Offshore tax evasion penalties could lead to double jeopardy and conflict of interest, warns expert

The government will introduce a new civil penalty for those who deliberately "enable" offshore tax evasion. It also plans to publish the names of enablers who have been charged the penalty.

The proposed enabler civil sanctions will be wider-reaching than the civil 'third party' sanctions that already exist, so a larger group of people will potentially be caught. Of most concern is the fact that the government has used the term 'enabler' to describe "those who provide services which support offshore evasion across the full behavioural spectrum - including whether or not there was knowledge of the evasion".

A consultation response containing draft legislation has been published by the government (42-page / 216KB PDF), which states that the policy is only intended to apply to those who "deliberately" enable offshore tax evasion, which sounds innocuous enough. However, the draft legislation does not use the word "deliberate" at all, while recent guidance by HM Revenue and Customs (HMRC) charts its expanding definition of "deliberate" to include failures to act and lack of knowledge in circumstances where HMRC considers that lack of knowledge to be unreasonable.

The enabler sanctions are therefore not designed to be reserved for those who carry out "deliberate" acts. As a consequence, an individual can technically be an enabler when he had no knowledge of the offshore evasion he enabled. This has a number of significant implications, particularly for advisers acting for clients during HMRC investigations into suspected offshore evasion.

The widening of the people potentially exposed to the civil sanctions also requires a wider consideration of the safeguards. However, the consultation response document is sparse in its coverage of the safeguards attached to these new powers.

Established principles

It is not the new sanctions themselves, but rather how HMRC intends to use them, that need clarification.

The concept of penalising the person HMRC deems responsible for the deliberate conduct to which the loss of tax is attributable is nothing new. HMRC's penalty legislation, established by the 2007 Finance Act, already provides for a penalty to be transferred to the person whose deliberate behaviour caused a taxpayer to submit the incorrect tax return. The 'dishonest agent' regime also creates a penalty liability on an adviser when dishonest conduct can be established. The proposed 'name and shame' provisions are also an established principle in HMRC's civil penalty regime.

The proposed new penalties for enablers are tax-geared, meaning they are linked to the amount of tax evaded. The tax evaded in the case of an enabler penalty is the amount of tax "which the enabler helped the evader to evade". This is not necessarily the same figure as the amount of tax which the evader accepts is culpable tax on which a penalty is due, but does follow the established principle that tax-geared penalties are linked to culpable tax errors.

Enabler penalties will follow the usual HMRC penalty regime conditions in that they will require HMRC to establish 'balance of probability' culpability, and will start out as a penalty calculated at 100% of the relevant amount of culpable tax. Similarly, any subsequent mitigation of the penalty rate is dependent on the level of cooperation and disclosure.

Limiting the financial liability

However, unlike other HMRC penalty regimes, there are no suspended penalty provisions and no upper maximum amount, and a minimum limit for the penalty charged is also proposed. This minimum limit is the lowest level to which the penalty can be reduced by virtue of mitigating factors, and these limits are dependent on whether the 'disclosure' is unprompted (£1,000 minimum penalty), or prompted (£3,000 minimum penalty).

The consultation response is vague on whether disclosure and cooperation taken into account to reduce the penalty rate will relate to behaviours of the enabler while HMRC is establishing the offshore tax evaded, or just to the enabler's disclosure and cooperation with regard to his own deliberate behaviour in enabling the offshore evasion.

If the provisions do in fact intend that the mitigation of the enabler penalty is dependent on how much cooperation and disclosure there is to establish the level of the evader's culpability, there are significant concerns regarding conflict of interest and double jeopardy.

The interface between civil and criminal sanctions

The new civil penalty regime forms part of a package of "tougher new sanctions" announced to tackle offshore evasion by the government as part of the March 2015 Budget. The government is legislating to create a civil and a criminal sanction for the tax evader, and a civil and criminal sanction for those who facilitate or enable the offshore evasion. Note that there are distinct definitions of "facilitators" in the criminal regime and "enablers" in the civil regime, but the terms are not mutually exclusive.

Before the enabler civil sanctions can apply, it must be undisputed that the taxpayer has evaded tax. In a criminal scenario, this would mean that the evader has been successfully prosecuted for tax evasion. The government intends that the new enabler sanctions should "complement existing criminal powers", but the consultation response is lacking the necessary detail explaining exactly how enabler civil sanctions could be used to achieve that.

With regard to the new criminal powers, as opposed to existing ones, the strict liability offence proposed as part of the sanctions against the evader is worth a specific mention. HMRC has confirmed that it will pursue enabler penalties in appropriate cases where a conviction has been secured against the evader.

HMRC explains that the prosecutor will take the enabler penalty into account when considering whether a prosecution is in the public interest. This suggests the enabler penalty could be charged before HMRC considers the appropriateness of a possible criminal investigation into the conduct of the enabler. What that criminal offence could be is unclear; but if HMRC's published criminal investigation policy was applied, the cases suitable for criminal prosecution should already have been selected as appropriate before civil sanctions are initiated.

HMRC is not a prosecuting authority, but it does have criminal investigative capabilities. It is therefore reasonable to expect more detail on exactly how these penalties will be used to complement HMRC's criminal investigation strategy, and to understand what safeguards will be in place. HMRC has said that it welcomes views on this as part of the consultation on the draft legislation, so hopefully this muddled thinking will be clarified in due course.

Conflict of interest

If an adviser is considered a possible enabler by HMRC, his advice to the client on penalty negotiations will almost always be a professional conflict of interest. The potential for conflict is much greater if he provided the advice on which the evader has relied, and which forms the subject of HMRC's inquiry.

Of course, at the point that the evader penalty culpability discussions are going on, the adviser will not know if HMRC considers that he may be a possible enabler as the evasion offence will not be established or finalised.

The level of enabler penalty requires the evader penalty to be agreed or determined. Since the existing penalty regime came into force, sometimes advisers recommend clients to accept culpability for purely commercial reasons – particularly where the costs of defending the proposed penalty and, in some instances, the chance of obtaining a suspended penalty, means it is not cost effective to challenge it.

The new enabler penalty and associated publication of the names mean that all evader penalty negotiations would be carried out at a point where the adviser is unclear if his actions during those negotiations could affect a future enabler penalty mitigation exercise. This is a deeply concerning development, as the behaviours judged are likely to be during a time when the enabler is not aware that he could potentially be charged a higher penalty himself.

Double jeopardy

As HMRC will be required to obtain finality on the amount of tax evaded before proceeding with enabler sanctions, and the proposed enabler penalty is linked to the amount of tax evaded, the legal concept of 'double jeopardy' should also be a logical consideration. The response document does cover double jeopardy, but largely discounts its relevance to the new enabler penalty on the basis that the enabler and the evader will always be two distinct legal persons.

The argument that two separate legal persons commit two separate offences, so the double jeopardy rule cannot be breached, appears to be a simplistic approach when considering the practicalities of the proposed new enabler penalty.

Charging a punitive penalty on one person, and criminally investigating the other, for their part in creating a single loss of tax is a complex area of developing law and guidance. The FA 2007 penalty regime has a double jeopardy clause, and most regulatory regimes consider the application of the double jeopardy provisions. The government view that the double jeopardy rule does not apply here appears to be inadequately considered, and hopefully more detail will be made available in due course.

Tori Magill is a tax investigations expert at Pinsent Masons, the law firm behind Out-Law.com.