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Tackling evasion: Government set to create strict liability for offshore tax evasion despite Law Society concerns

The government has announced today (19 March) it is to establish a strict liability offence for offshore tax evasion – despite concerns expressed by regulatory bodies including the Law Society.

In a report published by Chief Secretary Danny Alexander, tax evaders and professionals ‘who enable tax evasion’ are set to face ‘tough new sanctions’, including two new criminal offences and higher penalties.

The plans will bring in various punitive measures including a new strict liability criminal offence for offshore evasion – so in the worst cases it will no longer be possible to plead ignorance in an attempt to avoid criminal prosecution; a criminal offence for corporates to fail to prevent tax evasion on their watch; increased financial penalties for evaders; new civil penalties on those who enable evasion that match the tax evader’s; and publicly naming both evaders and those who enable evasion.

It builds on yesterday’s (18 March) budget set out by Chancellor of the Exchequer George Osborne which pledged to crackdown on firms who use the Channel Islands to avoid paying tax, and the introduction of a Diverted Profits Tax which is set to take effect from next month.

However, the move follows concerns expressed by the Law Society in a consultation last year, notably, on the issue of a strict liability offence, it said: ‘We support the objective of diminishing loss of revenue through evasion but consider deterrence is only achieved through increased risk of detection rather than the level of punishment, if detected. There are already criminal offences punishable with fines and imprisonment for tax evasion, which appear to have had no meaningful deterrent effect. We believe that the threat of further fines and imprisonment is unlikely to support the objective of reducing offshore tax evasion.’

The measure has caused some disquiet, Mark Whitehouse, head of tax litigation at PwC Legal told Legal Business: ‘I would have concerns about anything which criminalises without looking at the intent of the person who has allegedly committed the offence. It’s a fundamental tenant of our criminal law – you look to intent before you criminalise. You can impose severe penalties but there’s a difference between that and stigmatising somebody as a criminal without looking at the mens rea.’

Whitehouse added: ‘So I’m inclined to agree with the Law Society. Any departure from the fundamental principle of mens rea would be a concern and should be considered very carefully. But until we see the full scope of what is proposed it’s difficult to be precise about the ramifications and on the face of it.’

The real purpose is to put pressure on people to make voluntary disclosures now,’ Rob Smith, tax partner at DLA Piper told Legal Business. ‘Yes it is a concern in some ways because you may get innocent people not knowing they have income gains overseas. You could have a scenario where information could be incorrectly reported and then wrongly identify someone as a beneficiary of a trust. The next thing a poor individual knows they’re facing a revenue inquiry. Even then, it will take significant resource for HMRC to prosecute. Yes, it’s easier without mens rea but you will have significant cost and resource needed.’

The new regime will also broaden sanctions on those abetting tax evasion. John Cassidy, tax investigations partner at Crowe Clark Whitehill, said: ‘[It] stems from the recent media furore surrounding HSBC in Switzerland and whether the bank was complicit in helping tax evaders. However, in principle it could apply to anyone including professionals such as lawyers and accountants who are part of the process.’

The government is nevertheless forging ahead with the chief secretary saying: ‘Tax evasion is a crime like any other. If people help a burglar, they are accomplices and criminals too. Now it will be the same for those that help tax evaders’.

The government is set to consult on the detail of the new evasion regime, and is hoping to secure £100bn in additional revenue for HMRC as a result. ‘This includes more than £31bn from big businesses, and an extra £1.2bn from the UK’s 6,000 richest people, who each have a net worth of £20m or more,’ the Ministry of Justice added.