Finance Bill 2016 Clauses 150 and 154: Offshore tax evasion - CIOT comments

We have written to HMRC to express concerns about Finance Bill 2016 clauses 150 and 154.

Finance Bill 2016 Clause 150 and Schedule 20 introduce new civil penalties for deliberate ‘enablers’ of offshore tax evasion or other non-compliance, including a power to publish information about the enabler. 

We are concerned that the legislation applies to failure to take reasonable care as well as to tax evasion on the part of the taxpayer. Schedule 20 paragraph 1(1) reads: ‘A penalty is payable by a person who has enabled another person to carry out offshore tax evasion or non-compliance….’  It is our view that the legislation should differentiate deliberate behaviour from ‘non-compliance’ (which, although it is not defined, we assume must mean failure to take reasonable care or careless behaviour). Failure to take reasonable care is not tax evasion. We point out that tax evasion requires fraudulent conduct, and is broadly synonymous with deliberate conduct as used in Finance Act 2007 Schedule 24.  It should only be possible for ‘enabling’ to have taken place when the taxpayer has acted deliberately to evade tax.

The definition of ‘enable’ in paragraph 1(2)(b) includes the term ‘otherwise facilitating’ which seems very vague, requiring no active involvement on the part of the enabler and is therefore potentially very wide. The term needs to be clearly defined so that its meaning can be properly understood. We also note that the term ‘deliberate’ is not used in the legislation when referring to the enabler’s behaviour, despite the policy paper clearly stating that the penalty only applies  where the enabler’s behaviour is deliberate.  We will continue to see clarification from HMRC about how they are intending to apply the legislation and target the new penalty.

Finance Bill 2016 Clause 154 introduces a new criminal offence which does not require the need to prove intent for failing to declare offshore income and gains. Whilst restating in our letter our strong support for HMRC’s efforts to tackle tax evasion, we reiterate our overall objection to the introduction of a strict liability offence. We continue to believe, as a matter of principle, that it should be necessary to show ‘mens rea’ – that a taxpayer had criminal intent – before they can be convicted of a serious criminal offence such as offshore tax evasion.

Changes have been made to the legislation following consultation and these go some way to reassure us that the Government are serious about fulfilling their promise that the new offence will only be used in the most serious of cases. These changes include:

• that there will be a threshold of not less than £25,000 of tax lost per tax year (increased from £5,000): and
• that the offence will only relate to income and gains that  are not reported under the Common Reporting Standard (CRS), so the the offence is targeted at those jurisdictions where HMRC have most difficulty in detecting offshore evasion.

However, whilst the threshold of not less than £25,000 is contained in primary legislation, the application of the offence only to non-CRS jurisdictions is to be contained, not in primary legislation but in regulations which have not yet been published. The draft legislation is wide on the definition of ‘offshore income, assets or activities’ which can be from a source in, situated in or carried on in ‘a territory outside the United Kingdom’. Our concern is that HMRC could easily step back from the promise to relate the offence only to non-CRS jurisdictions, if they so wished.

In the current political climate (ie following the leak of the ‘Panama papers’) there will no doubt be increased pressure on HMRC to take more prosecutions in cases of offshore tax evasion. This raises the possibility that all non-CRS data linked to offshore tax evasion will automatically be processed as a criminal offence.

We continue to be uncertain about how the offence will interact with the Contract Disclosure Facility (CDF) which requires the taxpayer to admit fraud. We therefore continue to seek clarification from HMRC about how they intend to operate and target the new offence. Our view is that the offence should only apply to deliberate behaviour and not target taxpayers who make full voluntary unprompted disclosures.

Finance Bill 2016 Clause 150 Schedule 20 Civil penalties for enablers of offshore tax evasion
Finance Bill 2016 Clause 154 Offences relating to offshore income, assets and liabilities