Details emerge of HMRC's 'strict liability' offshore tax evasion offence as consultation published

Out-Law News | 20 Aug 2014 | 3:04 pm | 3 min. read

A proposed criminal offence of failing to declare taxable offshore income would only apply to cases which cause "significant" loss of revenue to the UK exchequer, and prosecutions would only proceed where proportionate, HM Revenue and Customs (HMRC) has said.

In a new consultation paper, HMRC is seeking views on the geographic scope of the new offence, the level of penalties and appropriate safeguards. It is also consulting on possible defences, which could include the taxpayer being able to demonstrate "appropriate professional advice" had been sought and followed.

The creation of the new 'strict liability' offence was announced in April as part of an update to HMRC's offshore evasion strategy. Currently, HMRC needs to be able to prove that an individual intended to evade tax when that person failed to declare offshore income. To prove that the new offence had been committed, HMRC would only have to demonstrate that the taxpayer failed to correctly declare income or gains, and not that this was done with the intention to defraud.

Tax expert James Bullock of Pinsent Masons, the law firm behind Out-Law.com, said that although the approach set out in the consultation was more measured than the chancellor of the exchequer had implied in April, the proposals could still result in criminal prosecutions for those who simply did not understand tax law.

"HMRC has more powers in its arsenal – and more funding – than ever before and the tax take through their investigations is at a record level," he said. "Considering 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."

"The detailed proposals are more moderate than many had feared, but the principle remains that individuals shouldn't lose their liberty and be sent to jail because they have been careless or forgetful or allowed themselves to be misled over what taxes they had to pay. They can already be hit by massive fines," he said.

In a second consultation, HMRC is also seeking views on tougher civil sanctions for those with taxable accounts offshore including those who move their taxable assets between offshore banks in different countries in an attempt to evade tax. In these cases, the value of the penalty could be directly linked to the transparency of the territory in which the income or gain arises. Both consultations close on 31 October 2014.

"£1.5 billion has been recovered from offshore tax evaders over the past two years thanks to the government's tough and effective approach, but the job is not done yet," said David Gauke, the exchequer secretary to the Treasury, in the foreword to the criminal sanction consultation.

"If taxpayers do not come forward to clear up their past non-compliance, or if they continue to fail to comply with their obligations in this new era of transparency, then they must face tough consequences. One of these consequences should be the realistic threat of a criminal conviction. That is why we are bringing forward a new strict liability criminal offence for those who do not declare offshore income … Offshore tax evasion has been a blight for too long, and it is time that those who exploit offshore arrangements to avoid paying their fair share face the consequences of their actions," he said.

According to the consultation, the new offence would "complement" existing offences by offering a "new, simpler offence, with less serious sanctions than existing criminal offences - albeit more serious than a civil penalty". Cases of fraud and cheat would continue to be investigated using its existing powers, while HMRC would continue to use its civil powers in the majority of cases.

The government intends that the new offence would be limited to income tax and capital gains tax, but that this should be kept under review. HMRC has proposed including inheritance tax within the scope of the new civil penalties, as this is not currently subject to increased penalties where offshore assets are concerned. A 'de minimis' threshold would likely be adopted, to ensure that "the new criminal offence is only prosecuted where the failure to declare taxable offshore income and gains leads to a tax loss over a certain amount, and therefore a sufficient amount of harm has been caused to warrant a criminal law response".

Sanctions for the new offence could be limited to financial penalties, or could include custodial sentences in the most serious cases, the consultation said. HMRC said that it was "minded" to ensure that a criminal penalty of a maximum of twice the potential lost revenue is available, in order to ensure that the maximum available sanction is no lower than the equivalent civil sanction. The current 20-year rule limiting how far back HMRC can look into a person's tax affairs could also be removed in both criminal and civil cases, according to the consultations.