Strict liability offence for offshore tax evasion will apply to all jurisdictions

The details of the proposed new offence are set out in a consultation document issued by HM Revenue & Customs (HMRC). Under the proposal it will be an offence if a UK taxpayer fails to notify HMRC that they are chargeable to income tax or capital gains tax in respect of offshore income, assets or activities or fails to file a return or include such income or gains on a tax return.

Under the current law a taxpayer can only be guilty of a criminal offence if HMRC can prove that the failure was deliberate. Under the new 'strict liability' offence the failure to declare the income or gains is sufficient and there is no need to prove that it was deliberate. The maximum penalty for the offence would be a prison sentence of up to six months.

It is proposed that the offence should apply to all offshore income and gains and not just to under-declared investment returns. However, the government proposes that the offence will only apply if the 'potentially lost revenue' exceeds £5,000. This threshold will apply to each tax year separately.

CRS is an information standard for the automatic exchange of tax information developed by the Organisation for Economic Co-operation and Development (OECD) in conjunction with the G20. Under CRS financial institutions will be required to provide information to their home tax authority about accounts held by non-residents. This information will then be automatically exchanged with other tax authorities.

When the strict liability offence was first proposed only 45 territories had committed to CRS. However, now more than 90 countries, including almost all major international banking centres, have committed, with the first exchange of information in 2017 or 2018.

The consultation document said: "Despite these advances in international co-operation there still remain challenges for HMRC in detecting and countering offshore non-compliance over and above those faced for domestic non-compliance, particularly where the tax transparency of other jurisdictions is limited or non-existent. Although we may receive some information under the CRS, gathering supporting evidence to demonstrate the intent of the taxpayer will still be very difficult, particularly if the facilitator is based offshore."

The document said that there should be "effective safeguards to ensure taxpayers who make every effort to get their taxes right are not caught by the offence". The draft legislation provides a defence if a taxpayer can prove that they had a 'reasonable excuse' for the failure.

Fiona Fernie, a tax investigations expert at Pinsent Mason, the law firm behind Out-law.com, said: “It is interesting that the consultation document suggests that taxpayers who make every effort to get their taxes right will be adequately safeguarded by the 'reasonable excuse' regime". 

"The draft legislation appears to place the obligation squarely on the taxpayer to show he has 'reasonable excuse' for the failure. Traditionally HMRC is very reluctant to accept that taxpayers have a reasonable excuse for failing to comply with their tax obligations and many who needed to rely on this 'safeguard' have in recent times had to approach the Courts to persuade HMRC to accept their view,” she said.

Although it is proposed that the regime will initially apply only to income tax and capital gains tax, the consultation document says that this could be reviewed at a later date. The original consultation asked whether respondents thought inheritance tax should be included.

The document does not state when it is proposed that the offence will be introduced but it confirms that "the offence will not have retrospective effect".

Trustees of settlements or executors or administrators of deceased persons will be excluded from the offence.

The proposed new offence was first announced in the 2014 budget and a consultation document was issued last summer. However, the proposals were not mentioned in the 2014 Autumn Statement and were omitted from the draft Finance Bill clauses published in December 2014. However the Chancellor announced in the March 2015 budget that the government was going to go ahead with the proposals.

In the March 2015 budget the Chancellor announced that the Liechtenstein Disclosure Facility (LDF) and the Crown Dependency Disclosure Facilities would come to an end, earlier than originally planned, at the end of this year.

The LDF is a disclosure process for taxpayers with UK tax irregularities connected to a bank account, investment or structure (for example, a trust, foundation or company) in Liechtenstein. Under the facility HMRC only seeks tax for the period from April 1999 rather than the normal 20-year period and there is immunity from prosecution.

Fernie said: “Taxpayers should act now to remedy any errors in their tax affairs, since the closure of the LDF at the end of the year will terminate any chance of obtaining immunity from prosecution – even for a full and frank disclosure”

At the same time as the consultation on the strict liability offence, consultation documents were also issued on strengthening deterrents for offshore evaders, civil sanctions for enablers of offshore evasion and a new corporate offence of failure to prevent the facilitation of tax evasion.