Red flags to look for when spotting financial abuse
“People have had ample opportunity to regularise their affairs”, says HMRC as it presents the next move in its “No Safe Havens” strategy. A package of measures was proposed in the Summer Budget 2015 designed to ramp up HMRC’s powers to tackle offshore tax evasion. With civil deterrents and civil sanctions the focus of the first two consultations, hard-hitting rules are being put forward in the criminal sphere.
The UK prides itself on taking a leading role in tax transparency. With agreements to exchange financial accounts information, Common Reporting Standard (CRS), now in place with over 94 countries, 2016 will first see HMRC receive a wide range of information on offshore accounts held by UK tax residents, with an extension to this scheme in 2017. Yet this does not appear to be enough.
As David Gauke MP, Financial Secretary to the Treasury, said HMRC will be “be relentless in pursuit of tax evaders”. Following the trend for holding corporates to account, e.g. under the FCA and SFO regimes, the role of enablers and facilitators are under particular scrutiny. It cites examples of professional advisors – bankers, lawyers, notaries beware! HMRC considers making sure corporations foster a culture of compliance a key weapon in its arsenal. Therefore whether a company has put in place systems to prevent, detect, and report criminal facilitation of tax evasion will come under intense scrutiny. Taking reasonable steps to prevent the facilitation of tax evasion will form the basis of the defence.
Who will this cover? HMRC confirms that “corporation” is used in a broad sense to include commercial organisations as well as not-for-profit companies and “agent” is a person who acts on behalf of the corporation. “Facilitation” and “criminal facilitation” are used to mean an act to facilitate tax evasion that is already considered criminal under existing law.
Action to deal with individuals is further advanced, building on work from 2014, with new legislation for a strict liability offence of failing to declare offshore income and gains on the table.
This means there is no requirement for the individual concerned to have intended not to pay tax, the mere fact of failing to declare taxable offshore income will make the offence complete. Whereas previously the tax authorities, when considering prosecuting an individual, were limited to the offences of cheating the revenue, offences under the Fraud Act 2006 or fraudulent evasion of income tax (s106A Taxes Management Act 1970) all of which required proof of mens rea (guilty intent), now they will have the option of a far simpler rule to prove a more broadly applicable offence.
It is this broad applicability that comes from strict liability that was questioned in the earlier debate. HRMC reports that many said that it was inappropriate for a taxpayer to commit an offence without having the intention – or in some cases the knowledge – of having done so. Indeed, the Fraud Lawyers Association argued that “tax evasion is quintessentially an offence of dishonesty”. HMRC counters this by arguing that the defences of reasonable excuse and reasonable care, coupled with the threshold amount, provide sufficient safeguards to ensure that only the most serious cases of non-compliance will be caught by the offence.
HMRC recognises that statutory defences may be seen to remove the "strict liability" element of the offence. It confirms that this consultation uses the term "strict liability" to describe offences that do not require the court to take into account the state of mind of the defendant.
Moving ahead with its plans, HMRC sets out the elements of the model proposed, confirming the offence would apply to all offshore income and gains, whether or not the jurisdiction is committed to the CRS. The offence will be triggered in three possible ways: failing to notify HMRC of chargeability to tax; failing to file a return; and filing an inaccurate return. It also proposes a minimum threshold amount (£5000) based on the “lost revenue model” in civil penalties – the threshold applying to each tax year separately.
Both prison sentence and fines are envisaged. The papers suggest that corresponding civil penalties will need to be taken into account - to ensure that civil sanctions do not end up being more severe.
Indeed, the boundary between civil and criminal jurisdiction is going to be one that is increasingly blurred as action in this area ramps up. Under immense scrutiny itself – both political and public - HMRC will be expected to deliver results. Whatever the detail of the regime implemented in due course (the consultation closes on 8 October), the likelihood is we will see increased investigations and arrests in matters that would previously have been civil.
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