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New proposed criminal and civil powers to combat evasion

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The Budget speech contained a reference to ‘comprehensive plans for new criminal offences for tax evasion and new penalties for those professionals who assist them’, which were to be announced by the chief secretary to the Treasury on Thursday 19 March.

What followed was a much more comprehensive document than that phrase suggested – entitled ‘Tackling tax evasion and avoidance’. It reads rather like an answer to the Public Accounts Committee’s criticisms of HMRC and the coalition government for being ‘too soft’ on avoidance and evasion. This document will merit further consideration in due course (and is likely to be tougher still in the event of a Labour-led government after the election).

This commentary largely focuses on the new proposed criminal powers only.

What has been proposed?

First, the proposed ‘strict liability offence’ is well and truly back on the table, confounding those who believed it had been ‘spirited away’. It was originally introduced as a ‘concept’ in a speech by the chancellor in April 2014 – and was consulted upon between August and October 2014.

The essence of the strict liability offence is that, in order to secure a conviction, a prosecutor would not have to prove ‘dishonesty’ on the part of a taxpayer who has omitted the material disclosure of an asset held offshore (such as an offshore bank account). A common defence in such cases is that the taxpayer relied on advice from a professional adviser or believed that the offshore arrangements amounted to legitimate ‘planning’ – and therefore the requisite dishonest ‘intention’ required to constitute a criminal offence does not apply. Once the proposed new offence is in place, the chief secretary states that these defences will no longer be available to taxpayers (despite the fact that a defence of taking ‘reasonable care’ was mooted in the consultation document).

One cannot help wondering whether it was the furore in February – following the Panorama programme about secret Swiss bank accounts and culminating in the furious reaction of the Public Accounts Committee to the news that only one person named on the famous ‘list’ of secret accounts had actually been prosecuted – that has led to this proposal coming back to life.

Widespread concerns were voiced about this measure during the consultation process last year, although those proposals contained two ‘concessions’. First, the new offence would not carry a custodial sentence. Secondly, it was stated as the government’s preference that the offence should only apply to assets held in countries that were not party to the Common Reporting Standard (CRS).

The new document notes that the previous consultation took place at a time when ‘fewer countries had agreed to begin exchanging information automatically’. In light of a significant increase in the number of participating countries, there will be a further consultation on the scope of the offence. We can expect this at any point (although the actual draft legislation is unlikely before this year’s Autumn Statement). The clear implication here is that the scope of the offence might well be wider than envisaged in the last consultation and, in particular, might apply to undeclared assets held in more conventional states, rather than being restricted to the relatively few (e.g. Bahrain, Panama and the Cook Islands) that will not have signed up to the CRS.

What about the new criminal offence for corporates?

Secondly, there will be a further criminal offence of ‘corporate failure to prevent tax evasion or the facilitation of tax evasion’. This will principally target banks, fiduciaries and professional services firms, although it will apply across the board and can be expected to be wider – and more specific – than the existing ‘anti-money laundering’ regime (which in theory should catch tax evasion).
This has the potential, in due course, to increase significantly the compliance requirements for regulated businesses, particularly those in the financial services sector. Again, a consultation is promised and will be awaited with considerable interest, particularly as to which safeguards are proposed and as to whether it will apply only to operations of corporates actually taking place in the UK – or internationally. It will be interesting to see whether the offence extends just to corporates (having a significant reputational impact) or will extend to individuals operating within the corporates as well.

Is that all that’s proposed on evasion?

No. There is a third proposal that there will be yet another consultation on new ‘collateral’ civil penalties targeting the ‘enablers’ of tax evasion, presumably as an alternative to prosecuting the offence set out above. The key feature here will be that a ‘facilitator’ of tax evasion will have to pay a penalty, equivalent to the penalty paid by the individual that they helped to evade tax; in other words, directly linked to the amount of tax evaded. In the words of the chief secretary: ‘If you help someone to evade tax of £1m, you risk a penalty of £1m or more yourself.’ This measure has the potential to drag banks, fiduciaries and advisers into tax investigations, as well as the taxpayer. There will also be provisions for the ‘naming and shaming’ of such individuals.

The civil penalty regime which targets evaders themselves (as opposed to facilitators) will itself be ‘beefed up’ to take account of the value of the hidden asset, not just the amount of tax evaded. This will have the effect of making civil penalties more like fines imposed in criminal proceedings.

Professional standards

Finally, the government also announced that it is asking the regulatory bodies that police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance.

Final thoughts?

All these new powers presuppose that HMRC will have the funds to put behind them; particularly in terms of mounting criminal investigations, which are notoriously expensive and resource intensive. A commitment to such resourcing is made in the document, but the attitude of the next government (and its own question of priorities) is going to be absolutely key.