A draconian deterrent

Last August HMRC issued two consultation papers on overseas tax evasion, 'Tackling Offshore tax evasion: A new criminal offence' and 'Tackling offshore tax evasion: Strengthening civil deterrents'. The government announced on 10 December that they intend to proceed with the latter. However there has been no further word on the proposed new criminal offence, although the HMRC website states: "We are analysing your feedback. Visit this page soon to download the outcome to this public feedback."

As the consultation ended on 31 October and all of the main professional bodies slammed the proposals in their responses, this probably means that the government has not yet made up its mind on what to do next.

The Grabiner report

Tax evasion has always been a criminal offence but curiously, there is no crime of tax evasion as such. Prior to the Finance Act 2000, HMRC normally charged a tax evader with cheating the public revenue or false accounting. Section 144 of the Finance Act 2000 (now Taxes Management Act 1970, section 106A) introduced a criminal offence of fraudulent evasion of income tax. This followed a recommendation from Lord Grabiner's report, 'The Informal Economy'.

Lord Grabiner thought that "prosecution in particular takes up large amounts of staff time, so the undoubted deterrent effect it has must be balanced against the high costs…there has also been a trend towards developing new offences that can be tried in magistrates courts as well as, or instead of, the crown courts where cases tend to be slower and are certainly more expensive". He recommended "creating a specific statutory offence of knowingly failing to meet basic tax obligations, which could be tried in a magistrates court". Gordon Brown, who was chancellor at the time of the report, adopted the recommendation, albeit restricting the offence to fraudulent evasion of income tax. This is the only direct statutory tax criminal offence.

It's not clear how many people have been prosecuted in the magistrates courts since April 2001 when section 106A came into force. HMRC's published statistics only list prosecutions without distinguishing between those prosecuted in the crown courts and in the magistrates courts. However total prosecutions have been very small, although the CPS has pledged to increase these to £1,145 per annum.

You would have thought that an obvious candidate for the Grabiner's recommendation would be those who have income overseas and don't declare it. It must surely be comparatively easy for HMRC to establish that once a person has received an item and has omitted it from his return, there is in most cases an inference, or indeed a likelihood, that in the absence of a credible explanation, he has deliberately omitted it in an attempt to evade tax. Apparently not.

A new criminal offence

The government has now decided (decided, it did not consult on whether, but merely how) to create a new criminal offence of, "Failing to declare taxable income and gains arising offshore". This is a summary offence, i.e. one normally dealt with in the Magistrates courts like the Grabiner offence. Unlike the Grabiner offence (and other tax offences) it will be a strict liability offence; the prosecution would need only to show that a person failed to declare the income or gains and not that they did so with the intention of defrauding the exchequer.

Stop and think about that. If I accidently omit an item of UK income from my tax return, HMRC can assess me on that income. I then have a right of appeal to an independent tribunal as to both the taxability of the income and the taxable amount. Once HMRC can show that they reasonably believe that I had received the income, it is for me to disprove HMRC's assessment. But that is not unreasonable because I only have to show that it is more likely than not that I am right. It is only if the tribunal thinks that what HMRC say and what I say are equally probable (or equally improbable) that it has to uphold HMRC's assessment.

But under the new offence, if I accidentally omit overseas income, HMRC merely have to show that I was entitled to taxable income and that I did not put it on my tax return. That's all it will take to commit a criminal offence under the new rules.

It is wholly irrelevant why the item was not shown on my return. I might not have known about the income, I may have legitimately thought that it was capital and covered by my CGT annual allowance, I may legitimately have thought it was exempt from tax, or I might have believed it was not my income but someone else's. All irrelevant. The mere fact that the item was not shown on my tax return is enough to line me up with every other class of criminal and irreparably damage my reputation.

Of course it is up to the CPS whether they prosecute, and they are likely to decide not to do so if the omission is clearly blameless. But the absence of prosecution does not stop my having committed a crime.

So why do George Osborne and David Cameron (and I assume Nick Clegg too, as he surely would have vetoed such an illiberal measure if he did not support it) want to introduce such a draconian measure? The consultation document tells us: "Naturally the case of a taxpayer who sets out to cheat the exchequer through some fraudulent scheme must be met with the toughest response…it is right to re-examine whether it should be necessary for prosecuting authorities to demonstrate that a person acted fraudulently in order for the court
to convict."

I am sure that most liberals, like myself, agree that the state should get tough with those who deliberately cheat the public, but few would make the leap from there to an assumption that the state should not have to demonstrate that the person deliberately sought to evade the tax. Most would think it fundamental that a person cannot accidentally commit a criminal offence in these circumstances.

Falling through the cracks

The consultation document says quite a lot about people who evade tax. It is framed to give the impression that the new offence is a response to offshore tax evasion and it is only tax evaders who need fear it. But that is itself evasive.

How about, for example, the Asian concept of family money under which a father in India is ceded control of the family wealth, but part of it may technically be income of a son who has emigrated to the UK, and probably has no knowledge of the income let alone of the investment structure that deems part of it to be his?

What about the immigrant who came to the UK on 4 April 2009 and knows that he is not taxable on his unremitted overseas income for the first six years, and correctly puts it on his tax return for 2015/16, but does not know that the two days he was here in 2008/09 meant that he should have declared the income the previous year? What about the immigrant whose overseas parent has secretly put funds into a trust for his benefit but has told the trustees not to reveal its existence to him until he is in need of the funds?

How about the UK beneficiary of an overseas trust whose trustees invest funds in the UK gilts in blissful ignorance that the accrued income scheme treats part of the sale proceeds as income? What about the person who believes that he is non-UK resident under our complex residence rules but HMRC take a different view? It may not be the intention of the government to brand all of these people as criminals, but the new strict liability rules could very well have that effect.

Admittedly the consultation document does grudgingly ask whether there should be a reasonable excuse defence, but quickly adds: "The availability of such a defence could make it more difficult to secure successful prosecutions, undermining the case for introducing the new offence."

This worryingly suggests that the government potentially sees a lack of fairness and reasonableness as collateral damage in their eagerness to prosecute aggressive tax evaders, who deserve to be criminally charged. But the question must be asked, where does this leave honest and innocent tax payers who will be wrongly criminalised, due simply to human error?

Robert Maas is a consultant at CBW Tax and chairman of the ICAEW tax faculty's enquiries and appeals sub-committee