The government is making a sensible move in criminalising the failure to declare taxable offshore income.
The government is making a sensible move in criminalising the failure to declare taxable offshore income
In August 2014 the Treasury announced its intention to create a new strict liability criminal offence of failing to declare taxable offshore income and gains and it is expected that, following a consultation, the government will confirm its intention to pass the appropriate law to create this offence before the general election as part of the Autumn Statement.
The move is part of an attempt by this government to show that it is tough on tax evaders despite the fact that it has cut the number of tax investigations it has undertaken, dramatically reduced the number of staff at HMRC and is now seeing the tax gap increase.
It is also happening against a background of noisy protest on this issue from the tax profession at large. There is a reason for this protest on their part. A strict liability offence is one where it is not necessary for intention to be proved for a person to be found guilty of a crime. We are all used to the concept: speeding offences are strict liability offences. There is no excuse for driving faster than the speed limit, you just have to be doing so as a matter of fact to be guilty of the crime.
This has not, however, been the case for tax offences to date and that will remain true of most of them after this offence is introduced. But for non-declaration of offshore income it will, once this new law is passed, be the case that failing to declare that income will be a crime, whatever excuse is offered by a person for not making declaration, including simple mistake.
The Revenue’s motive in seeking this new offence is obvious. Just read reports of the Harry Redknapp case and you will realise the problems HMRC encounter when trying to prove that a person has broken the law when depositing money offshore. They do not wish to face this problem in future when they are expecting to have vastly more information available to them on the identities of UK resident people with offshore bank accounts as a result of new information sharing agreements with tax havens, due to come into effect in the next couple of years.
HMRC know that this information sharing will have a deterrent effect, but they also know that if it provides an opportunity to negotiate anonymous, non-criminal settlements with those who have been stashing cash offshore, two consequences will flow.
The first is that they will be negotiating with some people forever and the second is that politically they will come under pressure for failing to recover the expected yield from this data. It’s no surprise then that they want to have a new weapon in their armoury to force compliance and place pressure on those shown to have accounts to come to a quick settlement.
I stress, this does not necessarily mean that they will prosecute all those who they discover have such accounts. I think that is very unlikely: they simply do not have all the resources needed to do so, largely because of the pressure of government cuts that is decimating staff at HMRC.
But that’s not the point. The threat to prosecute simply on the basis that there is an account that has not, as a matter of fact, been declared will get many recalcitrant taxpayers to settle quickly and in higher amount than might otherwise have been the case, and that is HMRC’s aim.
So, the question is whether or not this is fair. The tax profession says it is not. They say people resident in the UK have accounts outside this country for all sorts of reasons (I did when I once worked in Ireland, but it was an Irish account and it was declared for UK tax).
The usual suggested likely ‘innocent’ victim of this new crime is, they say, the person who has an account to manage the second home they have in France or Spain who has never realised that any interest (and letting income) recorded in this account must be disclosed on a UK tax return even if the income has already been taxed elsewhere. It is said many people hold such accounts in tax havens as it is easier for a UK resident person to open a euro denominated account in those places than it is with a UK branch of the bank with which they are familiar.
And, maybe, all of that is true. But the fact is that the tax return contains a declaration that anyone submitting one should be familiar with, and that says that the return is correct and complete to the best of the person making the return’s knowledge and belief. Candidly, I defy anyone operating a foreign bank account, let alone an offshore bank account, to sign that return without thinking that if they earned income from that source that they can now get away without declaring it.
After all, this is not a subjective area requiring a lot of interpretation of the law or judgement on how it applies: it is a simple question of whether or not the person making the declaration did, or did not, have income outside the UK.
In that case I have little sympathy with the tax profession’s objections on this issue. People have to realise that making a proper declaration for tax purposes is something about which they have to take care or risk a penalty, especially on such basic issues as saying whether or not an income stream exists.
I would equally add that such a law could not, and should not in my opinion, apply to areas where judgement is involved in declaration e.g. in determining how much a person’s income from trading is where it is commonplace that judgement is used in determining profits.
But this is not the target for this particular offence, whose the focus is solely on making sure that sources of income that a person has outside the UK are all properly disclosed to HMRC.
Given the losses to our tax authority that have arisen from abuse in this area and the need to tackle offshore abuse once and for all, the need for a strict liability offence that takes the ambiguity out of failure to disclose seems entirely appropriate.
For once I am, as a result, on the side of this government, and think they are taking an appropriate step to capture the tax that is needed to prevent austerity in the UK by placing the burden of responsibility on those who use offshore and overseas income sources to disclose their income the law requires, which seems the least we should expect of them.
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