Following on from my recent article on Managing Risks Related To Offshore Accounts and Tax Havens, I wanted to discuss the tax evasion offences relating to such arrangements.
In addition, this article will consider the difference between aggressive tax avoidance and tax evasion, and when that line is crossed in cases where wealth is placed offshore.
The first offences to consider are those provided for by the section 166 of the Finance Act 2016.
What are the offences under section 166 of the Finance Act 2016?
Section 166 of the Finance Act 2016 creates new offences under sections 106B, 106C and 106D of the Taxes Management Act 1970, namely:
- Failing to give notice of liability to income tax or capital gains tax.
- Failing to deliver a return.
- Failing to make an accurate return regarding offshore income, assets, or activities.
It is important to be aware that these are ‘strict liability’ offences, meaning the Prosecution does not have to show you dishonestly intended to evade paying tax, omitting to give notice or accurate information concerning offshore income, assets, or activities is enough to gain a conviction.
The offences will only apply to income tax and capital gains tax; however, all offshore income and gains are included, not just under-declared investment returns. If the total of the relevant unreported tax is under £25,000 for a particular year, no offence is committed. This signifies that in bringing in the legislation, the UK Government was not concerned with what it considers ‘minor amounts’. The offences are aimed at those who have significant income and/or assets located offshore.
The offences also do not apply:
- You were acting as a trustee of a settlement, or as executor or administrator of a deceased person, or
- You reported your offshore income or capital gains to HMRC under the Common Reporting Standard (CRS).
What are the defences available under section 166 of the Finance Act 2016?
If you can show you took reasonable care when submitting your return or had a reasonable excuse for failing to comply with your UK tax obligations, you will have a defence. But this does not mean you automatically escape conviction. The Courts will consider your circumstances, ability, knowledge, and experience. So, if you are wealthy, educated, with access to considerable support in terms of professional advisors, you will need to provide a persuasive and detailed argument that you took reasonable care or had a reasonable excuse.
The offences under section 166 and the crime of tax evasion and tax fraud (discussed in a previous article) are relatively straightforward in terms of what the Prosecution must prove. And although a defence can and often is built on the lack of dishonest intent by the Defendant, there is another grey area where a defence to tax evasion/fraud can be plucked from – was the Defendant engaging in tax evasion or aggressive tax avoidance, the latter of which may or may not be illegal? An example of this can be found in the 2015 HSBC scandal.
What was the HSBC scandal involving offshore accounts and tax avoidance?
Section 166 was introduced following the public outcry regarding the revelation that the UK- headquartered bank, HSBC, allegedly helped those holding offshore Swiss accounts, undertake tax avoidance and evasion. The International Consortium of Investigative Journalists (ICIJ) unearthed evidence of the bank providing large amount of untraceable bricks of cash in foreign currencies, colluding with clients to conceal ‘black accounts’ from tax authorities, and using “how to avoid the European Tax Savings Directive” information as a marketing strategy.
In her article, The Relationship Between Offshore Evasion and ‘Aggressive’ Tax Avoidance Arrangements: The HSBC Case, Iulia Nicolescu states that aggressive tax avoidance and tax evasion are seen as broadly the same in the court of public opinion. The Government is also alive to this and has sought to separate out the definitions of ‘tax avoidance’ and ‘tax planning’ as illustrated below.
Clarifying tax terminology
Tax evasion is always illegal. It is when people or businesses deliberately do not declare and account for the taxes that they owe. It includes the hidden economy, where people conceal their presence or taxable sources of income.
Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law. Most tax avoidance schemes simply do not work, and those who engage in it can find they pay more than the tax they attempted to save once HMRC has successfully challenged them.
Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament. Where this is the case it is right to take action, because it is important that the tax system is fair and perceived to be so.”
Aggressive tax avoidance is frowned upon by the Government and cases may be heard in court to decide whether the avoidance is manipulating the law in a way that does not represent the Government’s intentions towards tax. However, following the HSBC scandal, only one person was prosecuted. HMRC admitted that putting together a court case took years, and it was quicker and cheaper to try to recoup the lost tax rather than prosecute the bank.
Wrapping up
If you feel after reading this article that there are no clear answers when it comes to tax evasion offences and offshore accounts other than what is provided for under section 166 of the Finance Act 2016, that is because unambiguous law regarding tax avoidance is difficult to create. Governments must tread a fine line between collecting revenue and assuring the public that high-net-worth people are paying their fair share, and the need to encourage investment and not send the wealthy, with their considerable spending power and already high tax contributions, fleeing to more tax-friendly shores.
Being investigated or prosecuted for tax fraud or tax evasion is incredibly serious, and if you are convicted, you could go to prison. Our Tax Fraud Solicitors have extensive experience in successfully defending complex tax fraud cases and will provide the advice and representation you need to manage an HMRC investigation or prosecution.
To discuss any points raised in this article, please call +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.
Note: This article does not constitute legal advice. For further information, please contact our London office.
Share this Post