Panama, Pandora, James Bond and the need for money

The Pandora Papers reminds me of the Bond film, Tomorrow Never Dies, where a media mogul aims to trigger World War Three. Whilst the highlights of the Pandora Papers focus on high profile individuals, inevitably most of the records will relate to lesser known wealthy persons. Whilst I take this opportunity to pontificate over the Papers we also set out below what can be expected for those with offshore interest and how HMRC investigate such matters.

I have a theory that only wealthy tax evaders who have annoyed a wealthier person with more power get investigated by tax authorities: The judge hearing the tax fraud case against former President Donald Trump’s family business and its chief financial officer, Allen Weisselberg, has set a schedule with a potential court trial starting in late August or early September 2022, just months before the midterm elections. Is it a coincidence?

Now more than 330 politicians including 35 current and former country leaders have been exposed by the Pandora Papers. Rishi Sunak commented:

“I’ve seen these things overnight as well and it’s always tough for me to comment on them specifically given they’ve only just emerged, and of course HMRC will look through those to see if there’s anything we can learn.”

Are HMRC really going to pursue the wealthy and most powerful men (women) in the world? Firstly, I suspect many of the wealthiest would have pliable reasons for using offshore structures. Obviously, some will use them for legitimate reasons whilst others may have used them to hide the receipt of funds for leveraging deals. For example, the Panama Papers uncovered ‘second’ contracts between UEFA and Cross Trading S.A. relating to broadcasting rights:

“We can only think of two possible explanations. The first is that there are incompetent people in key positions at UEFA – managers that do not know the value of their own products…….Or Hugo and Mariano Jinkis have concluded the same kind of deal with UEFA as they are accused as having done with FIFA; they have bribed people to secure cheap TV rights and have sold them on for a profit….”

FIFA officials as well as the Hugo and Mariano were pursued for tax evasion and money laundering. Interpol raided offices, executives were arrested and the case still continues today.

For most average wealthy individuals who utilised offshore structures, prosecution is unlikely. Whilst the international Consortium of Investigative Journalists spent over a year analysing the 11.9 million records in the Pandora Papers leak, that is unlikely to be the main source of information held by HMRC:

• On 15 July 2014 forty-seven countries approved the Common Reporting Standard (“CRS”).
• The number of countries agreeing to the CRS is now more than one hundred.
• The CRS is a global initiative launched by the OECD and originally based on the US’ Foreign Account Tax Compliance Act 2010.
• The CRS intends to prevent tax evasion through the automatic exchange of information.

The Pandora Papers:

• The world’s largest ever journalistic collaboration: 600 journalists and 150 media outlets in 117 countries.
• The leak came from 14 offshore service providers that provided professional services to wealthy individuals and corporations.

You see, HMRC get more information from other countries than from leaks, although the journalists are likely to apply media pressure to ensure some perpetrators of tax evasion, money laundering and bribery are brought to justice. There are likely to be some high-profile cases although many others may be dealt with under the legislation introduced following the 2015 Budget: the strict liability criminal offence for offshore tax evasion. The offence merely needs to identify something wasn’t included in a return rather than prove intent to defraud. The liability carries a maximum sentence of imprisonment for up to 51 weeks.

Contract disclosure facility (“CDF”)

CDF or COP9 is issued where HMRC suspect fraud. That suspicion is founded on evidence obtained from information in HMRC’s possession. Alternatively, if you are aware of a tax irregularity you can ask a specialist adviser to request the protection offered from COP9.

Under COP9, HMRC offer the chance to make a full disclosure under a contractual arrangement called a Contractual Disclosure Facility (CDF). Those issued with COP9 have 60 days to respond once an offer is made. If a full disclosure is made, HMRC will not pursue a criminal investigation with a view to prosecution.

HMRC encourage when they provide COP9 that a specialist adviser is appointed. This is because whilst COP9 can protect you from prosecution, if you do not disclose a material item, COP9 can be withdrawn, and a criminal investigation be undertaken. The disclosure period is up to 20 years and a specialist adviser will be aware of how to disclose and present historic facts. They will also have experience of forensic investigations, the information available to HMRC and of course, how they can obtain information to assist the disclosure process.

The recipient of COP9 has the opportunity to make a complete and accurate disclosure of tax irregularities: those arising from deliberate and non-deliberate conduct. HMRC reserve the right to start a criminal investigation where there is a failure to make a full disclosure, or materially false or misleading statements are made or false documents provided.

Deliberate conduct means knowing:

• That an entry or entries included in a tax return and/or accounts were wrong; or
• That a liability to tax existed but chose not to tell HMRC at the right time.

Worldwide disclosure facility (‘WDF’)

The WDF is a process offered by HMRC for those wishing to make a disclosure of offshore income, money, investments, gains or assets. The WDF requires a self-assessment of the behaviour giving rise to the tax omission, which includes:

• Deliberate with a reasonable excuse.
• Inaccurate return with reasonable care.
• No return with reasonable excuse.
• Inaccurate return without taking reasonable care.
• Not deliberate without reasonable excuse.
• Deliberate failure to notify.
• Deliberately submitted an inaccurate return or deliberately withheld information by failing to submit a return.

Identifying the behaviour is a complicated task and assessing the behaviour is an integral part of the disclosure, which broadly means getting it wrong can result in civil intervention or criminal prosecution. The behaviour may be different for each omission. The prudent adviser should seek assistance from tax investigations specialist.

Using the WDF is unlikely to result in a criminal investigation unless:

• Activities giving rise to the omission involve crime.
• The disclosure contains material inaccuracies.
• Details of technical positions taken are omitted with an intent to illustrate a tax advantaged position.
• Details of estimates or methodology of calculating liabilities is omitted with an intent to illustrate a tax advantaged position.
• The statement of assets is inadequate or inaccurate.
• There is a continuance of behaviour during or following the disclosure.

HMRC’s ongoing investigations

HMRC have always been highly interested in investigating offshore structures or those holding offshore interests. The exchange of information simply makes HMRC’s task identifying those with offshore interest easier hence issuing nudge letters. HMRC does suffer resource restraints although modern technology is easing the ability to identify and work cases. Following the Pandora Papers, the inevitable media pressure will encourage HMRC to increase its investigations over those holding offshore interests. In addition, and after the expense of Covid, HMRC are likely to be tasked with increasing the revenue take.

Offshore Criminal Offences

Sections 106B–106H were inserted into TMA 1970 by Section 166 of the Finance Act 2016, introducing the criminal offences which apply for the purposes on income tax and capital gains tax only, where a person has failed to declare offshore income or gains in accordance with TMA (1970) Sections 7 and 8. The offence applies where the loss of tax meets the threshold amount.

Section 106B is the offence of failing to give notice to being chargeable to tax. Section 106B(1) establishes a new criminal offence if a person was required and failed to give notice to being chargeable to income tax, capital gains tax or both for a year of assessment and the tax chargeable is wholly or in part on or by reference to offshore income, assets or activities.

Section 106C is the offence of failing to deliver a return. Section 106C(1) establishes the offence where there is a failure to deliver a tax return following a notice under Section 8 of the TMA 1970 and the return is not so delivered before the end of the withdrawal period, when an accurate return would have disclosed a liability to income tax or capital gain tax or both and the amount of tax is greater than the threshold.

Section 106D is the offence of making an inaccurate return. The offence is where a person who is required by notice under Section 8 of the TMA 1970 to deliver a return and at the end of the amendment period, it contains an inaccuracy and the amendment results in tax greater than the threshold.

The offences are subject to a threshold amount of tax, below which there is no offence. The amount is currently £25,000 although the Treasury may by regulations specify the amount for the purposes of Sections 106B to 106D. A reasonable excuse defence is possible for Section 106B and 106C and a reasonable care defence is available for 106D.

Section 106E sets out exclusions from offences, which include persons responsible for giving notice for making a return by virtue of being a trustee of a settlement or an executor or administrator of a deceased person.

The offences do not prescribe the need to prove intent for failing to declare taxable offshore income and gains.

Supplementary provisions under Section 106F provide that where HMRC, the Tribunal or an officer extend the time limit for giving notice or delivering a return: the period under the offences is also extended. Furthermore, it provides for amending the threshold amount as well as the method of calculating the tax for the purposes of the threshold amount.

Section 106G provides for the penalties for the new offences on summary conviction. A person guilty of an offence under section 106B, 106C or 106D may face an unlimited fine and/or imprisonment not exceeding 51 weeks (six months in relation to an offence committed before section 281(5) Criminal Justice Act 2003). In Scotland or Northern Ireland, the fine must not exceed Level 5 on the standard scale and/or to imprisonment for a term not exceeding six months.

The offences are intended to catch those situations where detailed advice has not been sought or where it was not followed properly. However, there is a risk that HMRC taking an aggressive approach may seek to push the boundaries in a move to deter and combat tax mitigation/avoidance as well as evasion.

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