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Penalties for enablers of offshore evasion

A person or company can penalised if they 'enable' offshore UK tax evasion or non-compliance by others. Policies and procedures designed to prevent companies from committing the corporate criminal offences of failing to prevent the facilitation of tax evasion should be cross-checked to ensure they also mitigate risk under the enabler penalty regime.

This guide was updated in May 2018.

The enabler penalty regime is contained in Schedule 20, Finance Act 2016, and for the first time creates a civil regime for penalising third parties who assist or encourage a UK taxpayer to engage in non-compliance. Prior to the introduction of this regime, the only action HMRC could take was to consider commencing a criminal investigation into whether the enabler committed a criminal offence of aiding and abetting or otherwise facilitating a tax evasion offence.

Criminal investigations are costly and involve proving the misconduct to the criminal standard (99% sure) rather than civil standard (51% sure). It is therefore expected that the civil regime will be more widely used by HMRC for tackling enablers than has historically been the case for HMRC's approach to prosecutions of enablers under the criminal law.

The enabler penalty regime was introduced shortly before the new corporate 'facilitation' offences in the Criminal Finances Act 2007 of failing to prevent the facilitation of tax evasion. The new facilitation offences do not change the underlying criminal offences which are committed when a third party intentionally 'facilitates' fraud by a taxpayer. They merely attribute that criminality to an organisation where the third party commits the facilitation offence whilst acting for that organisation.

There are some parallels to be drawn between the civil penalty regime and the new facilitation offences, but also some differences:

  • the enabler regime only applies to UK taxes, and only where there is an offshore connection;
  • the enabler regime applies not just where the taxpayer has engaged in criminal conduct, but also careless conduct; and
  • a different approach to the attribution of conduct to companies applies under the enabler regime from that under the facilitation offences.

Conditions

An enabler penalty is payable where:

  • a person 'has enabled' another person, the taxpayer, to carry out 'offshore tax evasion or non-compliance' involving UK income tax, capital gains tax or inheritance tax;
  • the person knew when their actions were carried out that they enabled, or were likely to enable, the taxpayer to carry out offshore tax evasion or non-compliance (Condition A); and
  • the taxpayer has been convicted of offshore tax evasion or penalised for offshore non-compliance (Condition B).

'Enabling' offshore tax evasion or non-compliance is widely defined and involves encouraging, assisting or otherwise facilitating conduct by the taxpayer that constitutes offshore tax evasion or non-compliance. Conduct by the taxpayer includes a failure to act, such as failing to declare offshore income.

'Offshore tax evasion' means that the taxpayer has committed a criminal offence of:

  • cheating the public revenue involving an offshore activity;
  • fraudulent evasion of income tax involving an offshore activity;
  • one of the new 'strict liability' offences of failing to notify chargeability to tax, failure to file a correct return or failure to correct an incorrect return, in all cases in relation to an offshore matter or transfer. 'Strict liability' means that the taxpayer does not have to intend to underpay taxes to commit the offence.

'Offshore non-compliance' means that the taxpayer has engaged in conduct relating to an offshore matter or transfer that makes him liable to various types of civil penalty. The civil penalties include penalties payable where the taxpayer has brought about an error in his tax return deliberately or carelessly. They also include the penalties for an 'offshore asset move', which arises where a taxpayer moves assets from one jurisdiction to another to avoid detection including under the Common Reporting Standard.

An inaccuracy or failure involves an offshore matter if it results in a potential loss of revenue that is charged on or by reference to income arising from a source in a non-UK territory, assets situated or held in a non-UK territory, activities carried on wholly or mainly in a non-UK territory, or anything having effect as if it were income, assets or activities of one of these kinds.

An offshore transfer is where there is no offshore matter but income or the proceeds from a disposal are either received in a non-UK territory or received in the UK and transferred to a non-UK territory.

Condition B requires either that the taxpayer is convicted of an offence and any rights of appeal have been exhausted, or that the taxpayer has either accepted a penalty or has exhausted all rights of appeal against a disputed penalty. This means that liability to an enabler penalty does not technically arise unless and until the matters have concluded in respect of the taxpayer's conduct. However, there is nothing to prevent HMRC from commencing an investigation of the enabler at an earlier stage and it is likely to do so in practice in order to safeguard evidence.

The regime came into force on 1 January 2017 so penalties may arise for conduct occurring on or after that day.

Corporate liability

A company can be liable for an enabler penalty. Companies cannot act for themselves so the question is when does the conduct of an individual give rise to liability for a company – often referred to as 'attribution'.

In the criminal law, the conduct of individuals can be attributed to a company only where the individual in question constitutes the 'directing mind and will' of the company, and it is that high bar which led to the introduction of the new corporate criminal offences. In civil law, however, the punishment for wrong-doing is less severe, so the law will generally apply a lower bar. The law of attribution in civil cases is not prescriptive, and the courts will seek to apply a rule on attribution which is consistent with the overall policy of the legislation.

The enablers' legislation is silent on attribution. Some other direct tax penalty legislation provides that a company is liable where a person 'acts on the company's behalf', which is clearly much less than the directing mind and will of the company. Although the position is not clear, we think that this lower bar could apply in relation to enabler penalties.

It is notable that during the consultation process HMRC appeared to downplay the likelihood of enabler penalties being applied to companies. HMRC appeared to operate off the presumption that the tougher criminal rules of attribution would apply. However, we think that the courts would be likely to take a broad view of attribution. We would expect them to take the view that the company would, for example, be bound by the acts of those sufficiently senior to be able to write business on behalf of the company, particularly if there was inadequate supervision of their activities.

Penalty

The enabler penalty is the higher of 100% of the potential lost revenue, essentially the tax that has not been paid, and £3,000, unless the penalty relates to an offshore asset move where an asset is moved to avoid CRS reporting, when the penalty is the higher of £3,000 and 50% of the potential lost revenue.

HMRC must reduce the penalty if the enabler makes a disclosure to HMRC or assists it in an investigation leading to the taxpayer being charged with a relevant offence or found liable to a relevant penalty. However, the penalty cannot be reduced below the higher of 10% or £1,000 in the case of 'unprompted' disclosure and 30% or £3,000 in the case of 'prompted' disclosure. HMRC does have a power to reduce a penalty "if they think it right because of special circumstances".

HMRC may publish the details of an enabler who has been found liable to a penalty where the tax evaded exceeds £25,000 or who has been subject to 5 or more penalties in a five year period where any level of tax has been evaded. HMRC has two years from when the fulfilment of all the conditions (including Conditions A and B) comes to the attention of an officer.

Knowledge

The definition of enabling is wide. However, a person will only be liable for a penalty if they knew, when their actions were carried out "that [those actions] enabled, or were likely to enable, [the taxpayer] to carry out offshore tax evasion or non-compliance".

In the response to the consultation on the legislation before it was introduced, the government made it clear that 'wilful blindness' could lead to liability for the penalty. It said: "where it is, or should be, obvious to a person that they have enabled tax evasion, and they consciously and wilfully decide to be blind to what they have done (or its consequences or both), the government considers the enabler's acts to be deliberate. Those who unreasonably adopt a position of wilful blindness to tax evasion which they have enabled are not merely careless, and should not be able to rely on pretence of ignorance to avoid penalties for their deliberate enabling act."

Although this part of the consultation only referred to tax evasion the enabler penalty does not just apply where the other person has committed criminal tax evasion. It also catches non-compliance in relation to an offshore matter where the third party is subject to a penalty – which can include where they have acted carelessly – and there is no reason to suggest that HMRC would not pursue a 'wilful blindness' approach in these cases as well.

Practical points

Many organisations are putting in place procedures designed to prevent the 'facilitation' of tax evasion and thus to provide a defence in the event that any such facilitation does happen to take place. These procedures will in many cases also mitigate against the risk of an enabler penalty arising. However, given that the enabler penalties can apply where either the taxpayer has acted carelessly, or the taxpayer commits a 'strict liability' offence, ie where there was no intent to commit tax fraud, the procedures ought to be cross-checked to see if fit for the purposes of mitigating risk under the enabler penalty regime.

Jason Collins is a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com.