Islands in the stream? Tax enforcement and offshore data leaks

With the bunting now down from the recent Guardian and BBC Panorama celebrations in winning the Investigation of the Decade accolade at the British Journalism Awards, stolen confidential information from offshore service providers –firms included – continues to find its way into the hands of journalists and the UK tax authorities.

The Panama Papers exposé – for which the Guardian and the BBC were honoured – originated from a still unidentified source who claimed social justice motives. It comprised the comprehensive confidential client records, internal notes and correspondence of Panamanian firm Mossack Fonseca. Circa 11.5m documents were leaked, first to German newspaper Süddeutsche Zeltung – which in turn shared it as a collaborative effort with the over 100 media outlet strong International Consortium of Investigative Journalists (ICIJ) – of which the Guardian and the BBC form a part.

The journalists found they had an apparent treasure trove of information – some of which confirmed their worst suspicions about what they regard as the “darkest corners of international finance”. They began publishing it in early 2016 as targeted articles about various individuals around the world and then provided an indexed database of company ownership information. What made this exposé new and different was, as well as just titillating readers and viewers and embarrassing wealthy people around the world by revealing their use of offshore companies to privately hold their wealth, it also pointed in a small but clear subset of cases to obvious wrongdoing – tax evasion and much else besides. For the first time in a major leak, journalists had documentation from within an offshore law firm appearing to show the facilitation of wrongdoing.

In UK tax terms alone, information from the Panama Papers resulted in HMRC opening dozens of new criminal and civil investigations into wealthy people suspected of tax evasion or failed tax avoidance – and the recovery of over £200m in unpaid taxes. As such, it was heralded as a great success – not just by UK journalists, but also by the UK taxman and politicians. The impact was similar around the world – particularly in countries where revelations showed not just tax irregularities, but also evidence of broader criminality, including high-level political corruption.

When, a year later, in 2017, the ICIJ followed up its Panama Papers scoop with the announcement of the so-called “Paradise Papers” – which focused on an apparently similar leak of confidential client records from reputable international law firm Appleby – it came as no surprise the situation was very different. As the journalists discovered, there is no essential difference between a bona fide law firm based onshore in somewhere like London, or one headquartered somewhere like Bermuda – as Appleby is. Although the BBC and the Guardian used the leaked information to publish and broadcast private details of the wealth management and tax avoidance arrangements of prominent parties connected to the UK such as Sir Lewis Hamilton, and despite repeated trips to UK tax experts to seek guidance, they could identify no wrongdoing. Meanwhile, Appleby took rapid breach of confidence proceedings against the BBC and the Guardian in the English High Court. This culminated in a private settlement in May 2018.

Notwithstanding the fundamental difference between a firm engaged in providing legitimate professional services and a firm which, at best, operated with less diligence, UK politicians castigated HMRC for failing to produce impressive statistics – as they had with the Panama Papers – of tax investigations opened and tax recovered based on Paradise Papers information. 

Famously, Lord Tomlin stated in the Duke of Westminster’s case (Inland Revenue Comrs v Duke of Westminster [1935] UKHL 4 (7 May 1935)): “Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be”. A lot has changed since then in the development of sophisticated anti-avoidance legislation – much of it focused on blocking the use of contrived artificial offshore arrangements to achieve a benign tax effect. However, whether journalists, politicians and the general public like it or not, there is still such a thing as legitimate offshore tax planning – and shining a light on it does not suddenly undo it and open the floodgates for HMRC.

HMRC’s long reach into the past

To understand the potential value of leaked offshore information to HMRC it is important to appreciate the scope of HMRC’s powers to go back many years to assess and collect unpaid tax and the scope of its information powers to follow up on the leads it gets from leaked information.

Unsurprisingly, HMRC has substantial civil powers to investigate the past, claw back unpaid tax and levy tax geared penalties and late payment interest. The length of HMRC’s reach to assess historic tax and the level of any penalties depends upon the 'behaviours' involved.

Broadly, HMRC only has 12 months after the filing of a Self-Assessment Tax Return to open a statutory enquiry within the 'normal' enquiry window – whereupon, while that enquiry remains open, HMRC can make appealable amendments to the return in question. However, all that is required for HMRC to assess tax outside the enquiry window is to make a “discovery” additional tax is payable. Subject to statutory time limits based on behaviours, HMRC can then raise “discovery assessments” to recover the unpaid tax.

Where tax returns have been filed:

• deliberate wrongdoing – i.e. there is tax evasion of some sort - HMRC can raise “discovery assessments” going back up to 20 years;
• carelessness – HMRC can go back at least six years – and under new 'offshore' specific rules for Income Tax (IT), Capital Gains Tax (CGT) and Inheritance Tax (IHT) the assessment window is gradually extended to up to twelve years for the 2013/14 tax year onwards;
• innocent error – originally four years but under new 'offshore' specific rules for IT, CGT and IHT the assessment period is gradually extended to up to twelve years for the 2015/16 tax year onwards.
• Where no tax returns were ever filed:
• with a reasonable excuse – originally four years, but under new 'offshore' specific rules the assessment period is gradually extended to up to twelve years for the 2015/16 tax year onwards;
• without a reasonable excuse (and with negligence required too pre-2009/10) HMRC can go back 20 years for taxes generally, or indefinitely without time limit for IHT.

Set in this context, offshore leaks are of enormous potential value to HMRC in leading to the discoveries HMRC needs to go way back in time to put the past right. Sometimes leaked information is enough for HMRC to make discoveries of unpaid tax in its own right. Often too, leaked information gives HMRC the leads it needs to demand more information. Although advisors sometimes conflate HMRC’s discovery and information powers, HMRC’s powers are a distinct and complementary adjunct which can be brought to bear in the absence of an open statutory enquiry and before a certain discovery of an insufficiency of tax is made.

HMRC cannot simply 'fiish' for discoveries - its ability to seek further information from the taxpayer is ultimately underpinned by whether or not an Inspector can issue a valid Schedule 36 notice. Statutory records aside, Para 1 of Schedule 36 to the Finance Act 2008 (FA 2008) requires information or a document is: “reasonably required for the purposes of checking the taxpayer’s tax position”.

In turn, Condition B at Para 21(6) of Schedule 36 FA 2008 requires: “an officer of Revenue and Customs has reason to suspect that. . . an amount that ought to have been assessed to relevant tax for the chargeable period may not have been assessed”.

A hypothetical Tribunal would need to be satisfied the HMRC officer concerned had reasonable ground for their suspicion and the burden would fall on HMRC (see for example, the FTT’s recent deliberations in Perring v Commissioners for HM Revenue and Customs [2021] UK FTT 110). However, in practice, HMRC is granted broad latitude – and rather than vainly contest HMRC requests for information, taxpayers are normally better advised to offer HMRC full co-operation – and through that cooperation, to seek to mitigate penalties on any omissions that might come to light.

HMRC’s evolving modus operandi

Traditionally, HMRC has investigated the potential misuse of offshore structures and offshore investment accounts using specialist teams of Inspectors within what is currently called the HMRC Fraud Investigation Service (FIS). The latest name is misleading since FIS does not just deal with suspected fraud but with large and complex investigations as a whole. Many readers will know FIS under one of its previous guises, such as HMRC Special Compliance Office.

The great majority of investigations – even of serious suspected fraud – have been conducted as civil rather than criminal investigations. This is in light of HMRC’s substantial civil powers, its primary focus on tax collection rather than punishment – and the greater procedural difficulty in proving deliberate intent to a criminal evidential burden and standard of proof, rather than the extent of unpaid tax and leviable penalties civilly.

The sparing use of criminal investigations has particularly applied of late to offshore matters involving leaked confidential information – where admissibility of evidence issues could hamper successful prosecution, but no such constraints exist in HMRC’s ability to use such information for civil purposes to inform “discovery assessments” of unpaid tax or to prompt the reasonable suspicion needed to exercise its information powers in search of more information.

Over the last 15 years, HMRC has received ever more vast amounts of information about UK residents’ offshore arrangements. That has come not just from a multitude of leaks from offshore banks, laws firms and trust companies but also privately from ever greater international cooperation, including:

• the automatic exchange of financial information about each other’s residents with over 100 other jurisdictions around the world under the Common Reporting Standard – which began in 2017 and now includes most of the traditional so-called “tax havens”;
• ever closer bilateral working between HMRC and sister organisations such as the IRS using assistance protocols within double tax treaties or Tax Information Exchange Agreements;
• privileged access to overseas beneficial ownership registries;
• special initiatives and task forces – such as the Joint Chiefs of Global Tax Initiative (J5).

This has left HMRC with more information than it can possibly use traditional human teams to investigate and has prompted the adoption of more sophisticated “carrot and stick” and “nudge” methods, including:

• the Liechtenstein Disclosure Facility amnesty with special terms between 2009 and 2015;
• the Requirement to Correct any offshore irregularities with the threat of unprecedented penalties if a 30 September 2018 deadline was not met;
• now, and for the indefinite future, the generation by HMRC computers of thousands of “nudge letters” intimating at offshore information held by HMRC and inviting recipients to self-disclose, quantify and pay any outstanding tax, with the implicit threat of investigation should they not do so.

The state of play

Where all of this leaves HMRC is still as an eager consumer of good information on obvious offshore wrongdoing – another Panama Papers would still prompt large numbers of investigations and large recoveries of tax. However, there are diminishing gains for HMRC from more leaks of information on carefully planned and responsibly advised arrangements. These are unlikely to prompt many investigations by HMRC when it already has so much information from mainstream information exchanges to work with.

The latest ICIJ exposé is the so-called “Pandora Papers” of c.12m documents said to be from 14 different offshore service providers. So far, judging by the absence of “gotcha” headlines where the UK is concerned, it is looking like HMRC will no doubt send hundreds of speculative “nudge letters” to UK parties figuring in the arrangements, but will be sparing in allocating precious resource to opening targeted investigations. 

Meanwhile, after a relentless crackdown on offshore for a decade and a half, and with most of the obvious wrongdoing and low hanging fruit of hidden offshore bank accounts now addressed, massive political pressure is now being brought bear to focus closer to home and to recover some of the £5bn+ said to be lost to the covid-19 support fraud.

Andrew Park is a tax partner at Andersen LLP in London, specialising in tax investigations, voluntary disclosures and contentious tax: uk.andersen.com