Tax evasion: massive increase in scope of penalties

Stephen Smith, Legal Director, CMS

In connection with last week’s Budget, the Government has announced plans to introduce new penalties and offences for tax evasion targeting both evaders and their advisers.

In relation to the evasive taxpayers, there is to be a new ‘strict liability’ criminal offence for tax evasion relating to offshore income.  A strict liability offence means that HMRC will not need to establish that the taxpayer intended to evade tax. The Government hopes this “will bring an end to the defence of ‘I knew nothing, it was my accountant’”.  Strict liability offences are generally imposed where the goal is to prevent physical harm, for example, driving offences.  The introduction of this type of offence indicates how seriously the Government is taking the fight against evasion.

This is not the first time the Government has consulted on introducing this offence.  In response to the earlier consultation, in 2014 the Law Society stated that, in a scenario where detailed investigation of the facts and of the 30,000 page tax code is otherwise required to determine liability, a strict liability law could “give rise to breaches of the fundamental principle of a right to a fair trial”.

The government says that the significant increase in the number of countries signed up to exchange tax information automatically under the Common Reporting Standard by 2017/2018 (see our earlier blog) means that it is now appropriate to reconsider the introduction of this offence.  It is not immediately clear that access to additional information will guarantee taxpayers a fair hearing.

The government are to consult on “appropriate defences and thresholds”; the press release announcing the changes stated the offence was intended for “the worst cases”, although provided no further detail.  The concern is that this will become yet another instance of taxpayers being taxed by a widely drawn statute and untaxed by HMRC concession.

HMRC is already able to impose penalties on the evasive taxpayer of up to 200% of the unpaid tax.  It is proposed that penalties would, in future, be linked to the value of the offshore assets, which could lead to larger penalties.

A second set of measures is aimed at advisers and enablers.  A new criminal offence for corporates which fail to prevent evasion is proposed.  Banks will be keenly interested in the wording of this offence, as will legal and accountancy firms if the new law also applies to partnerships.

The Bribery Act imposes similar obligations by requiring companies to have policies in place to prevent employees giving bribes.  However, if the new law obliges companies to actively prevent their clients evading tax, a greater level of supervision may be required.  It is currently unclear whether directors would be personally liable for an employee’s or client’s crimes.  It also raises questions about what could amount to ‘failure to prevent’ tax evasion; how much of their financial affairs will banks need clients to disclose before allowing them to open an account?

These measures are likely to push banks to evaluate risk more cautiously, potentially turning away new clients or shutting down existing accounts.  The recent move by HSBC to close accounts in Jersey where the account-holder could not prove they were resident there shows that banks are already taking a more cautious approach to offshore accounts.

To complement the existing criminal offences for individual “enablers”, proposed new civil penalties will mean that individual enablers face broadly the same consequences as the evaders themselves.  This will make it considerably easier for HMRC to successfully penalise individual enablers, as HMRC will only have to meet the lower civil burden of proof.  In addition, a new “collateral penalty” will mean that the enabler could be liable for the same fine as the evader.

These new civil and criminal sanctions on advisers and enablers will shift part of the burden of detecting and preventing evasion on to those parties.  How much of a burden this is will only become clear once the details of these proposals are thrashed out. The Government also says it is asking regulatory bodies to set clear professional standards around facilitation and promotion of tax avoidance” (note: “avoidance” not just “evasion”). The financial industry may criticise the government for putting the administrative burden on them, in essence using them as proxy investigators. However, it could be that creating a greater risk for advisers and enablers is an effective way to prevent tax evaders from exploiting loopholes in the system.  The efficacy of these measures remains to be seen; is it possible that they will force persistent evaders to regularise their affairs (which, presumably, is what the Government are hoping for), or simply switch to less scrupulous advisers?

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