Proposed UK legislation has potentially far-reaching powers - not just in severity, but also geographically. Wealth advisors in Asia, for example, who deal with UK persons and organisations, must take note.

Editor's note: An earlier version of this item appeared on WealthBriefing, sister news service to this one. The lawyers in question have stated that an important feature of any new UK powers on tax evasion will be extra-territoriality: the legislation will affect advisors and UK taxpayers living abroad, such as in Asia and the Middle East. An advisor handling expats in Singapore, for example, will need to pay heed to this legislation, if enacted, just as they need to pay regard to the UK's anti-bribery legislation. The reach of the law extends far beyond the shores of the UK. To some extent, this is a natural progression of how countries around the world are trying to kill tax evasion and forms of avoidance. This publication is interested in the views of Asia-based financial advisors about this issue.

Proposals by the UK to punish taxpayers for evading taxes even if there is no proof of intent to do so are a “step too far”, law firm Kingsley Napley said, while other firms have criticised the move.

HM Revenue & Customs, the UK tax authority, could acquire powers that are draconian and could mean innocent mistakes will be treated as crimes, the law firm said in a reaction to publication of proposals yesterday, issued following a round of industry consultations.

As initially set out in consultations earlier this year, HMRC proposes to make tax evasion a strict liability offence so that it is not necessary to prove intent to commit a criminal offence. Civil penalties will also be increased on wrongdoers. The measures also mean that advisors could fall afoul of the law if they are considered to have aided a tax evader and not had processes in place to avoid this outcome. This publication recently attended a briefing by another law firm, Stephenson Harwood, the conclusion of which was that the role of providing offshore tax planning advice is becoming increasingly difficult, and risky. It also argued that the government's potential new powers are extra-territorial in scope, like the Bribery Act of 2010, and could affect persons as far away as Hong Kong or Singapore, for example.

The development - which has yet to be fully enacted into law - is part of moves by the UK and other governments to stamp out forms of tax avoidance they consider “artificial” (where there is no underlying economic rationale to a scheme) as well as tax evasion. Governments are bringing out a Common Reporting Standard on the exchange of data connected to tax, seen as an extension of the controversial US FATCA legislation that is designed to go after US expats for unpaid taxes.

There are concerns that by making tax evasion a strict liability offence and taking out a reference to intent, an important principle of due process of law has been violated.

Commenting on clauses in the draft Finance Bill 2016, David Sleight, partner at Kingsley Napley, said: “Whilst we recognise the government’s commitment to fighting tax evasion, it cannot be reasonable or proportionate for an individual to face criminal proceedings and a potential custodial sentence when there is no evidence that they intended to evade tax.

“It is disappointing that HMRC has not taken previous strong opposition to this measure on board. Tax evasion by definition requires a deliberate act to deprive the revenue of monies to which it is entitled. There must therefore logically be a specific intent to evade tax for the offence to be made out. As such, the basis of any prosecution should require proof of fraudulent or dishonest behaviour. The problem with what is proposed is that someone could be found guilty of committing tax fraud following a genuine mistake,” Sleight continued.

“The question is why do we need this offence at all? Criminal prosecutions for tax offences have increased by 300 per cent since the last spending review in 2010 and in his [finance minister George Osborne’s] Autumn Statement he pledged a further £800 million to tackle tax evasion. No examples have been given of the kind of behaviour which would be caught by the proposals that are not already covered by offences under current tax evasion provisions. The proposed legislation is complex, confusing and is likely to create more litigation than it resolves,” he said.

In its published document on the government website today, HM Treasury said of its anti-evasion move: "This measure introduces a new criminal offence for those who have income or gains outside of the UK and evade their UK income tax or capital gains tax responsibilities. The criminal offence does not require the prosecutor to prove intent. The offence will not apply to excluded offshore income, assets or activities reportable to HM Revenue and Customs (HMRC). The offence only applies if the tax underpaid or understated in relation to those income, assets or activities in scope is more than a threshold amount. The offence cannot apply if the taxpayer can satisfy the court that they had a reasonable excuse for failing to comply with UK tax obligations. Conviction can result in a fine or prison sentence of up to six months."

The government said its proposed new law, which could come into force in September 2017, if enacted, would not apply retrospectively. It will first apply in the tax year in which the offence is introduced. For example, if the offence comes into effect in September 2017 then returns filed in relation to the tax year 2017 to 2018 would be the first to potentially fall within the scope of the offence.

Policymakers argue that there is no directly comparable statute law to deal with tax evaders. Prosecutions for offshore tax evasion of income tax and capital gains tax are principally brought under the common law offence of "cheating the public revenue".

"This [new] measure introduces a new criminal offence where people fail to notify HMRC of their liability to pay tax, fail to submit a return or submit an inaccurate return. There can be no conviction if the taxpayer can satisfy the court that they have a reasonable excuse for failing in their obligation to notify or file a return or to get the return right," the government said.

Proposals include creating a new criminal offence for corporations that fail to take adequate steps to prevent the facilitation of tax evasion.

Facilitation
Pinsent Masons, the international law firm, said this new criminal offence is most squarely directed at financial services and professional services firms but all sectors will be in its scope. Companies that commit the offence will have a criminal record, which may hamper their ability to win public contracts.

However, HMRC will encounter very significant challenges if it decides to prosecute overseas firms that played a role in allowing evasion of UK taxes to take place, the firm said.

"It will be very hard for the UK to force an overseas company to turn up in a UK court to face prosecution. You can’t extradite a company," said Jason Collins, partner and head of tax at the firm.

“HMRC may resort to 'prosecution by press release' – i.e., by issuing criminal proceedings which, because they are in the public domain, will mean the foreign company has to decide whether to respond in the public domain," he said. “This is the sort of legislation of which US lawmakers would be proud. It is a bold attempt by the UK to extend the arm of its law beyond its borders. It needs to be matched with resources to police the offence otherwise it will become a damp squib."