A UK law firm examines proposed moves by the government to make tax evasion and facilitation of such behaviour a crime even if there is no intent to commit such an offence.

As reported in these pages recently, proposed moves by the UK government to criminalise tax evasion regardless of intent and raise the risk that advisors who facilitate such behaviour are prosecuted has prompted a hostile reaction from parts of the private client industry. In this article, David Sleight, partner at law firm Kingsley Napley, considers the proposals as they stand and the issues for the sector. The editors of this publication are pleased to share these insights with readers; they do not necessarily endorse all the views expressed and invite readers to respond.

In his Autumn Statement programme to lawmakers, the Chancellor [aka UK finance minister] George Osborne promised to reinvest £800 million in the "fight against tax evasion”.  This promise supplements the substantial investment the government has made in criminal tax investigations over the last five years, which has resulted in a 199 per cent increase in the total number of criminal prosecutions for tax evasion (420 in 2010/11 rising to 1258 in 2014/15).  

However, potentially the most significant development in the government’s clampdown came last week in the form of the Finance Bill 2016.  The bill introduces a “strict liability” offence for those who have income or gains outside of the UK and evade their UK income tax or capital gains tax responsibilities.  It is significant, because unlike other tax offences, the draft legislation makes it possible for an individual to be found guilty and liable to a term of imprisonment of up to six months for mistakenly not declaring taxable income.

The offence will apply in three scenarios. A taxpayer: a) fails to notify HMRC of its chargeability to tax; b) they fail to file a return; or, c) they file an inaccurate return.  The offence will apply to all offshore income and gains, not just to cases of under-declared investment returns.  

The good news is that the provisions are not retroactive and will first apply in respect of the tax year in which the offence is introduced, likely to be in 2017.  In addition, there will be a minimum annual threshold amount of £25,000 of under-declared tax (a figure which has increased from £5,000 following concerns raised during the consultation on the draft legislation).  There are also defences of taking reasonable care and/or having a reasonable excuse for not declaring.

However, there is no doubt that high-net-worth individuals (and those that advise them) will need to be even more circumspect in the coming years to ensure that their tax affairs are in order.  With increased resources and an additional criminal sanction whetting HMRC’s appetite for criminal prosecutions, prudence is paramount.

What has changed? 
The biggest, and indeed most controversial, change is that HMRC does not need to show that the individual intended to evade tax.  In what is essentially a move to reverse the burden of proof, all HMRC has to show is that tax is due and the individual is presumed to have committed an offence (subject to defences of taking reasonable care and/or having a reasonable excuse for not declaring).

This is a marked departure from existing legislation and how the criminal law normally operates.  Typically it is for the prosecution to prove beyond reasonable doubt that a person has knowingly and/or dishonestly committed a criminal offence.  The exceptions to that relate to certain strict liability offences (such as those relating to firearms and driving offences) where, for public safety reasons, a departure from the norm is justified. Tax evasion is not in the same category of offences. 

Tax evasion by definition requires a deliberate act to deprive the Revenue of monies to which it is entitled. It is not possible to evade, hide or conceal something carelessly or recklessly - specific intent is necessary. The basis of a prosecution for tax evasion should therefore be found on proving dishonest intent.  Anything less means that individuals are potentially liable in criminal law for an honest mistake (notwithstanding any defence of reasonable care or excuse) for which they could receive a custodial sentence. 

The question posed by those of us in opposition to the draft legislation is why we need the new proposals at all? With an increase in investigations, prosecutions and convictions, in tandem with the introduction of the Common Reporting Standards (CRS) which will allow automatic exchange of account information globally by 2017, it is clear that HMRC already possesses the firepower it needs to combat tax evasion. 

Advisor as enabler?
With the personal, professional and regulatory consequences that can stem from a criminal prosecution, it is important that professional advisors are alive to the new regime.  The provisions set out a defence to failing to notify HMRC of its chargeability to tax namely - “reasonable excuse”, and those regarding failure to file an inaccurate return - namely “reasonable care”.  Although these defences are not clearly defined it seems highly likely that an individual who has sought appropriate professional advice may have a defence.  What is unclear at this time is whether incorrect or negligent advice would render a professional advisor criminally liable under the act?   There is certainly an added risk to those who advise in this area.

The act does provide clauses dealing with new civil penalties and naming provisions for advisers/enablers who “assist” tax evaders, with the penalty for the enabler of up to 100 per cent of the tax evaded. These provisions target those who have deliberately assisted taxpayers to hide assets and taxable income and gains outside of the UK to evade their UK tax responsibilities. The penalty only applies where (i) the enabler’s behaviour was deliberate; and (ii) the evader has received a penalty relating to offshore tax non-compliance, either through deliberate behaviour or because they failed to take reasonable care.  

Another issue for the professional advisers and services firms to consider is the proposed corporate criminal offence of Failure to Prevent Facilitation of Offshore Evasion.  Whilst not part of the draft finance bill it seems certain that the government will want to push these proposals through next year.  Modelled on the recent Bribery Act, the new offence would apply if a corporation fails to take reasonable steps to prevent its agents from criminally facilitating offshore tax evasion. 

With the increased resources and investment at HMRC’s disposal and a Chancellor’s promises of a return of £5 billion as a result of the government’s anti -avoidance and evasion measures, it seems certain that criminal investigations and prosecutions will continue to rise.  Such high stakes for both professional advisors and individuals mean a greater focus on compliance is not only advisable but inevitable.