Are you compliant?

Following a consultation over the summer of 2015 and despite concerns raised by professional bodies, the government published draft legislation in December 2015 confirming its intention to introduce a new criminal offence for people who fail to declare offshore income or gains accurately.

As one of a number of measures introduced to tackle offshore tax evasion, which includes the strengthening of civil sanctions and broader government strategies such as the automatic tax information exchange rules with the Crown Dependencies and the OECD Common Reporting Standards, the new criminal offence has greatly changed the offshore landscape for felonious, as well as more law abiding, tax payers.

The new offence applies if a taxpayer has offshore income, assets or offshore activities and, where required to do so, either:

• fails to notify HMRC of his or her chargeability to tax;

• fails to file a return; or

• files an inaccurate return.

Unlike other criminal offences, the need to prove intent has been removed, making it a strict liability offence. This means that for the first time, a taxpayer can now commit a crime where there is no evidence of deliberate intent to evade paying tax.

The controversial new measure, under which a person convicted can receive an unlimited fine or a prison sentence of up to six months, represents a dramatic shift in legal principle. Strict liability offences usually apply where an individual has deliberately placed themselves in a position requiring them to take on specific duties or responsibilities, such as a landlord, a driver or a practitioner in a regulated field.

The class of individuals who will potentially be caught under the new offence is much wider. For example, expatriate pensioners or beneficiaries under a will or a trust with interests in offshore assets, may not seek out that role nor deliberately choose to take on the responsibility of dealing with offshore assets or income.

Consequently, a number of statutory defences have been included to ensure that the offence applies only to the most serious cases of tax evasion. Therefore, the offence will not apply if a tax payer has exercised reasonable care in disclosing his or her offshore income and gains, or has a reasonable excuse for failing to do so (for example they have sought or relied on proper advice).

Trustees and personal representatives (when acting in that capacity) are also exonerated, which will come as a relief to those individuals who may not have known about, nor had access to the information that they would have been obliged to disclose.

Another welcome amendment to the original proposals is the raising of the threshold to which the new offence will apply. This is now set at £25,000 of tax underpaid or understated per tax year. The threshold was initially set at £5,000, which would have caught many people who had simply made innocent mistakes in their tax affairs.

The offence is limited to income tax and capital gains tax liabilities. Income and gains reportable under the Common Reporting Standard will be excluded from the new criminal offence, as such taxpayers are already liable to civil penalties.

The legislation will not take
effect until at least April 2017, when other changes in relation to offshore
tax evasion (including an increase
in penalties linked to asset values and not just tax evaded) are scheduled to come in.

While the move to strict liability in cases of tax evasion represents a dramatic development in the government's attack on would-be tax evaders, the new safeguards in place to protect taxpayers who have taken reasonable care or followed proper advice should mean that the offence will only apply to a small proportion
of those who fail to declare and pay their taxes.

Nevertheless, given the complexity of the tax system particularly in relation to offshore structures, some tax payers may still unwittingly be caught out by these new rules. Beneficiaries of offshore trusts, wealthy expatriate pensioners and those with interests in other high value offshore structures, will need to take particular care in complying with their disclosure obligations and take professional advice on their position where possible.

Clare armitage is a senior associate at Wedlake Bell