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HM Revenue & Customs (HMRC) are writing to approximately 5,000 people who they believe are offshore account holders.

Following up on in the offshore disclosure project in 2007, HMRC have begun sending letters to thousands of taxpayers who did not respond last year, demanding to know why tax is not owed to the Treasury on funds held in offshore bank accounts.

Whilst there is nothing wrong in having an offshore account, the account holder does need to let HMRC know about any liabilities they may have.
 
According to John Cassidy, Tax Investigations Partner at PKF Accountants & business advisers, HMRC's move turns one of the central tenets of the English legal system on its head by presuming that taxpayers are guilty and demanding proof of innocence.
 
John says: "HMRC is demanding confirmation and an explanation as to why tax is not due on funds about which it knows little.  In many cases, HMRC only knows that someone has an offshore bank account and the funds it contains at a few specific dates. It has little idea how much interest was earned on the deposits, where the money came from or the key question of whether there is an undeclared UK tax liability at all.
 
"Legally, to issue an assessment for unpaid tax, HMRC must have made a 'discovery' or, in other words, have actual knowledge that further tax is due, not just that it might be due. Yet the threat is that such assessments will definitely be issued unless informal, voluntary answers are given to the questions raised.
 
"The fact is that taxpayers are under no legal obligation to respond to these letters, but the reality is that anyone who ignores one will ultimately face an assessment seeking to collect the tax assumed to be due, perhaps after a detailed investigation into their tax affairs. This type of "intervention" exercise was piloted in 2006 and was heavily criticised by taxpayers and agents alike, so much so that HMRC agreed to suspend them pending further review and discussion. That review, launched by HMRC's director general Dave Hartnett, does not seem to have achieved much..
 
"With so many complexities and possible twists in these cases it is essential that the boundaries of the legislation and taxpayers' rights are respected, whilst always being aware of practical solutions. The only sensible option for individuals who have not fully declared their income in the past is to make a full voluntary disclosure to HMRC. But anyone contemplating this approach should seek expert advice on how to do it in a way that keeps penalties and risks to a minimum while reducing exposure to further investigation and potential prosecution."

Chas Roy-Chowdhury, head of taxation at the Association of Chartered Certified Accountants (ACCA) agrees that this is a complicated compliance check by HMRC. He believes they are depending very largely on the willingness of offshore account holders to inform them of their financial details. But if this is not done proactively, HMRC will find other ways and means, such as targeting banks and finance providers. Ultimately HMRC are intent on getting the information they want.

Gary  Ashford, a tax investigations director at Grant Thornton comments that those who receive the form must then sent it back to HMRC, who will use this information to verify the individual's reply and either let them off or apply penalty tax accordingly. Ashford says, "The letter in itself is no cause for alarm as many offshore  account  holders will not have used the offshore disclosure initiative  because  they  had good reasons for holding an offshore account which they  didn't  feel required further explanation to the taxman. These individuals  may  wish simply reply to HMRC with a valid reason as to why they have not  disclosed  the  details  of  their  accounts  and expect to be bothered no  more."

He  adds,  "The  letter does not amount to a formal enquiry, however, this  less  formal  approach  for  information  was given support in last week's  Budget."

On  the other side of the fence, there will be some who knowingly avoided using the offshore disclosure initiative in the hope they would not be caught. Some of these individuals could face penalties of up to 100 per cent of the tax due and in exceptional circumstances, criminal investigation.

Ashford  believes  individuals  who  have  knowingly avoided paying tax on  their  offshore accounts should own up as soon as possible because HMRC are taking cooperation into account when determining any penalties, but he  warns that HMRC has said penalties will be no less than 30%.

"Tax  evaders  had their chance to come clean and pay reduced penalties of  10%  last  year.  Now,  HMRC  is  playing  hardball  and will be taking no  prisoners," says Ashford. This  hardball  approach  is  indicative  of  increased powers for HMRC as  announced  in  last  week's  budget  to  carry  out  compliance  checks on  taxpayers.

HMRC relentlessly push for increased powers of investigation  and  the changes announced in the Budget will enable tax inspectors to carry out spot-checks on all companies and self-employed people who run their  businesses from home from next April. So now those who run their businesses from home can expect HMRC to turn up whenever they like.