Enter Your E-mail

TW Ed takes great exception to HMRC’s proposed criminal sanctions for failing to declare offshore income or gains. Unsurprisingly.

Introduction – Strict Liability – Innocence is No Excuse

HMRC has published its consultation on new proposals to introduce a “strict liability” criminal offence for failing to account for tax on offshore income or capital gains. This is a consultation so the final version may well be different to the current proposals – but HMRC has made clear its preference in key areas.

I have two main objections.

The proposals are unfair because:

• An onshore failure to account for as little as £2,000 would invariably be dealt with through the civil penalty route. In particular, an innocent failure might suffer no penalty at all – but innocence is irrelevant under these new criminal proposals. Worse, HMRC is recommending a lottery by country, where only certain countries carry the risk of criminal sanctions.
• Innocent error might easily be the cause of the offence, yet HMRC is deliberately stripping away the fundamental defence for such cases.

At its simplest, a “strict liability” criminal offence is a device to punish the innocent alongside the guilty.”Strict liability” means that HMRC needs not worry about whether or not the taxpayer actually realises or intends that they are doing wrong. And that is what “innocent” means: someone who is ‘unknowing’ of the criminality of an act. So, under the proposed new regime, even the innocent will be “guilty” – or at least convicted.

In its consultation, HMRC gives examples of “strict liability” criminal offences which already exist, such as driving while disqualified, or the unlawful possession of firearms or ammunition. My lay appreciation of such offences is that

• The fault is obvious and unlikely to be ‘accidental’
• ·         The desire to protect the public from harm is the primary concern

It seems HMRC has an eye at least to the latter point since the consultation says at 2.12, “regardless of the state of mind of the taxpayer, this failure harms the compliant majority...”, which is a fair comment but should perhaps be considered in context – for which, see later.

The New Offence

It is worth bearing in mind that HMRC already possesses a range of criminal sanctions in its arsenal, e.g.:

• the common law offence of cheating the public revenue (or conspiring to cheat the public revenue);
• the Fraud Act 2006, which introduced criminal offences of fraud by representation and fraud by failing to disclose;
• Taxes Management Act 1970 s 106A which introduced an offence of fraudulent evasion of income tax;
• anti-money laundering legislation.

It is proposed that the new offence will stand alongside the above. It is considered a lesser offence, albeit more serious than a mere ‘civil penalty’ offence. HMRC confirms at 2.15 that it will continue to prosecute cases of fraud and cheat under the pre-existing powers, so that the most serious case receive the most serious punishment. Perhaps other readers will have difficulty in reconciling the introduction of “crim-lite” with an overwhelming desire to protect the public from harm, when HMRC readily admits that it will in fact use pre-existing powers to attack serious cases.

So what would it mean to be found guilty of “crim-lite”? HMRC helpfully summarises at Section 4 what it sees as the consequence of a criminal conviction:

• Loss of taxpayer anonymity, with a corresponding impact on reputation;
• A criminal record, with corresponding effects on employment, qualification as a director, and “fit and proper” status;
• The sentence of the court – which HMRC hopes will include the option of a custodial sanction;
• Action to recover the tax lost.

HMRC has said that the government wants a criminal financial penalty of up to twice the Potential Lost Revenue – essentially the tax at risk – and the option of a custodial term of up to 6 months.

Remember that this could be imposed on a person who is unwitting of the crime: innocence is no defence.

Scope

Taxes Covered

HMRC currently intends the new measure to apply only to individuals and only to income and/or capital gains. Although HMRC bemoans offshore ‘facilitators’ of tax evasion as generally being beyond its reach, (2.2), these new measures will not address that problem. Companies, etc., are also outside the scope so this measure is, thankfully, unlikely to deter global multi-nationals from setting up shop in what is apparently the most competitively-priced corporation tax regime in the G7.

HMRC is considering whether or not to include Inheritance Tax but at the moment is put off by the expected additional layer of complexity.

Types of Income and/or Gain

HMRC is also unsure as to whether or not to attack only income/capital gains on financial investments, or any category. It currently favours covering all categories, noting at 3.18 that it might seem unfair if someone who invested in overseas property could enjoy rental income and capital gains without similar fear of criminal sanction as someone who invested in stocks and shares. It might also seem very easy to circumvent the new regime.

Where in the World?

The consultation suggests that the new regime should not apply to failures to pay tax on income or gains arising in any countries which sign up to the new Common Reporting Standard, where adherent overseas tax authorities will supply HMRC with substantial information on UK residents who are investing in their respective jurisdictions. The rationale is that HMRC will automatically get sufficient information to address concerns as to possible tax risk for any UK taxpayers investing in those countries.  Dozens of territories have already signed up, including the EU and America.

Proportionality

HMRC is proposing to have a de minimis threshold, below which the new regime will not apply. The measure most naturally suited seems to be the extent of the tax put at risk by the individual’s failure(s). At 4.15 the consultation identifies that the median “Potential Lost Revenue” for relevant offshore cases over the last few years was an astonishingly small amount of around £1,850. Bearing in mind that the new regime is clearly intended to apply to the lower end of the spectrum of offences, the implication is that £1,849 would result in a conventional civil penalty, while £1,851 might well result in a loss of liberty and reputation.

It is perhaps worth mentioning that HMRC already has a system of publishing the details of individuals who have deliberately defaulted on their tax obligations. (See Publishing Details of Deliberate Tax Defaulters) It is perhaps also worth mentioning that in such cases,

• HMRC will have demonstrated that the action was deliberate, and
• The tax at stake must exceed £25,000

So a ‘normal’ offence must have been deliberate – not innocent – AND be in excess of £25,000 in terms of the tax at stake, before there is serious risk of reputational damage. Offshore, the tax can be significantly less than 10% of that figure and nobody is interested in whether or not the failure to pay was deliberate. This is difficult to reconcile. It is also difficult to see that a potential loss of tax of as little as £1,850 could be such a risk of harm to the public as to warrant such measures.

Safeguards

The consultation suggests that there will be numerous safeguards in place, such as:

• The de minimis threshold so that negligible tax losses will not be pursued
• The consultation asks whether or not there should be a statutory defence – for instance, that the taxpayer took “reasonable care” to ensure that his tax affairs were in order.  At 5.7, however, HMRC expresses concern that “such a defence could make it more difficult to secure successful prosecutions, undermining the case for introducing the new offence” which, for some reason, HMRC perceives to be a problem.
• HMRC has a Criminal Investigation Policy which outlines the relatively very rare circumstances in which HMRC will take criminal proceedings over the civil penalty route. Having been, shall we politely say, “wrong-footed” by assurances given in consultations in the past, (renewals basis, anyone?), I have today sought and received assurance that the same policy will cover the proposed regime, since 5.11 could have been interpreted differently (for instance, that existing policy would effectively apply only to pre-existing routes).
• The prosecution is required in the public interest.

“Reasonable excuse” is notable for its absence – for obvious reasons.

Fairness and Consistency

I believe that the rules are unfair, particularly given that mens rea has been removed from play, the risk of innocent error resulting in criminal sanctions is unpalatably high. For instance:

As we have previously noted, HMRC has already given a good example of someone who could innocently fall foul of the new proposals, as per page 3 of its previous publication No Safe Havens 2014, where a widow unwittingly inherited overseas bank accounts formerly belonging to her late husband. Interestingly, HMRC sees that example as a warning to dead people not to leave toxic foreign accounts to surviving relatives: “your problems can be inherited by your loved ones”; HMRC appears to be blind to (or should that be innocent of?) the fact that it serves as a good example of why these “strict liability” proposals are so offensive.

Many taxpayers simply do not appreciate that they may have to account for tax on a transaction in more than one territory. I have on several occasions advised well meaning (UK tax-resident) clients who had sold an overseas property and then confidently assured me that they had dealt with all their tax obligations in the local territory, so there was nothing to disclose to the UK tax authorities.

In a similar vein, I have had to advise clients who were foreign nationals and working temporarily in the UK that, at some point, income and/or gains in their home country might become taxable in the UK.  While the rules are now arguably clearer thanks to the statutory regime, they may well remain relatively opaque to unrepresented taxpayers.

In short, well-intentioned and otherwise compliant taxpayers could fall foul of these rules. We might object based on their innocence but the new law would not, perhaps even could not, discriminate.

I also believe that the rules are inconsistent, both with the ‘normal’ domestic regime and the proposals to exempt CSR territories. Criminality should not be an accident of geography and ignorance, if at all possible.

Finally, while my main concern is on behalf of taxpayers who might unwittingly be caught out by these proposals, it is perhaps worth mentioning that, in the sister publication issued today, Tackling Offshore Tax Evasion: Strengthening Civil Deterrents, HMRC makes the following statement at 1.11:

“Safeguards come in a variety of forms and ensure that taxpayers are treated fairly and in accordance with the law. They must be adequate, appropriate and effective in order to protect everyone: both the compliant and the non-compliant.” This philosophy is not evident in the first consultation document – where it is arguably even more important.

Do We Really Need a New Regime?

On the basis that a de minimis threshold would remove the lower half of eligible cases, and that unreported income/gains from most of the ‘mainstream’ countries, being CSR-compliant, will be exempt, and assuming that HMRC applies its Criminal Investigation Policy consistently as now, it seems to me that there will be only a relatively very small number of cases which are not excluded from criminal sanction, one way or another. But this begs the question: why bother? (Or more likely, “what am I missing?”

A cynic might say that this is an attempt by HMRC to look tough with minimal effort. I should argue that the idea that a government body should wish to criminalise some of its citizens without exercising a decent degree of rigour, is itself an offence to all decent-minded persons. And I suspect that HMRC would deny it. But at para 1.5, the consultation talks about “the design of a new strict liability criminal offence... ...which will help to increase the proportion of cases which are handled through the criminal justice system”. At this point, the assurance that HMRC’s existing Criminal Investigations Policy will continue to apply starts to look a little thin.

Now, why would HMRC want to increase the number of criminal cases? Because in 2011, they promised exactly that: a five-fold increase in prosecutions by 2014/15, to counter claims they had ‘gone soft’. In fact it is clear that this issue has long shaped their thinking in relation to these proposals – as we previously mentioned, HMRC has made no secret that they think the proposals will help them achieve their prosecution target. (See “clap Granny in irons: we have targets to reach”).

I suspect that HMRC would instead argue that the measure is intended to send a strong signal to would-be offenders, etc., etc, as per section 1.2. But here’s the rub: such a measure can only deter people who are already aware they are contemplating doing something wrong: someone who is innocent cannot be deterred from doing something which they don’t know is a crime. (Or not with a measure like this, at least). So, if someone is guilty, where is the harm in proving it in court?

Perhaps the most telling sentence in the consultation is that at 5.7: “On the other hand, the availability of [a statutory] defence could make it more difficult to secure successful prosecutions, undermining the case for introducing the new offence.”

While the above has already been noted in that it seems that, in the latter part, HMRC is more concerned with creating a new offence than ascertaining whether or not it is actually needed, the former also bears further consideration: why on Earth would a civil service, whose role it is to serve UK taxpayers, object to a statutory defence of “reasonable care” in case it acts as a barrier to securing convictions against the taxpayers it serves? What are HMRC’s priorities here?