Jennifer Emms looks at the Revenue and the Crown Prosecution Service’s legal armouries when it comes to persecuting tax evaders.
The second weekend in July was a big weekend for sport. Football fans were perched on the edge of their sofas as Portugal’s goal in extra time saw them beat the host nation, France, to win the Euro 2016 final. For those more partial to a game of tennis and some strawberries and cream, there was a victory for Andy Murray after two tiebreaks at Wimbledon. There was even something for petrol heads, as Lewis Hamilton went crowd-surfing after securing first place at his record third consecutive British Grand Prix.
From sporting history to sporting heroes. Or should it be anti-hero? As the verdict came in for arguably one of the greatest, and wealthiest, footballers of all time: Lionel Messi.
The Barcelona forward was found guilty of three counts of tax fraud and, on Wednesday 6 July, a Spanish court sentenced him to 21 months in prison (although, in practice, he is unlikely to serve any jail time) and a fine of €2 million. Messi has already paid over €5 million, which is equal to the tax that he allegedly owed plus penalties.
Messi’s conviction related to concealing earnings from image rights under contracts entered into between 2007 and 2009 with brands such as Pepsi and Adidas. The Spanish court was not convinced by Messi’s argument that he was focused on his football and did not understand the documents he signed. The judge is reported to have said that Messi’s lack of knowledge about his personal affairs was ‘avoidable’, ‘derived from indifference’, and that ‘it does not remove responsibility’.
So what penalties could have been imposed on Messi in the UK? Is there any truth in the old adage, that ignorance is bliss? As the law currently stands HMRC and/or the Crown Prosecution Service (CPS) have a number of options available to them.
HMRC may seek to impose two types of penalties on taxpayers, both designed to discourage taxpayer non-compliance. The first are ‘failure’ penalties, for instance, failure to file a return (giving rise to an initial £100 fine if the return is up to three months late) or a failure to pay tax within the relevant timeframe.
The second are ‘culpable’ penalties, broadly, submitting incorrect returns (containing an inaccuracy which leads to an understatement of the taxpayer’s tax liability or an inflated claim for loss or repayment of tax), or not notifying HMRC of liability to tax.
The penalties for the latter are generally based on the percentage of the lost tax. The level depends on whether the taxpayer’s actions were careless (where the maximum penalty is 30 per cent of the lost tax), deliberate (a maximum of 70 per cent) or deliberate and concealed (a maximum of 100 per cent).
If the taxpayer makes an unprompted disclosure to HMRC this can lead to a lower penalty. If a taxpayer’s error relates to income connected to a jurisdiction which does not automatically share information with the UK, the culpable penalties are higher (for instance, they can be up to 200 per cent for a territory such as Panama).
With regard to criminal proceedings, there is no separate offence of ‘tax evasion’. The CPS is most likely to deploy the criminal offence of fraudulent evasion of income tax (which carries a maximum term of imprisonment of seven years or a fine or both) or cheating the public revenue (for which the maximum penalty is life imprisonment and/or an unlimited fine). In order to be convicted of either of these offices, it is necessary to demonstrate beyond reasonable doubt that the taxpayer’s conduct is dishonest according to the ordinary standards of reasonable and honest people and that the taxpayer realised his conduct was dishonest by those standards.
In the fight against tax evasion, HMRC has a wide armoury which is ever-increasing, with a raft of new measures in the Finance Bill 2016 (including a strict liability offence where no dishonesty will need to be proved) and increasing support from the public and press over recent years. Meanwhile, back in Spain, the whistle may have blown but it is not all over. It is time for a re-match, as Messi is set to appeal against his conviction to the Supreme Court.
Jennifer Emms is a Senior Associate at boutique private wealth law firm Maurice Turnor Gardner LLP.