“HMRC agreed a target to increase the number of prosecutions not involving organised crime by 1,000 a year by 2014-15 from a baseline of 165 in 2010”.
HMRC, wanting to increase the number of prosecutions and deter offshore tax planning, have introduced the Offshore Criminal Offence. This article considers the threats to a reasonable excuse defence which, if successful, could find the unknowing facing fines and/or a prison sentence.
The reasonable excuse that many will currently be confident in applying is that reliance has been placed on professional advice.
What is the offshore criminal offence?
Clause 154 Finance Act 2016 is headed “Offences relating to offshore income, assets and activities” and amends TMA 1970 to introduce new criminal offences which apply for the purposes on income tax and capital gains tax only, where a person has failed to declare offshore income or gains in accordance with TMA (1970) s(7) & (8). The offence applies to any subsequent loss of tax over a threshold amount which will be defined in the regulations annually.
Crucially, the offence does not prescribe the need to prove intent for failing to declare taxable offshore income and gains.
Sections 106B to 106D TMA 1970 set out the new offences, which are broadly:
- Failing to give notice to being chargeable to income tax or capital gains tax (CGT)
- Failing to deliver a return
- Making an inaccurate return
The offences could therefore apply to potentially many situations including:
- Where reliance on an offshore structure, within the commercial exemption disapplying the anti-avoidance legislation, is not available
- Where a scheme with an offshore element has not been successful
- Interpretation of associated operations for the transfer of asset abroad rules is incorrect bearing in mind the more recent subtle changes to the legislation: HMRC hold the opinion that the changes reflect the position in the earlier legislation (but one thinks the scope is much changed)
A lot of offshore structures sit within an area of law where the tax treatment is open to debate. This means, at its worst, HMRC could seek to apply the offence where there is a failure relating income or gains of offshore companies, trusts, foundations, protected cell companies, qualifying non-UK pension schemes, retirement benefit schemes, pension liberation arrangements, employee benefit schemes, employee remuneration trusts, contractor loan arrangements and remuneration trust structures.
In the absence of a reasonable excuse, the offence could apply to a considerable amount of offshore tax structuring. This appears to meet HMRC’s policy because:
“Criminal investigations and prosecutions are reserved for where the conduct involved is such that only prosecuting an offender is appropriate or where HMRC needs to send a strong deterrent message”.
Luckily, each offence is open to a reasonable excuse defence. Where there is no excuse a taxpayer may face an unlimited fine in England and Wales and/or a custodial sentence of up to 6 months for offences committed before section 281(5) of the Criminal Justice Act 2003 comes into force, and 51 weeks thereafter.
What is a reasonable excuse?
FA 2009, Sch 55 para 23(2)(b) and (c) states:
“Where (the taxpayer) relies on any other person to do anything, that is not a reasonable excuse unless (the taxpayer) took reasonable care to avoid the failure.”
“Where P had a reasonable excuse for the failure but the excuse has ceased, P is to be treated as having continued to have the excuse if the failure is remedied without unreasonable delay after the excuse ceased.”
HMRC compliance handbook further define reasonable excuse may be where the taxpayer was “acting on advice from a competent adviser which proves to be wrong despite the fact that the adviser was given a full set of accurate facts”.
Considering a client adviser relationship over several years and the legislation in conjunction with HMRC’s interpretation, a reasonable excuse will be available where:
- A client seeks a competent adviser to provide tax advice on a proposition to include whether a notice to chargeability needs to be made, a tax return delivered and whether disclosures or entries need to be entered onto a return
- All relevant facts are provided to a competent adviser
- Based on those facts, complete tax advice is provided
- The tax advice provided is considered independent and of a standard where it would be reasonable for the client to believe that advice is delivered in their best interest
- The tax advice is specific on the actual tax treatment i.e. does not state that the treatment is open to differing interpretations
- An adviser is placed in a position by the client to be able to provide ongoing comprehensive and accurate advice based on all relevant facts
Unfortunately, levels of advice and relationships are not always so perfect, for example:
- The adviser may have advised on an unfamiliar area
- The client may not have taken prudent steps, having regard for their financial astuteness and tax knowledge, to ensure the adviser was competent in that area
- The advice provided may lack detail and/or references to supporting legislation or case law and, having regard for the client’s financial astuteness and tax knowledge, it is not reasonable that the advice was relied upon
- The client may not have provided all relevant facts or may have not implemented advice as intended
- Advice may have included several potential risks, which may be considered to be acceptance by the client that the transactions undertaken may not be necessarily treated as hoped
- The advice may come from a provider of a structure (or scheme) and it may be reasonable for a client to consider that advice may be conflicted, not independent nor in their best interest
- The adviser is not regularly kept informed of what and how transactions are undertaken within the offshore structure leaving them in a position that they are unable to provide continued and accurate advice
Case law supports these views.
In both Schola UK Ltd 2011 (TC001004) and Life Property Management Limited (The Ironworks) 2013 (TC02708) it was confirmed that when considering reasonable excuse (in that case in respect of an employer) it is the actions of the taxpayer from the perspective of a prudent person exercising reasonable foresight and due diligence and having proper regard for responsibilities under the Tax Acts. The case of Anderson (deceased) v HMRC 2009 set out the same requirement to consider what a reasonable taxpayer exercising reasonable due diligence would have done and the case of Hanson v HMRC 2012 confirms that reasonable excuse will be available where reliability is sought from a reputable adviser.
The older case of Nunn v Gray 1997 illustrates the risk where reliance was placed on an old adviser because the taxpayer had failed to correct the omission of dividend income and a gain on the disposal of shares without unreasonable delay. The taxpayer was considered to have experience of tax having submitted returns for a a number of tax years, therefore he should have been aware of the responsibility to include such income and gains.
With regard to those using tax schemes, the cases of BP Litman & A Newall v Commissioners for HMRC  (TC03229) and Herefordshire Property Company Ltd v Commissioners for HMRC  (TC04286) should be of interest. Both cases were in relation to capital redemption scheme planning although in the first, reasonable care was denied but accepted in the second. In the Litman case, reliance was placed on the promoter for tax advice as well as for entries to be included in their tax return. The advice provided was minimal. The taxpayers relied on the promoter to complete the documents for the scheme and implement it. The taxpayers did not check the steps, in particular whether loans were entered into, ahead of submitting their returns. The taxpayers were negligent in signing their returns reflecting transactions which they had no evidence of being entered into. The outcome for Herefordshire Property Company was different because the director explained that the promoter’s previous scheme had not failed and he had no reason to doubt their abilities, reputation or advice.
What is the risk of the offshore criminal offence applying?
HMRC have added an extra 200 staff to criminal investigations work and to revising the conduct of investigations. HMRC has also agreed with the Crown Prosecution Service how to work together to achieve the target. HMRC met and exceeded the prosecution target in 2014/15 (1,183 tax fraud prosecutions not involving organised crime). Additional funding has been made available for criminal investigations into serious and complex tax crime. The intended focus is on wealthy individuals and corporations, with the aim of increasing prosecutions in this area. HMRC aims to secure widespread publicity for prosecutions because it believes that this has a significant part to play in creating the deterrent effect.
If HMRC is looking for an easy target to bolster prosecutions the offshore criminal offence offers a fast track route to obtaining numbers in particular from users of avoidance schemes who relied on the promoter. The increased information passing to HMRC from offshore accounts and the intended focus on wealthy individuals and corporations gives a great opportunity to target them although this may take a little longer to achieve.