Strict Liability Applied to Offshore Bank Accounts

The various Accountancy bodies have recently circulated a warning that HMRC are planning to introduce the “strict liability” criminal offence of failing to declare offshore income and gains, which could result in taxpayers who have no criminal intent being sent to jail.

James Bullock, head of litigation and compliance at the law firm Pinsent Masons, said that whilst the detailed proposals are “more moderate than many had feared”, the principle that “individuals shouldn’t lose their liberty and be sent to jail because they have been careless or forgetful or allowed themselves to be misled over what taxes they had to pay”, should remain in law.

HMRC’s detailed proposals on the design of the new offence were first announced in April. David Gauke, Financial Secretary to the Treasury, said then that the government “will introduce a new strict liability criminal offence that could mean jail for those who do not declare taxable offshore income”.

Pinsent Masons noted that the consultation launched on Tuesday outlines a number of possible defences, including the taxpayer being able to demonstrate that “appropriate professional advice” was sought and followed.

But the Chartered Institute of Taxation (CIOT) warned that the “hugely controversial” new offence meant the tax authorities “would no longer need to show the person had acted dishonestly or with criminal intent”.

CIOT spokesman Gary Ashford noted that HMRC already has the power to launch a criminal investigation where it can show there has been a deliberate failure to declare untaxed funds.

“The new offence would enable criminal convictions, potentially with custodial sentences, to be made without any requirement to show the defendant wilfully acted in a criminal way.”

“This new offence would go against the general presumption that mens rea (guilty mind) is required to impose criminal liability. Strict liability offences have up until now mostly been used for matters with immediate risk to the public such as speeding offences or selling contaminated food. It’s hard to see how non-declaration of tax fits into this category.”

Ashford added: “UK and international taxation is a minefield of complexity, and the government must recognise that there will be individuals who make mistakes in their financial affairs without intending to act wrongly. Not everyone who under-declares their tax is acting with criminal intent.”

In its immediate response to the consultation KPMG merely noted that the proposed new offence would apply “regardless of the intention to evade tax” and that the government is considering an exclusion for income and gains reported under the new OECD Common Reporting Standard for exchange of tax information.

HMRC’s consultation paper said there are “hundreds of offences” that do not require demonstration of the mens rea. Where a strict liability offence is found, Parliament has determined that “the state of mind of the defendant has no bearing on whether they should be liable to a criminal sanction”. Examples include driving and firearms offences as well as some offences relating to indirect taxes, HMRC said.

The new tax offence would mean that the prosecution “would need only demonstrate that a person failed to correctly declare the income or gains, and not that they did so with the intention of defrauding the Exchequer”.

HMRC invited views on whether the “harm” that could be caused by non-disclosure is “sufficient that a custodial sentence could be justified in the most serious cases”.

It added that if a custodial sentence is justified, the government is “minded to provide for up to six months imprisonment, allowing the courts to impose this significant sanction in the most serious of cases.”

The HMRC report “No Safe Havens”, published in April, set out HMRC’s offshore evasion strategy for 2014 and beyond. The report said HMRC would consult on the new offence. Responding to that report, Bill Dodwell, head of tax policy at Deloitte, told The Times: “It’s horrifying. People should not be put in prison unless you can prove intent. I’m shocked to find that an offence which could lead to a prison sentence could be decided on a strict liability basis.”

In a second consultation paper published on Tuesday, HMRC is seeking views on options to strengthen civil sanctions to “more effectively deter tax non-compliance linked to income and gains arising and assets held offshore”

At Morgan Jones & Co we have a number of clients who have offshore accounts, predominantly in the Isle of Man and the Channel Islands; which were opened years ago, mainly on the recommendation of their high street bankers.

I’m not talking about those few greedy individuals who stash millions in the Virgin Islands, whose actions are effectively blatant tax evasion. The individuals that I deal with, in main opened these accounts before tax-free ISA’s were introduced, to enable their savings to grow tax free for their eventual retirement or to mitigate against Inheritance Tax.

They are not criminals and most opened their accounts on the advice of their local bank managers to legally avoid tax, not to deliberately evade it.

And as the net about to be thrown by HMRC is extremely wide, it could potentially catch thousands of others who have properties abroad and have local accounts which the foreign banks don’t tax as in most cases the individuals are still officially residents of the UK. Are these people now to be considered criminals by HMRC?

Quite frankly, I’m appalled and believe that this new proposal by the Treasury and their Waffen-SS colleagues at HMRC is a step too far.

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