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Q&A: Consultations on tackling offshore evasion

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What has happened?

Fresh from the success of its role in pushing the OECD’s Common Reporting Standard (CRS) to countries around the world, HMRC is now consulting on four new measures to try to drive offshore tax evasion out of existence ( Affected businesses have until 8 October to respond.

The proposed measures have been a long time in the offing; and the case of the strict liability offence has for some time been particularly noticeable by the absence of any news on its progress. However, these measures were refreshed in the March Budget.

The consultations are:

  • A new corporate criminal offence of failure to prevent the facilitation of evasion: a new Bribery Act style offence for corporations with ‘agents’ that facilitate the evasion of tax by others.
  • Civil sanctions for enablers of offshore evasion: penalties linked to the amount of tax evaded for those who 'enable' evasion by others.
  • A new criminal offence for offshore evaders: a new strict liability offence for those who fail to declare offshore income or gains without reasonable excuse.
  • Strengthening civil deterrents for offshore evaders: tougher penalties for offshore evasion, including a penalty based on the value of any undeclared asset for the most serious cases.

Who will the offence of failure to prevent facilitation apply to?

Corporations (whether UK or non-UK) with ‘agents’ that facilitate the evasion of UK tax; and UK corporations with ‘agents’ that facilitate non-UK tax evasion. Corporations will include companies and partnerships and certain not for profit organisations. All taxes are intended to be covered. 

The offence will be committed by the corporation alone. As it is a corporate offence, punishment will be in the form of a fine only and, more significantly for most corporations, a criminal record.   

An ‘agent’ can be either a natural or legal person and will include employees, contractors and other authorised intermediaries. The geographical location of the agent is irrelevant.

Why is this new offence needed?

The consultation makes it clear that to engage the new offence, the agent must himself be engaged in a criminal offence (i.e. have the necessary ‘mens rea’) when facilitating the evasion. The agent must ‘intend to do the act of facilitation, believe that his or her act is capable of assisting the perpetrator to commit an offence; and know the essential matters that constitute the perpetrator’s offence’.

Under current law, a corporation only commits an offence if the agent that facilitates the evasion is a member of senior management; and thus the ‘directing mind and will’ of the corporation. The new offence criminalises a corporation in all other circumstances, unless the corporation can show that it has taken reasonable steps to prevent the agent from facilitating tax evasion. 

What will count as facilitating evasion?

The consultation document sets out five broad areas where corporations could commit the new offence. The five areas are where the corporation or its staff:

  • act as a broker or conduit by arranging access and introductions to others that facilitate the evasion;
  • provide planning and advice on the jurisdictions, investments and structures which will enable the taxpayer to hide their money, especially involving an attempt to frustrate the automatic exchange of information under the CRS;
  • provide ‘delivery of infrastructure’ by setting up companies, trusts and other vehicles which are used to hide beneficial ownership; opening bank accounts; and providing legal services and documentation which underpin the structures used in the evasion, such as notary services and powers of attorney;
  • provide the ‘maintenance of infrastructure’, which includes providing professional trustee or company director services, including nominee services; and providing virtual offices, IT structures, legal services and documentation which obscures the true nature of the arrangements, such as audit certificates; and
  • provide financial assistance, including helping those trying to evade tax to move their money out of the UK or to keep it hidden by providing ongoing banking services and platforms; providing client accounts and escrow services; and moving money through financial instruments and currency conversions.

How will it work extra-territorially?

First, the consultation intends to apply the offence to non-UK corporations – including non-UK banks, trust companies, company formation agents and professional firms – in respect of UK tax evasion.

There will, of course, be practical difficulties around legal jurisdiction if the UK authorities try to prosecute a foreign corporation. However, non-UK corporations may for other reasons take steps to comply, even if in practice they do not fear being prosecuted. These include damage to their reputation and the possibility of offences arising under their local anti-money laundering regime (such as deriving benefits from the commission of a foreign offence). 

Second, the government also wants UK corporations to prevent the facilitation of non-UK tax evasion. The consultation says: ‘We believe that corporations with a presence in the UK should be obliged to take reasonable steps to prevent their agents being complicit in criminal tax evasion, wherever that tax is evaded.’ UK corporations therefore have to factor in the risk of their agents facilitating overseas evasion. 

Whilst a bold move, it is of concern that the UK is trying to extend the reach of this offence without seeking to do this as part of a wider international effort; thereby putting corporations in the UK or with UK-facing operations at a disadvantage over others by imposing additional obligations on them. 

How might companies other than banks, fiduciaries and professional advisers be caught?

The offence was initially trailed as applying to the failure to prevent evasion as well as the facilitation of evasion – but the consultation document now appears to limit the offence to the facilitation limb only, and is clearly aimed at banks, fiduciaries and professional advisers.

Until we see detailed legislation it is not clear how far the measure will go, but the examples given (although FS-sector focussed) show how wide-reaching the offence is expected to be. Facilitation may not just be limited to the acts of providing the banks account, companies and trusts which help another person to evade tax.

Corporations in all sectors will need to consider whether their processes are robust enough to show that their agents are not able to facilitate tax evasion by other means. Examples might arise around the use of contractors and ensuring that invoicing arrangements stand up to scrutiny; ensuring their suppliers are registered for tax and declaring their income, especially in respect of offshore arrangements. 

Bribery Act procedures will also need to be updated, given that illegal payments are unlikely to be being declared for tax purposes – particularly if the offence will apply, as suggested, to overseas tax.

How will the strict liability offence for offshore evasion work?

Under the current law, a taxpayer can only be guilty of a criminal offence if HMRC can prove that the failure to declare offshore income was deliberate. Under the new ‘strict liability’ offence, the mere failure to declare the income or gains is sufficient and there is no need to prove that it was deliberate. The only defence will be if there was a ‘reasonable excuse’ for the failure. However, traditionally HMRC has been very reluctant to accept that taxpayers have a reasonable excuse for failing to comply with their tax obligations; and many who needed to rely on this ‘safeguard’ have in recent times had to go to the courts to persuade HMRC to accept their view. The maximum penalty for the offence would be a prison sentence of up to six months.

It is proposed that the offence should apply to all offshore income and gains and not just to underdeclared investment returns. However, the government proposes that the offence will only apply if the ‘potentially lost revenue’ exceeds £5,000. This threshold will apply to each tax year separately.

Why does HMRC need this offence if it will receive information anyway from foreign jurisdictions under CRS?

It is proposed that the offence will apply to income and gains in all overseas jurisdictions and not, as was originally proposed, just to income and gains connected to states which have not signed up to CRS. HMRC recognises that it will be receiving significant amounts of information under CRS, but believes that it will continue to be very difficult to gather supporting evidence to demonstrate the intent of the taxpayer. HMRC believes that the proposed strict liability offence will provide a ‘valuable additional tool to tackle offshore evasion and help to increase the number of prosecutions for offshore evasion’, since it will remove the need to obtain that proof.

What changes are being made to the penalty regime?

The proposals include a number of options for changes to the penalty regime. The first option is to legislate so that, from a given future date, all disclosures in respect of income and gains connected to offshore arrangements will be subject to a higher minimum penalty than is currently in force. This will reflect that fact that taxpayers have had a number of opportunities to disclose inaccuracies. The proposed minimum is in the region of 30%, rather than the current 20%. 

The second option involves amending the factors taken into account in calculating the reduction for disclosures. The key suggestion is to only allow the maximum reduction for those who provide a full account of the evasion, including details of how monies were moved offshore and evidence of who assisted with the evasion. 

A third option suggested in the consultations (either stand-alone or in conjunction with the first two options) is to impose a penalty of 10% of the value of any undeclared asset where the asset constitutes the proceeds of evasion. One suggestion is that this would only apply where the tax lost exceeded £25,000 and the behaviour of the taxpayer was deliberate. Alternatively, it might apply only in cases where the disclosure is prompted and not when the taxpayer comes forward voluntarily.

The final option proposed is ‘a new special penalty to be awarded by the Upper Tribunal in exceptional cases which might mean that the total amount of duty interest and penalty was equivalent to the value of the assets linked to the offshore evasion’. This would only apply in the most serious cases of evasion.

What should anyone with undeclared offshore income or assets do now?

These measures make it more important than ever that anyone with undeclared income or gains connected to offshore arrangements takes urgent steps to regularise their affairs. Even though these new measures will probably not come into force until April 2016 at the earliest, the fact that the Liechtenstein disclosure facility (LDF) comes to an end at the end of this year makes action a priority. The LDF is currently the only facility which gives immunity from prosecution – and it is extremely unlikely that we will see such a favourable regime for settling past irregularities again.