Updates to Criminal Offence for Offshore Tax Evasion

Well that game used to be easier…….

The 2015 Budget set out the intention to introduce a new strict liability criminal offence for offshore tax evasion. With the end of the Offshore Disclosure Facility (ODF) approaching fast (notification by 31 December 2015), we consider:

• The changing environment
• Exchange of information and increased scrutiny
• The need for an independent sounding board
• The consultation on the strict criminal offence for offshore tax evasion

Broadly the Government is slightly upset at people who have been able to (with relative ease) “hide their money overseas to evade tax”. Around two years ago a process began which has resulted in improved international tax transparency; although the real gems flow through next year (2016). Agreement has been reached with 94 countries to exchange information. The exchange of information will be automatic every year.

In 2016 the Crown Dependencies and Overseas Territories will provide HMRC with a wide range of information on offshore accounts held by UK tax residents (either held directly or indirectly i.e. through structures and will include beneficial owners). The information will include names, addresses, account numbers, interest and balances.

Information will be fed into Connect: HMRC’s award winning data analytical software for identifying tax irregularities and connecting people and entities. Inevitably a number of targets will be identified for scrutiny.

Obviously in the knowledge that HMRC will have considerable information, those with offshore interest will be diligently checking that they are legal. This process would ideally involve an independent review of tax risks. The rationale is:

• The client should desire a clear understanding of risks
• An adviser who is conflicted may not accurately reflect risks (we are not stating they would withhold risks but may have a slanted opinion)
• The adviser should have knowledge of how HMRC find ways to challenge structures and generally this will be someone significantly experienced with investigation cases (suspected serious fraud and criminal prosecution cases)

Meanwhile, HMRC believe that they have given taxpayers plenty of opportunity to regularise their tax affairs. They are however, being very kind and will launch a last chance disclosure facility ahead of information flowing freely. Where the opportunities are not embraced, HMRC consider it fair game to pursue through penalties and potential criminal offence to both taxpayers and those who help them (advisers etc.).

Given the environment over the past few years, HMRC simply don’t want UK resident individuals or businesses to benefit from reduced tax by using offshore structures. It appears that where there is a genuine commercial reason for a structure there will be safety from successful challenge subject to how things are done in practice. Those with pure tax planning structures are at significantly greater risks. It is also likely that the cost of offshore structures will increase (a lot) with administrators passing on the costs of increased compliance (and possibly in light of the commercial view they are losing business elsewhere and need to make more money from other sources –maybe I’m being cynical). Is this another conflict supporting the appointment of an independent adviser as opposed to a friend of the administrator?

HMRC have published four consultations:

• A new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion by their agents
• Tougher financial penalties for offshore evaders, including the possibility of a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders
• A new penalty regime for those who enable tax evasion, based on the tax they have helped taxpayers to evade and naming of enablers
• A new simpler criminal offence to make prosecution of offshore evaders easier

The consultation so far on the new simpler criminal offence sets out the following:

• Apply only to income tax and capital gains tax (though this could be reviewed at a later date)
• Apply to all offshore income and gains and not just to under-declared investment returns
• Minimum threshold amount, set in legislation and based on the “potential lost revenue” model from the existing civil penalties, for inaccuracies on returns
• The threshold should apply to each tax year separately
• It is recommended that courts take account of the corresponding civil penalty to ensure that individuals subject to civil sanctions were not at risk of being treated more severely than corresponding individuals who were guilty of the crime
• There should be an option for a prison sentence of up to 6 months
• There should be effective safeguards to ensure taxpayers who make every effort to get their taxes right are not caught by the offence

It is likely that a number of people with offshore structures are relying on the safeguard that should HMRC challenge their tax position, they can rely on having sought appropriate advice and will have a defence of reasonable care. HMRC state:

“A prudent taxpayer is expected to seek advice if there is any doubt about the tax treatment of any activity. Similarly, any taxpayer who had a reasonable belief that he did not need to do something (or had already done it) might be considered to have a reasonable excuse for a failure. Therefore, the Government believes defences of reasonable excuse and reasonable care provide sufficient safeguards in themselves. HMRC will continue to challenge what it sees as inappropriate claims to reasonable care or excuse, when the facts as it sees them do not support those claims, as it does elsewhere in the tax system.”

However, where tax planning is undertaken, what is reasonable? For example, if the planning is in receipt of Queen’s Counsel’s opinion, does that constitute reasonable? The problem is further complicated in the situation of promoted tax schemes/products because generally, there is one all-encompassing opinion from Queen’s Counsel. Such opinions are based on “assumed facts”, which may not apply precisely to the situation of the person entering the planning. HMRC may contend that a non-specific QC opinion does not assist the employer to evidence they have done everything to verify the position and therefore they have not taken reasonable care.

HMRC’s criminal investigation policy makes it plain that a complete and unprompted disclosure will be taken into account when considering a criminal investigation. However, HMRC do not agree that there should be an exclusion from prosecution for a full, unprompted disclosure. HMRC state that “Even a full unprompted disclosure cannot change the position that an offence (if within scope) has been committed”.

The risks are set to increase considerably and far too many users of offshore structures do not know the technicalities of their structure and how they can be challenged.

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