Let us be clear from the start: tax evasion has always been illegal – but it could soon become a criminal offence, not just a civil one.
HMRC’s offshore evasion strategy No Safe Havens defines offshore tax evasion as ‘using a non-UK jurisdiction with the objective of evading UK tax. This includes moving UK gains, income or assets offshore to conceal them from HMRC; not declaring taxable income or gains that arise overseas, or taxable assets kept overseas; and using complex offshore structures to hide the beneficial ownership of assets, income or gains.’
Due to the difficulties in detecting offshore non-compliance the government believes there is a case for increasing the cost of being caught. There are already civil penalties based on the type of behaviour that leads to the understatement or non-disclosure of tax, linked to the tax transparency of the jurisdiction in which the income or gain arises. These can be up to 200 per cent of the tax owing and the government is proposing to strengthen these.
Although the majority of cases are still likely to be investigated and settled through civil means, the introduction of a new a strict liability criminal offence is a brand new step.
The proposed strict liability criminal offence is for failing to declare offshore income and gains. Strict liability means that it is not necessary for a court to ascertain the state of mind of a person who has broken the law, just that it has been broken, before convicting. There are no other strict liability offences in the field of direct tax.
Criminal prosecution is the strongest action open to tax authorities. It results in loss of taxpayer anonymity (with corresponding impact on reputation), a criminal record and the sentence of the court, followed by action to recover tax lost.
Initially, HMRC’s new consultations on the introduction of a criminal offence (closing 31 October) deal with income tax and capital gains and asks for views on whether the offence should only apply to investment income and gains or to all offshore income and gains.
A wider proposal is also contemplated, which would include inheritance tax, but the government recognises that this would make the operation of the offence more complicated and it might not be appropriate for a strict liability approach. This is because those who are responsible to filing inheritance tax returns are the executors and trustees who often have to rely on information provided by third parties.
Taking a few particular points in turn:
Geographical scope: This is under debate. Those jurisdictions that have/are signed up to the Common Reporting Standard may be excluded from the scope of the new criminal offence. Views are being sought.
De minimis: To ensure that only the most serious of cases attract a criminal sanction, the government is minded to set a de minimis threshold for the amount of undeclared tax. This threshold has not yet been set.
Penalties: The consultation is seeking views on maximum versus unlimited financial penalties and appropriateness of custodial sanctions for severe cases and makes clear that any financial penalty should be more than can be imposed under the civil penalties regime (up to 200 per cent). Both financial and custodial penalties must be sufficient to be both deter and punish.
If taxpayers (or tax non-payers to be more accurate) do not come clean with their current and/or past non-compliance in this new era of transparency, then there is a very real threat of a criminal conviction when HMRC catches up with them. To encourage those who have hidden undeclared income and gains offshore to come clean, HMRC is offering time-limited disclosure facilities.
The consultations close on 31 October 2014. The documents can be found at:
Fiona Poole specialises in complex tax structuring at boutique private wealth law firm Maurice Turnor Gardner LLP