclosure Facility (CDF).
As part of the Code of Practice 9 (COP9), this process can only be used to admit to tax fraud, and is the only option that offers protection from prosecution.
Through a CDF agreement, HMRC will agree not to launch a criminal investigation or prosecute, as long as the individual makes a full disclosure.
It is essential to only use the correct disclosure facility for your situation, which is why you should consult a tax professional before acting.
Seek professional tax advice
Read the HMRC press release for more information about these nudge letters and disclosure options for taxpayers who receive them.
As HMRC has twelve years to investigate offshore tax non-compliance, the latest response to the Pandora Papers should serve as a reminder that if you fail to declare overseas income and pay the correct taxes, HMRC will find out eventually.
The longer the deception goes on, the more serious the consequences will be when it is uncovered. So, if you have offshore assets and gains that you should have declared, it would be better to speak to a tax adviser sooner rather than later.
Every case is different, but tax experts like gbac accountants can help you to resolve HMRC enquiries
as efficiently as possible.
We can conduct a review of your onshore and offshore interests in the context of your existing tax returns to identify any arising liabilities, and register you for the appropriate disclosure facility if necessary.
Should you require it, we can prepare a disclosure that minimises your exposure to penalties and interest, potentially negotiating pay arrangements with HMRC to resolve the matter cost-effectively.
For a no-obligation consultation about a tax dispute, please contact gbac by calling 01226 298 298 or emailing info@gbac.co.uk and we will assist you confidentially.