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Law firms oppose HMRC’s plans to make failure to prevent tax evasion a criminal offence

'It is a bold attempt by the UK to extend the arm of its law beyond its borders,' says Jason Collins

10 December 2015

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By Manju Manglani, Editor (@ManjuManglani)

HMRC has confirmed that it plan to seek powers to introduce a new criminal offence for businesses that fail to take adequate steps to prevent the facilitation of tax evasion.

It published yesterday draft tax legislation to implement policies published at the Summer Budget 2015 and the Autumn Statement 2015. It has also published new tax consultations and a summary of responses to policy consultations which took place over the past year.

The new criminal offence is directed at professional services firms and financial services firms, but all sectors will be within its scope. Organisations which commit the offence will have a criminal record which may hamper their ability to win public contracts.

City law firm Kingsley Napley has expressed strong concerns about the proposed new offence.

"We do not support the introduction of a strict liability offence for tackling off shore tax evasion," the firm said in its response to the consultation.

"We understand that respondents to last year's consultation were almost universally opposed to the introduction of a strict liability offence. It is a matter of grave regret that such concerns have gone unheeded and we find ourselves a year on dealing with a near-identical proposal. We adopt and endorse the widely-expressed opposition to the proposed strict liability offence, in particular that of the Fraud Lawyers Association."

The Chartered Institute of Taxation (CIOT) has said that, while it strongly supports HMRC's efforts to tackle tax evasion, it does not support the creation of a new offence.

"We are opposed as a matter of principle to the creation of a new strict liability offence for offshore tax evasion," it said in its consultation response.

"We are therefore disappointed that the Government and HMRC have decided to proceed with the introduction of this offence, despite paragraph 2 of Annex B stating that 'a significant majority of respondents were unconvinced by the case for a strict liability offence'."

The CIOT continued: "If the overall proposal proceeds, second-order choices need to be made about its design, and some specific provisions can mitigate to a degree the damage likely to be caused."

HMRC may encounter very significant challenges if it does decide to prosecute overseas firms that played a role in allowing the evasion of UK taxes to take place.

"It will be very hard for the UK to force an overseas company to turn up in a UK court to face prosecution. You can't extradite a company," commented Jason Collins, partner and head of tax at international law firm Pinsent Masons, which also responded to the consultation.

He warned that HMRC may resort to 'prosecution by press release' - that is, by issuing criminal proceedings which, because they are in the public domain, will mean the foreign company has to decide whether to respond in the public domain.

"This is the sort of legislation of which US lawmakers would be proud. It is a bold attempt by the UK to extend the arm of its law beyond its borders. It needs to be matched with resources to police the offence otherwise it will become a damp squib," he said.

"What does worry us is that HMRC's use of this threat may put off some foreign companies from offering their services in the UK for fear of falling foul of the new rules."

Collins noted that the US' "very aggressive approach to aggressive tax avoidance and tax evasion" has put off some financial services firms from exposing themselves to doing business in the US. He expressed concern that this new offence may lead to the same thing happening in the UK.

"HMRC has thankfully rowed back on the unworkable aspects of the definition of 'agent'. Gone is automatic liability for the acts of the staff of an intermediary," he said.

"The SFO just achieved its first 'deferred prosecution agreement' for a company failing to prevent is agents paying bribes. The DPA mechanism will also be available for companies caught under this new offence."

He continued: "The authorities could prosecute the company without having to also prosecute the agent or the person actually evading tax. This leaves companies at risk - a member of staff might seek immunity by 'whistle-blowing', leaving the employer to face the music."

The consultation document, Strengthening Sanctions for Tax Avoidance - A Consultation on Detailed Proposals, received 24 responses, among which four came from law firms. The consultation developed the proposals provided in an earlier consultation, published on 30 January 2015.

The consultation on the draft legislation will run until 3 February 2016, with the final details being confirmed in the Budget 2016 and finally introduced in the Finance Bill 2016.


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