The UK Government announces new measures to tackle money laundering in the wake of the Danske Bank Affair
This month, the UK Government has announced new measures to increase further transparency and tackle corruption. These are aimed at stopping the abuse of limited partnerships (LPs) and Scottish liability partnerships (SLPs) for money laundering purposes, an issue which has again come to the fore since the latest revelations regarding what is commonly known as the Danske Bank Affair.
The Danske Bank Affair concerned allegations that up to €200 billion was laundered through the Estonian branch of Denmark’s largest bank between 2007 and 2015. The European Commission has called it the “biggest scandal in Europe”, and it has prompted action from regulators worldwide causing impacts that have reached far beyond those directly involved. Although now closed, the case has triggered investigations in the UK due to the alleged use of limited liability partnerships (LLPs), LPs and SLPs for money laundering purposes.
The UK’s National Crime Agency has openly recognised the “threat posed by the use of UK company structures as a route for money laundering” and is investigating the use of these companies and professional enablers in connection with the widening scandal. One entity linked to the affair is already officially under criminal investigation.
Danske whistleblower Howard Wilkinson, who led the bank’s Baltics trading unit from 2007 to 2014, told a Danish parliamentary hearing last month that “The role of the United Kingdom is an absolute disgrace. Limited liability partnerships and Scottish liability partnerships have been abused for absolutely years”. In September, an inquiry by a Danish law firm into the affair stated that LLPs and SLPs made up the second biggest proportion of their Estonian branch’s non-resident customers – second only to those based in Russia.
Although UK regulators may have been aware of the misuse of these corporate vehicles for some time, this is the first time the Government has officially announced it will be introducing new measures to bring greater transparency and more stringent checks to LPs and SLPs.
The requirements will include that those registering LPs and/or SLPs must demonstrate that they are registered with an official anti-money laundering supervised agent, such as an accountant or a lawyer, or an overseas equivalent. The LP must demonstrate an ongoing link to the UK, for example by keeping its principal place of business in the UK. All LPs must submit a confirmation statement at least every 12 months to Companies House to ensure their information is accurate and up to date, and that Companies House will be given powers to strike off dissolved LPs and SLPs that are not carrying on business.
UK Business Minister Kelly Tolhurst said “The UK is taking strong action in the international fight against money laundering and today’s proposals will increase best practice amongst businesses.” The proposals come ahead of broader reforms which aim to ensure that Companies House is fit for the future and continues to contribute to the UK’s business environment through tackling corruption.
This most recent development in the UK shows the extent of the Danske Bank Affair’s impact. Although discussion around the need for changes to LP requirements dates back to well before revelations of the scandal, it has been a catalyst in bringing about significant changes to this area of UK corporate law. It will affect all UK-registered LPs and could make the UK a less attractive proposition for some investors due to the new demands. It is part of a continuing drive by the UK Government to ensure the country has world-leading corporate standards.
Read the press release from the UK Government on the proposed changes here.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
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.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (firstname.lastname@example.org).
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Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (email@example.com).