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EXCLUSIVE: Pinsent Masons On UK's Harsher Anti-Tax Evasion Measures

Fiona Fernie

Pinsent Masons

7 April 2015

The recent budget of the Conservative/Liberal Democrat coalition government in the UK – the country now is going through a national election – involved a number of features, one of which was the focus on stamping out forms of tax evasion. As this publication itself argued, there are concerns about threats to due process of law. In this article, Fiona Fernie, partner at Pinsent Masons, examines the issues. The views are not necessarily those of this publication but the editors are grateful for the insights and invite readers to respond.

Following the UK annual budget statement two weeks ago, the chief secretary to the treasury, Danny Alexander, announced in the House of Commons new measures targeting banks and professional advisors. Although we are now in the run-up to the general election, it is unlikely that these plans will disappear, since the day after the budget the shadow chancellor, Ed Balls, confirmed that no measures had been announced that he would reverse, were he in power.

One of the key tenets of Alexander's announcement was a new criminal offence of "corporate failure to prevent tax evasion or the facilitation of tax evasion".  In addition to banks and professional advisors, this measure will affect trustees and corporate service providers and will mean that banks and fiduciaries will have to pay greater attention to their employees' and customers' activities. However, unlike the anti-money laundering rules already in operation, it will not allow the exoneration of individuals, merely because they report suspicious activity. 

It is not yet clear the extent to which the offence will affect those based outside the UK. It is possible that it may operate like the UK's anti-bribery laws - which can criminalise the activity of foreign corporates in certain circumstances - for example when the transaction would constitute an offence under UK laws. It may therefore result in changes in corporate culture and better controls similar to those introduced in response to the 2010 Bribery Act.

The announcement of the new offence and the onus it puts on banks and fiduciaries to really know and understand their clients goes some way to explaining why many banks are reviewing their offshore businesses and even withdrawing from certain aspects of the offshore market.

In addition to the new criminal offence, Alexander suggested that new civil penalties would also be introduced, exposing those who enable evasion to the same level of financial penalty as the tax evaded by the evaders themselves. As Alexander put it: "If you help someone to evade tax of £1 million you can expect to pay a penalty of £1 million or more". 

Both of these announcements will involve a period of consultation.

Other elements of the measures announced affecting banks and fiduciaries were:
-- the extension of the "naming and shaming" rules to affect enablers of tax evasion as well as the evaders themselves; and
-- a requirement for all financial institutions and tax advisors to notify their customers that HMRC is being sent data on offshore accounts, of the changes in the penalties for evasion and of the final opportunity to disclose any unpaid tax before HMRC receives the data and opens investigations.

Of course it is not only the banks, fiduciaries and professional services providers who are being targeted. Alexander's announcement also indicated that a new "strict liability criminal offence" of failure to declare offshore income and gains would be implemented, together with an increase in financial penalties for evaders, including one linked to the size of the underlying asset rather than to the amount of tax evaded.

The strict liability criminal offence was previously consulted on in 2014. It was widely attacked but the government appears determined to pursue it, albeit after a further period of consultation. 

HMRC is already able to impose penalties of up to 200 per cent of the tax due in relation to tax evasion involving the use of "offshore" services in certain circumstances. The indication that there would be a further toughening of the range of penalties available to HMRC - again following consultation – particularly to include one which involves taking a portion of the underlying assets, shows just how seriously the government is committed to stamping out tax evasion.

In the current financial climate, with low interest rates, it is conceivable that an offshore account which remains undeclared will have given rise to very little in the way of untaxed income or gains. If the original deposit was out of taxed income these measures make it a real possibility for an individual to be paying penalties which bear no relation to the underpaid tax. 

The surprise announcement of the budget, which was subsequently followed up in Alexander's announcement, was the early closure at the end of 2015 of the current disclosure facilities, . These facilities have provided taxpayers who have undisclosed taxes associated with offshore, whatever the reason for the lack of disclosure, with an easy way of sorting out their tax affairs on beneficial terms.

Their closure at the end of 2015 means that time is running out; the new disclosure facility which takes effect in 2016 wilI be on less beneficial terms, and by the time of the advent of automatic exchange of information there will be no open disclosure facility at all. It is therefore increasingly important for taxpayers to undertake a review of their financial affairs and if they have any concerns that they have underpaid tax seek professional advice quickly - before it's too late.