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Reproduced with permission from BNAI European Tax Service Monthly Digest, 18 ETS 19, 12/30/16. Copyright 2016 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com DECEMBER 2016

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  • Reproduced with permission from BNAI European TaxService Monthly Digest, 18 ETS 19, 12/30/16. Copyright �2016 by The Bureau of National Affairs, Inc.(800-372-1033) http://www.bna.com

    DECEMBER 2016

  • Data Analytics andthe Tax TransparentWorldNigel Barker and Annis LampardDeloitte U.K.

    In an increasingly digital society HM Revenue & Customs(‘‘HMRC’’), in the U.K., like other tax authorities, is reviewing itsoperations and capabilities to respond to new demands upon thetax system. Beginning with HMRC’s 2015 Making Tax Digitalroadmap, this article looks at some key initiatives within HMRC,how these interact with increased data flows reaching HMRCunder the Common Reporting Standard and other measures, andfinally considers the key impacts of these trends on the privatewealth world.

    I. Tax Authorities and Data Analytics

    The past 20 years has seen the increasing digi-talization of communication, lifestyles andprofessional life and government bodiesaround the world are considering how to adapt theirprocesses and structures to interact efficiently with anonline society.

    HMRC has been particularly proactive in address-ing this and the U.K. tax authorities’ interest inMaking Tax Digital (a title adopted for the six inter-linked consultations released in August 2016) hasbeen building for some time.

    On December 14, 2015, HMRC published theirMaking Tax Digital roadmap (‘‘HMRC 2015 road-map’’), which expressed their desire to remove bu-reaucratic form-filling, eliminate unnecessary timedelays, and give taxpayers access to their data in oneplace, signalling the end of the tax return. At the sametime, HMRC are clear that there will be no loss of sup-port for those who struggle to access digital services.

    The six HMRC consultations released in August2016 build on HMRC’s 2015 roadmap by offering fur-

    ther detail on what a digital tax system could look like,ranging from proposals for HMRC to directly gatheran increased amount of third party data from banks,building societies, and potentially pension providers,to administrative points around how filing deadlines,late filing penalties and enquiry powers will be up-dated to reflect a digital, real-time tax system.

    Whilst HMRC’s 2015 roadmap understandably fo-cuses on simplifying the tax system and improving thecustomer experience, there is also a focus on reducingthe scope for error. As such, the consultation ‘‘MakingTax Digital: Transforming the tax system through thebetter use of information’’ proposes removing theburden of information-gathering from taxpayers, buttaxpayers will still have an obligation to check that theinformation held on them by HMRC is complete andaccurate.

    It would be reasonable to expect that HMRC mighthope that the digital agenda will assist in identifyingmore accurately tax risks and where they occur. Forexample, increasingly automated flows of third partydata could help reduce inaccurate tax reporting

    Nigel Barker is aTax Partner andAnnis Lampard is aDirector at DeloitteU.K.

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  • through innocent error. As well as the immediateimpact on the tax gap, HMRC’s interventions on re-maining errors could be more narrowly targeted.HMRC suggests that any remaining errors identifiedin a digital tax age are more quickly identified as de-liberate, rather than careless or innocent errors.

    Indeed, HMRC already moved to centralised riskreview teams some years ago, using computerized riskprofiling tools to identify cases which are perceived tobe at a higher risk of containing tax avoidance or taxevasion. These risk profiling tools have become in-creasingly sophisticated over the past decade, allow-ing HMRC to direct resources to areas which thedepartment perceives as most high-risk, whether thisrelates to particular sectors, geographical locations ortechnical issues.

    This is part of a wider, global, trend and a recentOECD report ‘‘Advanced Analytics for Better Tax Ad-ministration’’ noted that tax authorities as a whole aremoving in their use of data analytics from a genera-tion 1 approach, focusing on predictive analysis, to ageneration 2 approach, focusing on prescriptive ana-lytics. Under prescriptive analytics, tax authoritiesaim not just to identify areas of risk, but also to iden-tify the impact of their actions, so as to effectively andproactively influence specific groups. Seen in this con-text, data analytics could prove an important tool inHMRC’s ‘‘Promote, Prevent, Respond’’ strategy, whichaims to create significant behavioral change in thetaxpayer population.

    HMRC is aided in this by the introduction of theirlong-awaited Connect database. Introduced in 2008,but not fully operational until 2014, and with rumorsthat it cost between 45-80 million pounds to build andholds more data than the British Library, the databaseallows HMRC to see on a single screen what assets areheld by a taxpayer, what businesses, properties and in-dividuals a taxpayer is linked to, and to draw on datafrom other bodies such as the Land Registry and othergovernment departments. What used to take a team ofinspectors weeks to gather, can now happen at thetouch of a button.

    Moreover, this appreciation of the inter-connectedstate of a taxpayer’s affairs is reflected in the creationof the new Wealthy and Mid-Sized Business Compli-ance directorate in HMRC, which aims to review busi-ness and the entrepreneurs behind them in a holisticmanner. This new directorate is a reminder that whilstto some the HMRC 2015 roadmap can appear daunt-ing, the increasingly holistic approach within HMRCcan also be useful in aiding understanding of taxpay-ers’ affairs.

    Finally, it is worth mentioning what may beHMRC’s biggest data challenge at present, thePanama Papers. HMRC have joined a multi-body taskforce with the Serious Fraud Office, the FinancialConduct Authority and the National Crime Agency toanalyze the data from the much publicized leak.HMRC announced on November 8 it is launching over30 criminal and civil investigations. The practicalchallenges of analyzing this data could be seen as aforerunner of issues potentially arising around theCommon Reporting Standard, whilst it might be rea-sonable to expect that the four bodies in the task forceare pooling their knowledge as well as their resourcesto respond effectively to new data flows.

    II. The Common Reporting Standard and GlobalData Flows

    The Common Reporting Standard (‘‘CRS’’), in forcefrom September 2017, is often seen as the culmina-tion of the automatic exchange of information trendthat began with U.S. FATCA. However, the CRS is alsothe start of data analysis on a global scale by HMRCand the driver for further transparency initiatives.

    Below are some key dates on these initiatives.

    As seen, the U.K. has shown a willingness to actearly on transparency and on data exchange. Benefi-cial ownership registers for other EU countries willnot be in place until June 2017, with some jurisdic-tions yet to decide the terms and conditions of theirregisters. In April 2016, HM Treasury was at the fore-front of a proposal for countries to automatically ex-change the data in these registers, in addition to CRS

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  • data. The U.K. has also chosen to be a CRS ‘‘earlyadopter,’’ whilst U.K. FATCA effectively brings theCrown Dependencies and Overseas Territories intoCRS a further 12 months early.

    HMRC has responded these increased data flowsand the U.K. Government’s commitment to the trans-parency agenda by introducing further initiatives andreviews of HMRC’s powers, timed to coincide with thetimeframes around CRS.

    In August 2016, HMRC released a consultation on anew statutory Requirement to Correct (‘‘RTC’’) his-toric errors relating to offshore income and assets inyears up to and including 2015-16 tax year. RTC willbe in place from April 2017–September 2018, beingsucceeded by Failure to Correct (‘‘FTC’’) sanctionsfrom October 2018. HMRC is consulting on the FTCsanctions, but both models currently proposed byHMRC include the potential for public ‘‘naming andshaming’’ of offenders, and under one model penaltiescould start at 100 percent of the tax due and rise to300 percent of the tax due.

    Alongside this, the terms of the Worldwide Disclo-sure Facility (‘‘WDF’’) that opened on September 5,2016 will be revised with effect from October 1, 2018to coincide with the introduction of Failure to Correctand the full-scale CRS data exchange. At present, mostdisclosures will need to be filed with HMRC within 90days of registration with HMRC, and there will be anup-front self-assessment of the behaviors involved intriggering the disclosure, including whether the dis-closure is prompted by HMRC correspondence.

    HMRC’s consultation on corporate criminal sanc-tions for the failure to prevent facilitation of tax eva-sion will also be in situ from September 2017,requiring that U.K. businesses update their proce-dures to minimize risk. In a further sign of joined-upworking, it is understood that voluntary disclosures toHMRC may in the future focus as much on which par-ties advised the taxpayer as on the ultimate tax liabili-ties.

    III. The Impact on Private Wealth

    Automatic global data flows and increasingly-refineddata analytic tools within HMRC impact the wholetaxpayer population; however, the greatest impact islikely to be felt by high net worth individuals andfamilies, due to the complexity and volume of their fi-nancial affairs. In particular, non-U.K. domiciled U.K.residents who file their U.K. returns on the remittancebasis may face a perception issue around what hasbeen reported on their U.K. returns, compared withthe new data reaching HMRC.

    HMRC have also made it clear that RTC applies tocomplex situations where advice has been taken butthe tax position has changed over time, rather thansolely to the minority who deliberately evade tax.

    HMRC’s consultation on RTC recommends that tax-payers seek up-to-date advice on their affairs and thisrecommendation will be repeated in CRS notificationletters which banks and professional firms must sendto their clients by August 2017.

    In an era of data transparency, and where the toolsto analyze this data to a granular level are increasinglyavailable, taxpayers will want to review their affairs toensure they have a full understanding of their own po-sition. In some cases it may come to light that struc-tures which were thought to be wound up or resolvedare still active; in other cases, the emphasis will be onhaving an advance understanding so as to be able toquickly and thoroughly respond to any queries fromthe U.K. authorities on offshore wealth, and decidewho within a family or family office co-ordinates re-sponses to queries.

    Where a disclosure is necessary, it is equally impor-tant to act swiftly and any delay is likely to meet withincreased sanctions. The most obvious are the FTCsanctions in place from October 2018, and mentionedabove. Alongside this, the measures introduced in Fi-nance Act 2016—including a strict liability offense foroffshore tax evasion, further increases in tax-gearedpenalties relating to offshore matters, and a loweringof the threshold for ‘‘naming and shaming’’ throughHMRC’s Publishing Deliberate Defaulters regime—are currently awaiting their start date and it seems un-likely that HMRC will wait long before activatingthese further penalties.

    Within the existing rules and the current terms forthe WDF, the minimum tax-geared penalties on a dis-closure will be increased if there has been a significantdelay in making a disclosure, and/or if a taxpayer ig-nored the opportunity to enter previous disclosure fa-cilities. At present, a significant delay is defined asthree years, but this can be less if the error being dis-closed existed over several years.

    The final point for consideration is that a discussionof data analytics and data flows should not to losesight of the fundamental importance of the relation-ship with HMRC. The sheer volume of data reachingHMRC will need careful interpretation by the tax au-thorities. Now is the time to build a positive relation-ship with HMRC, so as to provide a clear context forthe data under review. The longer term benefits inhandling perceptions of risk and mitigating theimpact of any HMRC enquiry are clear.

    Nigel Barker is a Tax Partner and Annis Lampard is a Director atDeloitte U.K.This article reflects the understanding of the law and HMRCpractice or intended practice as at September 5, 2016. Thematters discussed are complex and many considerations whichneed to be taken into account in determining when and how toapply the RTC, FTC or WDF. If you intend to make a disclosureto HMRC, please seek professional advice.

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    Data Analytics and the Tax Transparent World