Increased Investment in Personal Tax Compliance in the UK

24 August 2022

Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries. 

The UK’s HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work.

It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.

This article discusses the main developments in support of the increased focus on international transparency and tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article. 

Economic Crime (Transparency and Enforcement) Act (ECA) 2022

Register of Overseas Entities

The ECA introduced the Register of Overseas Entities, which requires foreign entities that own or acquire property in the UK to register with Companies House and provide details of their beneficial ownership. The legislation received royal assent on 15 March 2022 and the launch of the register is scheduled for 1 August 2022.

Going forward, affected non-UK entities will have to register the details of beneficial owners within six months from that date and the obligation to register new acquisitions and to update changes in existing registrations will be ongoing. 

Broadly, the ECA requires non-UK entities that own or buy UK land to disclose details of beneficial owners with significant control (eg, participants owning more than 25% of the shares) before they may receive an ID number which, in turn, is needed to complete the property title registration.

The information provided will be verified and updated annually. An application to the register will also require details about any disposition made since February 2022, or a declaration saying that no disposition has been made.

Unexplained wealth orders

The ECA has also made some significant changes to the operation of unexplained wealth orders (UWOs), which were first introduced by the Criminal Finances Act 2017 to extend the powers available under the Proceeds of Crime Act 2002 (POCA 2002).

This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets. UWOs have to date been used sparingly but the changes introduced by the ECA may allow cheaper and easier access to them as a tool available to enforcement agencies.

Under the ECA, UWOs can now be directed at a responsible officer as a means of “piercing the corporate veil” and stopping complex ownership structures from obscuring a source of wealth. The ECA also extends the time period for an authority to act or decide on the next steps in relation to the UWO and, importantly, curtails any application for costs against the authority.

"This requires individuals to declare the nature and extent of their interest in certain assets and to explain how they obtained such an interest or face seizure of such assets."

Trust Registration Service (TRS)

The Trust Registration Service (TRS) is a register of the beneficial ownership of trusts. It was set up in 2017 as part of an EU anti-money laundering directive aimed at combating money laundering, serious crime, and terrorist financing.

Each EU member state has a similar register, and the UK agreed to maintain the TRS as part of the Brexit Withdrawal Agreement. The TRS is maintained by HMRC and mandates that trustees of certain trusts must provide HMRC with specific information within a given time period. Trusts with a UK tax obligation have been required to register since 2017, and non-taxable trusts since 2020.

 Broadly, the following two categories of trusts must be registered:

  • Registrable express trusts – these are created deliberately by a settlor. All UK express trusts are required to register, unless explicitly excluded, eg, trusts arising in financial markets infrastructure. Some non-UK express trusts are required to register, even if they are not "taxable", eg, those that acquire land or property in the UK, or where at least one trustee is a UK resident and enters into a “business relationship” within the UK.
  • Registrable taxable trusts – trusts with a UK tax liability must be registered, eg, non-UK trusts that receive UK source income or hold assets in the UK.

The primary registration deadline is 1 September 2022, but it varies depending on the type of trust (taxable or non-taxable) and date of creation. After the 1 September deadline, trusts will generally be required to register within 90 days of any event that causes the trust to be liable to register, eg, becoming liable for UK tax or entering into a “business relationship” within the UK. Taxable trusts must declare that the TRS is up to date by 31 January each year.

Person of Significant Control (PSC) Register

The PSC Register has been relevant for most UK companies and LLPs since April 2016. Companies House maintains the Central PSC Register but entities must also keep their own individual register.

A PSC meets one of the following conditions as someone who:

  • holds more than 25% of shares;
  • holds more than 25% of voting rights;
  • holds the right to appoint/remove a majority of the board;
  • holds the right to exercise, or exercises, significant influence or control (SIOC) over the entity; or
  • holds the right to exercise, or exercises, SIOC over a trust/firm the trustees/partners of which meet one of the conditions above.

The entity's register must include the information within 14 days of being confirmed and any update must be recorded at Companies House within an additional period of 14 days.

Mandatory Disclosure Rules (MDR) for Common Reporting Standards (CRS)

The implementation of the MDR marks the UK’s commitment to a global approach to tax transparency following its EU departure. The hope is that adopting a global MDR will further promote country-by-country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled globally.

“There should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.”

When the UK left the EU, it was no longer bound to implement the widely criticised and unduly onerous EU directive on administrative co-operation (known as DAC6), designed to give EU tax authorities early warning of new cross-border tax schemes. DAC6 required intermediaries, such as law firms, accountants and tax advisers, to file reports where arrangements met one of several "hallmarks".

DAC6 was implemented in the UK in January 2020 but following Brexit was quickly replaced by the draft MDR regulations which reflect and implement the OECD model rules. After lengthy consultation, the new MDR regulations are expected to come into force in the summer of 2022. It should be noted that while SI 2020/25, which implemented DAC6 in the UK, will be replaced and repealed; those regulations will still affect arrangements entered into before the MDR regulations come into force.

While the two regimes are broadly similar, under MDR there will be a reporting exemption, where disclosing the information would require the intermediary to breach legal professional privilege. There is also a very welcome de minimis exemption that applies to reporting a potential CRS avoidance arrangement where the value of the financial account is less than USD1 million.

Conclusion

Attempting to maintain some fiscal oversight on a global scale may be commendable and apparently consistent with public opinion. But there will always be a challenge where there is continued opportunity for tax arbitrage as each independent state is entirely at liberty to levy taxes at a rate and in a manner most economically suited to local economic conditions and subject to political will.

The vast network of tax treaties and information-sharing initiatives will nonetheless discourage any activity that seeks to exploit tax arbitrage beyond just healthy competition and with the now extensive raft of anti-avoidance, increased tax-compliance initiatives, there should no longer be any opportunity to hide wealth or assets beyond the reach of at least one tax authority.

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