HMRC Pandora Papers investigations: what we know now

  • Business Advice
Employment Tax
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Peninsula Group, HR and Health & Safety Experts

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David Francis, partner, and Joe Burns, associate director, in Grant Thornton’s tax dispute resolution team examine HMRC’s investigation activity related to the revelations in the Pandora Papers and how their approach will shape future compliance strategies.

In June 2023, HMRC wrote to 660 UK taxpayers implicated by the Pandora Papers leak of 2021. However, rather than opening investigations into these individuals, HMRC invited recipients to consider making a voluntary disclosure.

Historically, HMRC has investigated suspected tax loss by opening enquiries and conducting investigations. HMRC operates a risk-based approach to conducting investigations. It will use its information powers to gather evidence that enable it to check each of the tax ‘risks’ it believes are present and HMRC will only cease investigating once it is satisfied that all of its ‘risks’ have been satisfactorily addressed.

While HMRC investigations are intrusive for taxpayers and can take considerable time to complete, when worked properly, they are a highly effective means of recovering unpaid tax, particularly in cases where the taxpayer’s tax affairs are complex.

Following the Pandora Papers leak in 2021, it was widely expected that the information contained therein would lead to a raft of HMRC investigations. However, in a surprising move, HMRC’s initial attempts to recover unpaid tax from those named in the leak has not involved the opening of investigations but instead, the issuance of nudge letters.

There is no question that in recent years, nudge letters have proven to be a key tool within HMRC’s overall compliance strategy. The nudge letters encourage taxpayers to reconsider whether a specific activity, transaction or holding gives rise to UK tax consequences and provides details on how to make a disclosure, should one be necessary.

As an example, one of HMRC’s most successful nudge letter campaigns has targeted landlords who HMRC suspected of failing to report 100% of their income from property. The campaign has prompted tens of thousands of voluntary disclosures and generated millions in additional compliance yield.

However, in our opinion, the nudge letter campaigns have been so effective because they have been used to target relatively simple tax affairs. When the question is as simple as – ‘have I correctly declared my rental income?’, it is a relatively simple tax for most taxpayers to check the position and make a decision on whether a disclosure is required.

Complex offshore arrangements

Regrettably, the tax consequences associated with complex offshore arrangements require considerably greater knowledge of not only UK tax laws, but also the specific arrangements that individuals have entered into. This makes responding to a nudge letter considerably more difficult.

Many of the clients we are representing did not set up the offshore structures they are associated with and some have no knowledge whatsoever as to why they have been named within the Pandora Papers leak. Accordingly, it is absolutely impossible for these taxpayers to provide a meaningful response to HMRC within the 30 day-deadline.

We understand that Grant Thornton are not alone in this regard. During a recent conversation with HMRC, we were advised that whilst the response rate to the nudge letters was very high, a significant proportion of respondents have stated they are oblivious to any involvement in, or ownership of offshore vehicles.

Consequently, many taxpayers have elected not to make a disclosure, but have also been unable to provide any supporting information or documents that might help address HMRC’s ‘risks’. We believe this this puts HMRC in a difficult position.

HMRC issued nudge letters, hoping that they would prompt voluntary disclosures. Now though, with disclosures not as forthcoming as HMRC had hoped, it will have no choice but to pour resources into conducting investigations. This will be a slow, expensive exercise and where the investigations fail to generate a significant return on investment, may lead to HMRC reconsidering its approach to dealing with the information contained in the Pandora Papers.

We understand that HMRC had intended to issue more nudge letters to more taxpayers in the new year. However, given the response to this first tranche, we wouldn’t be at all surprised to see a change in approach from HMRC. With that in mind, and with the prospect of intrusive tax investigations around the corner, our advice is simple:

If you are worried about the prospect of HMRC contacting you regarding the Pandora Papers leak, do not wait for HMRC’s correspondence. Appoint an expert to help you review your tax affairs. Assuming everything is in order, you will gain substantial peace of mind. In the event that a disclosure is required, tax disputes specialists will guide you through the process and ensure you don’t pay any unnecessary tax, interest or penalties.

If you have already received an HMRC nudge letter, be mindful of what HMRC can and cannot ask you to provide. Regardless of whether you have made a disclosure or not, the key to avoiding a drawn-out, protracted exchange with HMRC is understanding what is and what isn’t needed to address HMRC’s risks.

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