18 Dec 2015

CAPITAL letters - Issue 10 Christmas Edition


Whose crime is it anyway?

Firstly, a very happy Christmas to all of our readers and best wishes for the New Year. Secondly, I wanted to pass on some good news, so forgive me for trumpet blowing, but we were winners of the "Private Client Law Firm of the Year 2015" award at the British Legal Awards and I have been included eprivate client's "Top 50 Most Influential People" in private wealth. Thank you to all of you for your support in helping us to become so successful this year. Now to business…

So, what’s under HMRC's tree this Christmas? 

I was hoping this edition would be an analysis of the government plans to impose IHT on UK residential property held through offshore trusts and companies, but it appears that this is in the 'too difficult to deal with pile' at the moment, so we are expecting some more news – and a consultation document - in the early new year. However, the Autumn Statement was not a total damp squib, as we had all sorts of new measures, including a very un-Christmassy announcement that HMRC will proceed with several new tax offences.

It may be the season of goodwill to all men, but not if you evade your taxes! There has been a marked change in HMRC attitude to tax evasion and the prosecution of offenders. For instance in 2013 there were 770 prosecutions, of which there were 540 convictions but in 2014 this jumped to 915 prosecutions, with 760 convictions. This has been accompanied by a dramatic change of tone by those seeking to influence public opinion on attitudes to tax avoidance and evasion and increased publicity generated by a largely hostile media and "tax justice" campaign groups.

It is questionable whether HMRC needs more criminal powers - there are already plenty of statutory and common law criminal offences which can be used against tax evaders. For instance, the most widely used is the common law offence of cheating the public revenue, although there are more specific statutory offences relating to the fraudulent evasion of income tax and VAT. However, the existing offences require a fraudulent intent on the part of the defendant which, it seems, HMRC is not happy with as it makes securing a conviction more difficult. The proposed remedy - a strict liability offence for taxpayers and a separate one for companies that fail to prevent tax evasion – is designed to make it easier for HMRC to secure convictions. It is also highly controversial.

What's wrong with imposing strict liability offences?

The problem is that imposing strict liability means that there is a very high chance of serious injustice; with people who make innocent mistakes, or who have simply been forgetful, becoming convicted criminals. For instance, one of the new offences is a failure to submit a tax return; which means that if forget to submit a return, or have done so beyond the so-called "withdrawal period" (12 months following the normal filing deadline) then you could become a convicted criminal and go to prison. That's harsh! There is a threshold of £25,000 (raised from the initial suggestion of £5,000) and it must relate to offshore assets, but that is quite easy to exceed if, for instance, you are engaged in foreign trading or investment. There is a similar offence for submitting an inaccurate return or, in other words, making a mistake. Surely these are disproportionate penalties for tardiness or errors? After all, our tax code is now the longest – and certainly the most complex – in the world, so it's quite easy to make a mistake. Whisper it, but even some tax advisors make mistakes from time to time due to the complexity of our rules. I know you will find that statement shocking.

Strict liability offences are not new to the UK and most people will have committed one at least once in their lives. For instance, speeding is a strict liability offence, as is drink driving. You can understand that the Police should not have to prove intent in order to convict someone of drink driving as, otherwise, you would get the following defence: "I really didn't intend to get drunk officer, I just lost count of the number of mojitos I downed". But road traffic offences, health and safety rules and so on are a totally different thing from tax evasion. Tax evasion is far more serious and is effectively fraud against the Revenue and fraud, under English law, has always required a criminal intent. This is why the decision to introduce new fraud offences without a requirement for intent is a highly controversial. Yes, this will increase convictions for HMRC – no doubt pleasing the tax justice campaigners and certain newspapers – but at what cost to our justice system's reputation for fairness?

If you think strict liability offences for tax evaders are bad news, then what about a new strict liability offence for failing to prevent other people from committing tax evasion?  Do you like that? If not, then pour yourself a sherry and read on.

The shocking new 'failure to prevent' offence

This is a real Christmas cracker of an offence. For a start it's extra-territorial – so watch out all you people in the Channel Islands and Switzerland; I'm talking to you. Secondly, it will criminalise your failure, as an organisation, to prevent other people from committing tax evasion. Yes, that's right; you will be criminalised for an omission, rather than for any positive act. Nurse, more sherry please!

This corporate criminal offence is deliberately extra-territorial in scope as it is designed to catch trustees, company service providers and bankers in the major offshore financial centres. The new offence is based on the Bribery Act (another favourite of mine) and it means that a failure to introduce and maintain proper procedures to prevent the facilitation of tax evasion could lead to criminal prosecutions. You will also need to train your staff to spot the potential tax criminals amongst your client base and employ proper vetting procedures for the intermediaries and service providers you use.

In a chilling example given by HMRC in its consultation document, it is suggested that a High Street bank could be caught by this offence if it refers a client to a tax advisor in Switzerland and that advisor subsequently puts the client into an 'abusive' offshore trust arrangement. The hypothetical bank in question was not involved in creating the trust or managing the bank accounts under the trust, its only 'crime' was to refer the client to the Swiss tax advisor. Apparently, the bank should have known that the Swiss advisor was a bit of a sharp operator and should have gone elsewhere. I'm sorry if I've made you choke on your mince pie (note how I cleverly weave in these Christmas references), but you need to know these things. This is tough love.

What can I take away from this?

For the corporate offences it's all about training and procedures. If you have them and they are properly monitored and enforced then you should be OK. If you don’t then it's only a matter of time before something horrible happens to you. How do you know if your procedures are OK? Ask us – we are experts on the criminal law and specifically the Bribery Act, upon which model this new offence is based, so we can help you protect yourselves from harm.

For private clients, if you have offshore assets then ideally you should get someone suitably qualified to prepare and submit your tax returns as the strict liability offence has a 'reasonable excuse' defence for people who have relied upon professional advice.

Is there any good news?

No. It's all bad news. Happy Christmas.

Christmas household tip 

I can’t bring myself to write about turkeys and Brussels sprouts, so here is one for post-Christmas period when you are sick of cooking and want a take-away pizza. Everyone over-orders pizza, so how do you re-heat the left-over the next day? You can't use the microwave as you end up with a sloppy slice hotter than the sun. The oven is better but it will lead to a pizza that looks more like a dried up ship's biscuit. The answer is put your pizza slice in a frying pan as the heat is applied from the bottom, thereby crisping up the base but keeping the topping moist.  Wash it down with some left-over Claret and you have an acceptable meal. Just.


James Quarmby

James Quarmby

T:  +44 20 7809 2364 M:  +44 7958 776 759 Email James | Vcard Office:  London

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