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Proposed Strict Liability Offence for Offshore Tax Evasion

About The Author

Helen Morse (Writer)

Helen is studying Law (European & International) LLB at the University of Sheffield, now entering her final year having spent an Erasmus year at the University of Vienna, Austria. Helen is interested in international and commercial law. Outside of law, Helene is a keen sports woman, playing at county level.

Offshore tax evasion has long been of serious concern to the UK government and taxpayers alike. It has been suggested that offshore tax evasion causes the UK total losses of up to £7 billion per year, and some even consider this a conservative estimate. When this money could be funding public expenditure, it is clear why the UK government has introduced a number of measures over the last few years in a bid to tackle, and ultimately put an end to, this form of tax evasion. This has been encompassed in the HMRC’s strategy, ‘No Safe Havens’, most recently updated in April 2014.

In line with this, last month, HMRC set out proposals for a new strict liability criminal offence for failing to declare taxable offshore income and gains. The proposals have been highly controversial and divided opinion greatly amongst financial professionals. One of the main concerns, as articulated by James Bullock of the law firm Pinsent Masons, is that the new offence could criminalise those who simply do not understand tax law or are careless with the management of their money. By the end of this article I hope to show why this concern with the new strict liability criminal offence is unfounded and why I am inclined to agree with the government that a hard line must be taken against offshore tax evaders.

Sorting Fact from Fiction

Before examining the proposal in detail, I feel it is important to set out exactly the legality of offshore banking.

If the words ‘offshore tax evaders’ are mentioned, the high profile case of comedian Jimmy Carr probably springs to mind; a rich person investing their money into a dubious scheme and hiding away his/her earnings in accounts outside mainland UK under the radar of the taxman. Whilst some argue that offshore banking is immoral, (which is a separate issue within itself and will not be debated in this article) it is actually perfectly legal, and I should add despite the scheme Jimmy Carr was involved in being morally questionable, there was nothing illegal about it. Such acts are known as tax avoidance, and, in fact, there are a number of legitimate benefits to offshore banking. For instance, offshore banking is useful to those who live in a politically unstable state in order to protect their assets, or for expats who want to keep all their funds in one centralised account for ease. However, what is illegal is when individuals or companies who use offshore banking do not declare their assets or taxable property held offshore to the tax authority where they are resident, and/or where they are liable for taxable income and gains. It is this illegal tax evasion that the new strict liability criminal offence is aiming to prevent.

Examination of the New Strict Liability Offence

In order to continue the UK government’s progress in preventing offshore tax evasion, the HMRC has published a consultation paper introducing a new strict liability criminal offence for those who do not declare offshore taxable income and gains. As it is a strict liability offence, it will not be necessary for the prosecution to prove the defendant had the intention of deliberately avoiding paying tax; to be found guilty, all that needs to be ascertained is that any taxable income or gains were not declared. There already exist a number of strict liability offences, such as driving without insurance; however this will be the first of its kind in tax law.

At first this may seem extremely harsh to potentially criminalise someone with no intention of doing any wrong and even David Guake, the Financial Secretary to the Treasury, accepts in his foreword that it is a 'tough sanction'. It is on this point that many experts have trouble with the new proposed offence. Gary Ashford, spokesman for the Chartered Institute of Taxation, makes the point that:

UK and international taxation is a minefield of complexity, and the Government must recognise... there will be individuals who make mistakes in their financial affairs without intending to act wrongly. Not everyone who under-declares their tax is acting with criminal intent.

Similarily, as noted before, James Bullock, Partner at Pinsent Masons, voices his concerns that individuals may be sent to jail simply 'because they have been careless or forgetful or allowed themselves to be misled over what taxes they had to pay'.

Initially, I was of the same opinion that to make the offence one of strict liability could lead to unfair prosecutions. However, after scrutinising the HMRC’s consultation document and further consideration I am now inclined to disagree with the above opinion.    

The consultation document states that the government endorses a de minimis threshold to accompany the new strict liability offence. This means the new criminal offence will be limited to cases where the tax loss is over a certain figure and therefore:

... a sufficient amount of harm has been caused to warrant a criminal law response. 

Admittedly, the threshold has not been stated yet and HMRC welcomes suggestions in how it may be set, but the de minimis principle will ensure that criminal prosecutions are limited to the most serious of cases involving large losses for HMRC. This also follows the approach taken to the General Anti Avoidance Rule adopted by the government earlier this year.

Now I do not claim to be any sort of financial expert, but my instinct tells me, the more money or assets one has involved in offshore banking the more careful and diligent one would be with the management of it. Indeed, the fact one is involved in offshore banking at all suggests to me they may be taking financial advice (as many of the ‘celebrity’ tax avoidance stories suggest) or have a better understanding of banking than the ordinary man on the street. I am not saying that taxation laws are not complicated, but I feel the category of people the new offence will affect, due to the de minimis threshold, will be very unlikely to be careless or forgetful with the management of their assets. If anything, with the threat of criminal prosecution, it is to be expected it will make those involved in offshore banking even more meticulous with their financial affairs. That is why I dispute the opinion that this new strict liability criminal offence should be dismissed on the basis that it could catch out those who do not understand the taxation system or are simply careless.

Concerns about unfairly prosecuting individuals with no intention of avoiding paying tax are also arguably tenuous because of the assurances within the consultation document that:

... as with other strict liability offences, [the] offence will still allow a court to recognise the circumstances of the defendant.

The consultation document states that the conduct and intention can be taken into account when sentencing, meaning those who truly were careless and had no intention of partaking in tax evasion would likely avoid a prison sentence. Equally, the argument is put forward by the government that there could be possible defences to protect those with no intention of committing the new offence. Such defences could include either taking reasonable care in conducting their financial affairs and/or acting solely on professional advice.

It must be noted, however, that these possible defences are, again, as with the de minimis threshold, not set and if, after consultation, it was decided there should be no defences such as these available then I would withdraw my advocacy in favour of the new strict liability criminal offence. There may be instances where those who find themselves caught up in tax avoidance scandals will not understand the complex schemes they have been advised to get involved in or fully appreciate how close they operate to the edge of the law. Accordingly, I feel that there must be safeguards for those who have taken care to seek financial instruction and simply followed that professional advice. This also suggests the government should perhaps focus on creating professional guidelines and sanctions for those promoting offshore banking, instead of directing all their attention to the tax-paying individual or company.

Having said all this, there already exist analogous ‘defences’ in the taxes civil penalties framework. For example, where a person has filed an incorrect return, a penalty is only due where the person did not take reasonable care in preparing the return. It seems illogical that similar safeguards will not also be applied to the corresponding criminal offence, thus offering ample protection to those with no intention to de-fraud the system.

A second basis on which some professionals disagree with the implementation of a strict liability criminal offence is because they deem there to be no policy reason for such a move. On the matter James Bullock stated: '[c]onsidering the success that HMRC is having in cracking down on tax evasion there doesn't seem to be the public policy requirement for these extra powers'. However, I would use the simple figures already stated in this article to dispute this. It has been estimated offshore tax evasion costs the UK government £7 billion per year, and whilst over the last two years the HMRC has successfully recovered £1.5 billion from offshore tax evaders, a rather large gap still remains. I would consider an additional £6 billion potential revenue per year a good enough reason to warrant the introduction of criminal sanctions.

Finally

For me, a new strict liability criminal offence is a welcome development in tackling the still very prominent issue of offshore tax evasion. As stated in the consultation document promoting the new offence, 'it is unfair that those who can afford to use expensive offshore banks and complex financial structures can evade their responsibility to pay the taxes which fund vital public services', and it is in the public interest to stamp out such activity. Criminalising the offence will hopefully deter individuals further from even considering not declaring their taxable income and gains. Concerns that individuals with no intention to cheat the system might be criminalised are, I feel, effectively dealt with by the de minimis threshold and the availability of defences similar to those that already exist within the civil penalties framework.

The 31st October 2014 is the closing date for making any comments on the proposals. Responses can be submitted via e-mail to: consult.nosafehavens@hmrc.gsi.gov.uk or via post to: Chris Walker, HMRC Centre for Offshore Evasion Strategy, Room 1C/26, 100 Parliament Street, London SW1A 2BQ. HMRC will then publish a response document later in the year outlining the scope of the new strict liability criminal offence in more detail. 

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Tagged: Criminal Law, Tax Law

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