On 18th May 2023 the BBC Data Journalism Team, published an article having spoken to, amongst others, John Barnett, Chair of the Chartered Institute of Taxation’s Technical Committee,  claiming that HM Government had not imposed £1bn of fines, which it is entitled to charge, in respect of entities not established in the UK failing to register verified proof of ownership by 31 January 2023 as required by the Economic Crime (Transparency and Enforcement) Act 2022 Property register fines worth £1bn not yet imposed – BBC News.

Caesium International is authorised to carry out such verification, and our limited experience indicates good reasons fines have been imposed.

The BBC reached their number by looking at the presumed number of entities which it appears should have been registered (roughly 5,000 but rounded down to 4,000 to be safe) x the number of days since 31 January 2023 (over 100) x the maximum daily fine of £2,500.

But the article does not offer the real, and very sensible, reasons behind the failure to impose fines.  The government’s reply is that they are building cases in readiness and as I will mention later, there are real reasons why cases have to be built.

But first some background.

Background

It has been estimated that some £50bn of unclean money has been laundered through the UK property market.  But now that the horse has well and truly bolted, let’s see how the UK has dealt with the use of UK based shell companies.  (Shell company is a term used to describe a company which has no ascertainable owner.  An early example would be the Cayman twins, where Cayman company A would own Cayman company B which would in turn own Cayman company A.   For more on this topic I highly recommend the book based on a proper academic study Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism by Michael G. FindleyUniversity of Texas, AustinDaniel L. NielsonBrigham Young University, UtahJ. C. SharmanGriffith University, Queensland)You can also read more on the website globalshellgames.com.

Readers might recall David “call me Dave” Cameron presiding over a G8 Summit at Lough Erne in November 2012.  At that Summit, it was agreed to crack down on economic crime (money laundering to you and me) by requiring the disclosure of the beneficial owners of companies.  These are now called PSCs (persons with significant control) and a search of any company registered at Companies House will reveal whether there is one and if so, who it is.   In July 2013 the UK Government issued a consultation document and replied to the representations made in 2015.  This ultimately led to the insertion of a new Part 21A in the Companies Act 2006 which came into force on 30th June 2016.

And there is more from Dave.  In 2016 he said,

We […] know that some high-value properties, especially in London, are being bought by people overseas through anonymous shell companies, using plundered or laundered cash. So we will insist that all foreign companies that own properties in the UK will also have to register publicly who really controls them, and that no foreign company will be able to buy UK property or bid for central government contracts without joining this register.

Of course, Dave did not set a timetable.  In 2018 Margaret Hodge MP, in her capacity as chair of the snappily titled ‘All-Party Parliamentary Group on Anti-Corruption and Responsible Tax’, claimed that the new laws were “oven-ready” (albeit not, as we will see below, fully cooked through), and went on to say, “One is left wondering whether the delay is intentional and whether the Government does not actually want to protect this market in money laundering that is flourishing in Britain”.

How cynical!  Ms Hodge might think so, but I am confident that Dave couldn’t possibly comment. Incidentally, the term “oven-ready” has taken a battering over recent years (pun intended).

And that was it.  That was until Russia invaded Ukraine (24th February 2022), and then the urgent need to enact this legislation became even more urgent, and Prime Minister Boris Johnson rushed the new law through as part of his war response.

The law came into effect in August 2022 with a deadline for entities which were not established in any part of the UK and which directly held land in the UK to register by 31 January 2023.    Failure to do so would lead to fines and the effective freezing of their UK property asset(s).

Now if you are a wealthy foreigner, owning a residential property in central London, a £2,500 per day fine is going to be annoying, but I have to applaud the tactic of de facto freezing the property asset as one which really does wake people up.

The next question was how do you inform people who are, most likely, not based in the UK, to comply with a new UK law?   Apart from the usual noise from the media and professional bodies and firms, Companies House and HM Land Registry (HMLR) started sending letters (i.e. in the post, in envelopes) to companies which appeared to be on the Land Register and incorporated outside the UK advising them to check whether they needed to become registered and that if they failed to do so a restriction would be put on their title stating that no transfer, mortgage or lease would be registered until the law was complied with.

So why the lack of fines?

With the improvement of the internet, technology, data gathering etc., the UK has increasingly imposed taxes on people whose only connection with the UK is that they own land here.  As traditional fiscal theory states (per the Institute of Fiscal Studies amongst others) the only things a state can tax heavily are land and the poor, as neither can run away.

In 2013 the UK introduced the annual tax on enveloped dwellings (ATED) and ATED-related CGT.  In 2019, the UK introduced CGT on foreigners who owned UK land or UK property rich companies.   HMRC also started issuing fines for non-compliance.   Those in remote areas of the planet felt aggrieved at receiving penalties and this brings me to the first reason for not imposing a fine, that the overseas entity might have a reasonable excuse.

HMRC have some experience of this already and as they are working hand in hand with Companies House and HMLR, will no doubt have shared their experiences with them.  As an aside the Register of Overseas Entities is brand new, with new IT, and in my experience is working well.

Excuse No 1 – the Law

HMRC’s experience includes one of my more recent favourite judicial comments in tax cases, that of Judge Richard Thomas in Mrs McGreevy v HMRC (2017).    Mrs McGreevy owned a house in the UK.  Mrs McGreevy returned to Australia in 2011, to live in Rozelle, NSW, and sold her former home in July 2015 (some 3 months after the house came into the charge to UK CGT).  There was no tax to pay in this case and she eventually filed a Non-Resident CGT return in August 2016.   HMRC then wrote to her demanding £1,600 in penalties.  Mrs McGreevy appealed to the Tax Tribunal claiming amongst other things, that she had a reasonable excuse.   HMRC in its statement of case, quoted at para 148 of Judge Richard Thomas’s comprehensive and thorough judgment said,

[148] In its contentions in the SoC HMRC say (verbatim):
(1) The appellant did not take care to avoid the failure to ensure that their [sic] NRCGT returns were filed within the 30 day limit.
(2) The new legislation was announced in the Chancellorʼs Autumn Statement in December 2014. This was followed up by Capital Gains Tax for Non-Residents: UK Residential Property, which was first published on 6 April 2015 on HMRCʼs website. That was many months before the disposal on 7 July 2015.
(3) The appellant had an obligation to stay up to date with legislation affecting her activities within the United Kingdom. On the sale of her property HMRC would expect her, acting as a prudent person, exercising reasonable foresight and due diligence, having proper regard for their [sic] responsibilities under the Tax Acts to have researched what is expected regarding her tax obligations.
(4) Ignorance of the law is not considered a reasonable excuse.
(5) Therefore the appellant has no reasonable excuse.
(6) HMRC have considered that the appellant was not aware that a NRCGT return was required 30 days after the date of disposal, and that she thinks penalties should not be applied where an honest mistake has been made. They do not consider that these are special circumstances.

In short, it had been on the WORLD WIDE web (emphasis added) for 3 months, so she should have known.

Mrs McGreevy was found to have a reasonable excuse, as have other taxpayers, but I choose this case for the delight of para 159 of the judgment where Judge Thomas said 

[159] I am sure that every December in the past few years the appellant, like many other inhabitants of Rozelle, NSW, Australia, has been agog with excitement waiting for the British Chancellor of the Exchequerʼs Autumn Statement. How much more relevant must it be to their tax affairs than anything the Australian Treasurer has to announce.

Excuse No 2 – HMLR delays

Courtesy of COVID and other circumstances, HMLR is woefully behind with updating the Land Register.  Apparently a routine transfer is taking 12 months to be processed.  We were instructed by one client to effect a registration of their overseas entity.  Not wishing to waste my time and the client’s money, I like to check that the entity does own what it thinks it owns.  In this case, the property in question was owned, per HMLR, by Mr and Mrs X.

I reverted to the client whose response was “but we bought the property from them over a year ago!”.    He called his solicitor who confirmed that all was well, registration had been applied for, but HMLR were taking months to process the application.

Accordingly, until sales by Overseas Entities have been registered, updated, names changed etc., by HMLR, how can Companies House be confident that they are fining the right entity?

Excuse No 3 – Death, Disappeared, Dormant or Forgotten

Whilst overseas companies do not die, their owners do, or disappear, or have accidents or sometimes forget.  You may well ask who forgets that they own land in the UK?  You would be surprised.  Setting aside dementia and other terrible diseases, some people have so many assets in so many countries, which are managed not by them but by others on their behalf, that they simply do forget.

Or die, leaving incomplete details of their assets.   I have come across an individual who forgot that they owned a shipping fleet (it was a long time ago and they were extremely wealthy), and a widow who “had no money” but knew that her late husband had £10m in a bank in London.   No clues apart from that, not even the colour of the bank’s logo, but it turned out she was correct!

These things happen.   In the UK there are millions of pounds in bank accounts which are in the name of people who must be long since dead, but which have never been claimed by their heirs.   If you know of anyone to whom this might apply, then Age Concern have some useful hints, see here.

Excuse No 4 – Wrong name

Again a real life case of our own where we had completed the verification process, but the client was still receiving letters from Companies House.  However, there were addressed to the company in its old name; the Land Register had not been updated for the change of name and HMLR are very particular about the name on the register (and rightly so).

Excuse number – 5 Loopholes

I referred to the PSC above.   This requires a company established in the UK to disclose who controls it.   Normally this would be its real owner.

Now if an English company is owned by me, but holds land in the UK in its name as a nominee for a Panamanian company, owned by a non-UK person, then unless one takes the view that the Panamanian company has a significant degree of control over my English company, then neither the Panamanian company nor its owner is a PSC.   Further as the property is registered in the name of an English company the register of overseas entities cannot apply.

One of the tests in the PSC rules in Part 21A Companies Act 2006 is whether a person has the right to exercise, or actually exercises, significant influence or control over the company (see Schedule 1A Companies Act 2006).

Now if my company is nominee for just the one person, then you would probably say that the Panamanian company should be recorded as a PSC.   However, what if my company is nominee for 12 different unrelated owners?   They might be able to control what it does with each of their properties, but they do not control what my company does.   They could not, in my view, be PSCs.

A further ‘loophole’ was closed just over a week ago on 11th May 2023 by SI 2023/534 – The Register of Overseas Entities (Definition of Foreign Limited Partner, Protection and Rectification) Regulations 2023.

Conclusion

So rather than Companies House failing to do their job, I would say the opposite.   They are building their cases.  Not least, given the delays at HMLR, Companies House would be wise to wait at least 12 months before launching any action as regards fines.   The asset is probably already frozen and the property is not going anywhere.  And even then, Companies House need to check that they have the right entity, and even if they do, whether it has been already verified but under a different name.

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