EU Clamps Down on Tax Evasion
People who are adverse to paying taxes on their investments are going to have to try a lot harder to avoid the clutches of the Inland Revenue, thanks to financial regulations introduced throughout Europe.
The EU savings directive, which came into force in July 2005, makes it harder for investors to keep quiet about offshore savings accounts, in which British bank customers hold an estimated £10 billion. At least, that was the figure until the introduction of the rules that saw a flurry of activity from savers moving up to £500 million back to accounts in the UK or to tax havens further afield, such as Dubai and Singapore.
The Chancellor of the Exchequer will recover around £70 million – and possibly as much as £100 million - annually lost in taxes, according to HM Revenue & Customs, Britain’s tax collecting body. But this is only a small proportion of the total funds that the country misses out on each year.
The Chancellor is a fervent believer in uncovering all the UK’s tax evaders, and for several years has run operations to recoup lost taxes. The new EU ruling is, however, seen as being about “fairness”, rather than as a “revenue raising issue”.
Under the latest directive, HM Revenue & Customs, shares banking data with EU member states, and receives information about savings income paid to UK citizens from such sources as bank deposits, bonds and cash-based unit trusts. Even traditional British offshore havens - including Jersey, Guernsey, the Isle of Man, the Cayman Islands and the British Virgin Islands - have agreed to take on a variation of the new European rules, despite not being part of the EU.
They will levy a ‘withholding’ tax on savings income if an investor lives in a different country. A large proportion of the appropriated funds will then be paid to the saver’s country of residence.
It is illegal in the UK not to declare offshore accounts with the intention of avoiding payment of taxes to the Inland Revenue. Basic-rate taxpayers must pay 20% tax on all interest earned through savings, while higher-rate taxpayers must pay 40%.
Hundreds of thousands of British investors are likely to be affected as a result of the latest EU regulations. Offshore savers who are caught by the taxman’s expanded Offshore Fraud Group for not having paid levies will be forced to stump up back taxes for up to the past 20 years. And they may also face a fine of 100% of the amount.
There are, however, a number of loopholes in the new rules, which allow investors to continue to unlawfully save cash without interference from the taxman.
‘Grandfathered’ bonds (ones issued before March 2001 that have had no further issues since March 2002) fall outside the remit of the directive, as do discretionary trusts, dividends, structured products that use derivatives, and offshore insurance bonds. All can be purchased from banks willing to retain their offshore customers, who typically are wealthy and are often City executives who choose to stash their sizeable bonuses where the taxman can’t get to them.
