The release of the Panama Papers in 2016 and the Pandora Papers in 2021 gave people an unprecedented insight into the financial systems used by royals, politicians (including world leaders), celebrities, and the super-rich to manage their tax liabilities.
Both showed the extensive use of offshore accounts, located in what are known as ‘tax havens’. Although having an offshore account in a tax haven is perfectly legal, they are sometimes used as a vehicle or cover for financial crimes such as money laundering, circumventing international sanctions, and tax evasion.
What is a tax haven?
When asked about tax havens, most people think of sunny Caribbean Islands. However, Hong Kong, Gurney, Jersey, Luxenberg, and the Isle of Man are all well-known tax havens and none of these countries are renowned for their good weather. Another misconception about tax havens is that they are a product of recent capitalism and globalisation. In fact, historians have found evidence of the ancient Greeks using isolated islands for tax haven purposes.
Regardless of the climate and modernity, what tax havens have in common is they offer low or no tax liability to foreign businesses and people to attract external investment. There is no strict definition of a tax haven; however, the Organisation for Economic Cooperation and Development (OECD) states that they all have the following common factors:
- No, or low tax on relevant income.
- Strict financial privacy laws.
- Little transparency.
The most cited research on tax havens is the Hines-Rice paper, created by James R. Hines Jr. and PhD student Eric M. Rice. It states that the differences in tax havens meant it was impossible to provide a blanket definition, beyond the requirement for low effective tax rates.
Is it illegal to have an offshore account in a tax haven?
Despite their shady reputation, placing funds in an offshore account in a known tax haven is perfectly common and can be completely legitimate. Examples of a legal use of offshore accounts include:
- You are an ex-pat or dual-citizen of the country where the account exists and any income entering the account is properly declared for tax purposes.
- You own a business that operates in the country where the account sits, and you declare any income to HMRC. The same applies to any commercial or rental property that you rent out.
- You declare any interest on the funds contained in the account to HMRC.
You do need to be careful and seek regular, professional advice when operating an offshore account because, similar to tax evasion and tax avoidance, the line between legal and illegal when it comes to depositing money in a tax haven is easily crossed.
When is using an offshore account in a tax haven illegal?
If you are using an offshore account based in a tax haven to conceal income or assets that you would normally have to pay tax on, you could be committing tax fraud or tax evasion.
For example, if you live in the UK and sell a property in the Cayman Islands and fail to declare the profit made to HMRC to avoid paying Capital Gains Tax, you could be committing an offence. This is an extremely simplistic example, the world of offshore banking, shell companies, and cross-border asset transfers is incredibly complex. It is for this reason that Governments spend a great deal of resources to unearth offshore accounts used for tax evasion.
How does the UK Government detect possible offshore tax evasion or tax fraud?
HMRC uses domestic and international intelligence to detect if a company or person is using an offshore bank account in a tax haven for illegal purposes. For example, the Organisation for Economic Co-operation and Development’s (OECD) agreement, titled the Common Reporting Standard (CRS) provides global visibility of the offshore financial accounts of taxpayers. HMRC currently receives information on around nine million accounts from over 100 jurisdictions. Other international agreements include:
- Reporting Rules for Digital Platforms, which came into force from 1 January 2024. Digital platform operators must now report information on people selling goods and services via their platform to tax authorities and sellers.
- Crypto-Asset Reporting Framework (CARF), to be implemented for the collection of information from 2026 and its exchange from 2027. The Framework will provide automatic exchange of information on ownership of, and transactions in, crypto assets, which are not covered by the CRS. See FAQ.
Domestically, the People with Significant Control Register provides publicly available information regarding who has beneficial ownership of a particular company. And in 2022, the Register of Overseas Entities was introduced. This provides HMRC information regarding beneficial ownership on people and entities using complex offshore structures to own and benefit from UK property.
Concluding comments
Although using an offshore account in a recognised tax haven can be perfectly legal, doing so can make you vulnerable to HMRC investigations. Our Tax Fraud Solicitors have extensive experience in managing these types of situations, as well as successfully defending complex tax fraud cases.
In part two of this series of articles, we will examine the various offences linked with offshore accounts and the defences available.
To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: The points in this article reflect the law in place at the time of writing, 20 December 2024. This article does not constitute legal advice. For further information, please contact our London office.
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