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Offshore is not a crime if its reasonable

By admin
01 Mar 2016
Tax Investigation

It is that exciting time of year again when the rules promised last year are unveiled. For our industry it holds similarities to the Geneva motor show: many new concepts with no idea how they will work in practice! We take a quick look at the offshore criminal offence based on draft legislation.

The offence is currently set out as a failure to give notice of being chargeable for a year of assessment and

“(a) the tax in question is chargeable (wholly or in part) on or by reference to offshore income, assets or activities, and

(b) the total amount of income tax and capital gains tax that is chargeable for the year of assessment on or by reference to offshore income, assets or activities exceeds the threshold amount.”

The threshold is to be not less than £25,000 and may be set by Regulation by the Treasury. But what is does “by reference to offshore income, assets or activities” mean?

The draft legislation defines “by reference to offshore income, assets or activities” as:

“(a) income arising from a source in a territory outside the United Kingdom,

(b) assets situated or held in a territory outside the United Kingdom, or

(c) activities carried on wholly or mainly in a territory outside the United Kingdom.”

The wide meaning could catch an array of historic structures that face dispute. What is particularly concerning is that offshore structures often work around anti avoidance legislation, which is very complicated. At its simplest form consider the transfer of asset abroad legislation which was “revised” when enacted into Income Tax Act 2007. In particular the definition of associated operations was drastically revised although the profession did not consider this to have retrospective effect. HMRC are however, challenging pre 2007 structures on whether the new definition of associated operations applies. If it does, has there been a criminal offence? There are numerous other circumstances that an offshore structure could be argued to be within the remit of the criminal offence based on a technical difference if it were not for reasonable excuse or taking reasonable care.

TF for Reasonable excuse

Or not: because the term reasonable excuse is not defined in the legislation. The meaning arises from court decisions although is summarised quite nicely in Rowland v HMRC (2006) as “in light of all the circumstances of the particular case”.

HMRC’s guidance ever useful defines a reasonable excuse as “an unexpected or unusual event that is either unforeseeable or beyond the person’s control which prevents the person from complying with an obligation to notify when they would otherwise have done” and assess whether a taxpayer exercised “reasonable foresight and due diligence” that would be expected of a prudent taxpayer.

Many may suggest that they relied on an adviser and that constitutes reasonable excuse. HMRC will not normally accept reliance on a third party as a reasonable excuse unless he took reasonable care to avoid the failure.

TF for Reasonable care

HMRC consider reasonable care to be a standard of care undertaken by a prudent reasonable person while also identifying the person’s ability and circumstances. The case of Blyth v Birmingham Waterworks Co i described the standard as:

“Negligence is the omission to do something which a reasonable man, guided upon those considerations which ordinarily regulate the conduct of human affairs, would do, or doing something which a prudent and reasonable man would not do. The defendants might be liable for negligence, if, unintentionally, they omitted to do that which a prudent and reasonable person would have done, or did that which a person taking reasonable care would not have done.”

It is therefore likely that the following would be asked:

  • Would a prudent reasonable person consider it likely that tax would be legitimately avoided by the transactions undertaken?

HMRC consider it is a question of examining what the person did or failed to do and asking whether a prudent and reasonable person would have done that or failed to do that in those circumstances. They also consider it correct to consider a particular person’s abilities and circumstances. For example a person with a high degree of education and professional qualifications may be regarded as knowing more and understanding the complexities in more depth.

It will be necessary to provide evidence of what other people in the circumstances did or would have done. Whilst a lot of people undertook the establishment of offshore structures, I would argue that far more with similar circumstances and background did not.

It will be necessary to find somebody who can testify as to what was widely accepted practice and evidence it. Maybe some of those politicians on the Swiss HSBC list will come in useful after all.


Given the increase in target prosecutions along with the new offshore criminal offence coming into force following the end of the offshore disclosure facility, you get a tingly feeling something is going to happen in this area. It’s time to start preparing what is reasonable and identifying whether those with offshore thingies have some risks in the closet.

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