THE local finance industry has a golden opportunity to shape future relations with the UK tax authorities following last month’s UK Budget. Jason Ward, head of tax compliance for Walbrook Group, said that the budget contained few new measures that would have a direct impact on the local finance sector.

However, Chancellor Gordon Brown had clearly left the door open to make significant changes in the future. The attitude of offshore centres could influence the extent of these.

A clear statement of intent was made in the 2003 Budget, when the Inland Revenue’s new compliance and enforcement package was unveiled.

This aims to raise more than £1.6bn by targeting fraud and tax avoidance.

‘These new resources have been used, in part, to tackle fraud involving the concealment of undeclared profits and income offshore,’ said Mr Ward.

‘This has now gone a stage further and they are targeting anyone trying to hide from the Inland Revenue or seeking to avoid tax by exploiting loopholes in the law.’

In a move to ‘turn up the heat on tax avoidance’, the Inland Revenue has now established an Offshore Fraud Project Team and, in a separate initiative, an Offshore Arrangements Project.

The first is specifically targeting fraud using offshore trusts, and investigating compliance with reporting requirements on certain schemes.

The second is a specialist unit, looking at companies and individuals with connections in finance centres such as Guernsey.

Although these are likely

to have an impact locally,

Mr Ward said adopting a cooperative approach could prove beneficial.

‘There is no escaping the fact the offshore finance industry will be affected in some way by these initiatives.

‘How inquiries from the Inland Revenue are managed could largely dictate the extent of this,’ said Mr Ward.

‘If trustees offshore are seen to be generally compliant we could satisfy the Inland Revenue that more extreme measures of investigation are not necessary.

‘However, an industry that is generally resistant to compliance will surely incite the UK tax authorities to implement more drastic and vigorous action.’

The information the Inland Revenue will request will fall into two categories – statutory and non-statutory disclosure.

The first covers information trustees are legally obliged to provide, while the second is discretionary.

Mr Ward said a generally co-operative approach was likely to be appreciated.

But this has to be balanced against a trustee’s duty to as act in the beneficiary’s best interest, without breaking the law.

‘The Inland Revenue is certainly not always entitled to everything it asks for, and managing the release of information to the under non-statutory enquiries should be carefully considered.

‘This is where the tax experts will come in, to help educate firms and trustees in their tax compliance obligations,’ he said.

‘These can be very technical and complex, and a number of trust companies may not have the in-house expertise to deal with this.’

One new measure announced in the Chancellor’s Budget speech was a legal obligation on providers to report tax avoidance schemes.

This will not directly apply to offshore trust firms, because the Inland Revenue does not have any legal enforcement power on the local industry.

But Mr Ward said the new requirement did have implications on the local industry, particularly for smaller firms.

‘Under the new requirement, the obligation to report certain schemes will fall on the client, because it is they who are subject to the Inland Revenue requirements, not us.

‘However, the end result will be they will only want schemes that are watertight, so firms are going to require specialist tax advice before promoting products.

‘That could impact on smaller trust companies who don’t have that expertise in-house.’