Cayman Islands Tax Agreement: the clock is ticking

Remember, remember the fifth of November. . . that’s 5 November 2013 in this case, the date UK signed an automatic tax information sharing agreement with the Cayman Islands. And it’s time to act now

Following on from an earlier UK agreement to share tax information with the USA, and a subsequent similar commitment made by British Overseas Territories with a financial centre, the Cayman Island Tax Agreement states that the authorities in Cayman Islands will automatically provide information HMRC about those who have a funds in its jurisdiction as well a link to the UK.

With strict penalties awaiting those who fall foul of offshore non-compliance and the potentially advantageous disclosure window rapidly closing, it is essential to take advice on all your offshore schemes as soon as possible – speak in confidence to an expert advisor now.

Cayman Islands Tax Agreement – The Basics

The agreement envisages the first date for reporting data will be 31 May 2016 but that this will include all reportable data for 2013, 2014 and 2015. The reportable data for 2013 and 2014 is limited and will broadly include:

  • The name, address, date of birth and National Insurance Number of each specified account holder
  • The account number
  • The name of the reporting institution
  • The account balance

There are enhanced reporting requirements for 2015 and 2016 and an alternative reporting regime for those who are identified as being resident but not domiciled in the UK and who are taxed on the remittance basis.

HMRC hopes that the agreement signed on 5 November 2013 will help ensure that those with money in Cayman Islands accounts are paying the correct amount of tax. It also hopes it will increase its ability to clamp down further on individuals and entities who seek to hide their assets offshore. Undoubtedly, as the Cayman Islands has historically been regarded as a tax haven, HMRC will be gearing up to commence tax investigations into anyone who is notified to them.

Cayman Islands Tax Agreement – The Timing

In certain aspects the timing associated with this agreement is unfortunate. This is because the initial reporting commences after the end of the Liechtenstein Disclosure Facility (LDF), which currently offers significant potential benefits to those who have underpaid their tax.

The main attractions of the LDF are that it provides an amnesty in relation to pre-1 April 1999 taxes and limits the financial penalty HMRC can impose to 10% of the tax for years up to 2008/09 and 20% thereafter. Unfortunately the ability to participate in the LDF finishes on 5 April 2016 so will not be an option for Cayman Island account holders who wait until HMRC contacts them, which will be sometime after May 2016 when the first batch of information has been received, processed and acted upon.

Clearly therefore, by waiting for the agreement to come into force in 2016, those who have a disclosure to make may well be financially disadvantaged. They would be very wise to make a voluntary disclosure ahead of HMRC receiving the information at a later date.

Cayman Islands Tax Agreement – Penalties

For the purposes of penalties for offshore non-compliance, the Cayman Islands falls with ‘category 1′ meaning the maximum financial penalty HMRC can pursue in respect of tax non-compliance is 100% of the potential lost revenue. The 100% penalty will be HMRC’s starting point if it is left with no option other than to open tax enquiries or tax investigations into the tax affairs of anyone it suspects of having failed to report income or gains on funds held in that territory.

Cayman Islands Tax Agreement – Why has this agreement come into being?

In September 2012 the UK became the first jurisdiction to sign an enhanced automatic tax information exchange (“TIEA”) agreement with the USA. Moves to tackle offshore tax evasion have moved quickly since then. This original agreement followed the development of a new model intergovernmental agreement based on the US FATCA (Foreign Account Tax Compliance Act) legislation.

The agreement to exchange tax information with the Cayman Islands follows a commitment given earlier this year by British Overseas Territories with a financial centre including Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Gibraltar, Montserrat and the Turks and Caicos Islands to sign such agreements. The blueprint of the Agreement was published as part of a discussion document dated 26 June 2013, which considered how the UK agreements with the Crown Dependencies could be implemented and set out the information likely to flow between the Cayman Islands and the UK.

In negotiating the agreement the UK’s approach was to achieve maximum consistency with arrangements the US is also putting in place with the Overseas Territories and the Crown Dependencies. This will minimise the additional costs and burdens to businesses that the increased reporting requirements would otherwise bring.

The deal between the UK and the Cayman Islands is non-reciprocal meaning information will flow only from the Cayman Islands to the UK and not vice versa. As a result the agreement has not required UK domestic legislation to bring it into effect. It is likely that similar agreements will very quickly be reached with the other Offshore Territories.

Cayman Islands Tax Agreement – What should I do?

HMRC will have to wait until the first batches of information are received in 2016 before being in a position to make direct approaches to individuals and entities who appear to have undisclosed funds in these territories. Based on the various campaigns HMRC has launched over the years in its fight against offshore tax evasion it is likely that, even when armed with firm evidence of undeclared offshore funds, it may still offer the vast majority of account holders the opportunity to make a voluntary disclosure and secure preferential treatment. But there is no guarantee.

The clear message to anyone who has used banks or financial institutions in the Crown Dependencies, Offshore Territories or indeed any other offshore jurisdiction for the purpose of tax evasion or questionable tax avoidance is to give very careful consideration to coming forward now to make a voluntary disclosure to HMRC.

The LDF has clear attractions for this purpose but any other approach on a voluntary basis is likely to produce a much better result in terms of the tax, interest and penalties that would otherwise result if HMRC starts its own tax enquiry, tax investigation or even criminal investigation with a view to prosecution.

Anyone who thinks there may be an issue to consider should seek specialist advice immediately. With years of experience in the field, the experts at inTAX are here to help.

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