The mission creep of tax evasion

HMRC has confirmed legislation will follow its three ‘Tackling offshore tax evasion’ consultations. ?A fourth consultation, ‘A new corporate criminal offence for failure to prevent the facilitation of evasion’, will continue.

The alert reader may have noticed a theme developing. Beware – it is not evasion as you may believe you know it. 

Solicitors whose clients ?have offshore interests ?should take note.

Civil deterrents

The first consultation considers further sanctions to deter non-compliance linked to offshore interests.

There is no reference to deterring deliberate non-compliance. While the consultation claims that its subject is ‘those evading tax by using non-UK territories to hide taxable income… offshore’, its scope is well beyond that. It will impact those who, deliberately or otherwise, are non-compliant. 

The consultation provides a rationale for this redefinition of what constitutes ‘evasion’:

• It has been easy to hide money overseas;

• HMRC has given people ample opportunity to regularise their affairs;

• Going forward the world ?will be more transparent;

• HMRC will identify and enquire into those with offshore interests;

• Those identified as non-compliant are ‘would-be offshore evaders’; and 

• By this categorisation, ?they deserve ‘the vigorously-enforced sanctions proposed’.

Some people caught will have been deliberately evading tax. Many will have mistakenly thought they have been compliant. Some will have received bad advice; some will be caught by new legislation or changing family circumstances; some will simply not have the documentation to prove themselves innocent. 

In the increasingly complex world of offshore tax, few advisers or HMRC officers claim to know everything. However, the state is proposing to proceed on the basis that, following detailed examination, those who have got anything wrong in their reporting are ‘would-be offshore evaders’ who deserve heavier financial penalties. Proposed penalties are up to the full value of the offshore asset, irrespective of the tax consequences. 

Strict liability offence

The scope of consultation two is how best to introduce a new strict liability criminal offence for failure to declare offshore income and gains. As with consultation one, the proposal proceeds on the basis that offshore non-compliance is, by its nature, evasion. 

Following a prior consultation exercise, HMRC now seems to be proposing a ‘strict liability-lite’ version, where a minimum amount of tax (£25,000, which may be spread over a number of years) should be at stake before the offence is triggered. 

The proposal also suggests possible defences, such as ‘reasonable care’ or ‘reasonable excuse’. It may be noted that this defence, if successfully argued in normal non-compliance, would mean HMRC had no penalty position. Here, the grateful taxpayer might no longer be banged up but they would still be subject to financial penalties and the ducking stool of public shaming. 

Sanctions for enablers

This proposal is the first time HMRC has set out its views on punishments for ‘enablers’ of offshore tax evasion.

First, the consultation concludes the current sanctions against enablers are inadequate. Next, it defines an enabler. ?Do you ‘act as a middleman’? Provide ‘planning or bespoke advice’? ‘Deliver’ or ‘maintain’ ‘infrastructure’? Enabling is a broad church.

While non-compliant taxpayers may be caught by the proposed evasion measures with no requirement to prove their actions were deliberate, a higher bar is set for imposing penalties on enablers. The proposal is for three categories: ‘unaware’, ‘careless’, and ‘deliberate’, with only deliberate enablers subject to penalties.

Before emitting a sigh of relief, enablers should review the HMRC guidance on category criteria. Enablers must prove they are not acting deliberately by pointing to good systems of identification and active investigation of clients.

For a penalty to be imposed ?on an enabler, the evasion in question is not limited to cases ?of criminal conviction. It covers taxpayers subject to an offshore penalty under consultation one. 

Corporate criminal offence

The original consultation considered ‘an appropriate and proportionate’ means whereby corporates could be held criminally responsible for failing to prevent their agents from criminally facilitating tax evasion. 

Previously, for criminality, ?the acts of an agent had to be attributed to the corporation via the ‘directing mind and will’ test. Under the new offence, the onus is on the corporation to prove it took reasonable steps to prevent its agents from facilitating tax evasion.

Given the sensitivity of the measure, it is not surprising that consultation four is being extended. Legislation following the other three consultations needs careful consideration, both for the interests of our clients and our professional practices.

Andrew Watters is a director at Thomas Eggar @ThomasEggar www.thomaseggar.com