Tackling offshore tax evasion: strengthening civil deterrents

Comments from ACCA to HM Revenue & Customs



Dealing with tax evasion is a matter of balancing two conflicting models of taxpayer behaviour which together account for the levels of compliance experienced by the administration – on the one hand, the “rational economic taxpayer” model, which attributes compliance purely to the analysis by the taxpayer of the relative costs and likelihoods of paying tax voluntarily as against evading and the risk of discovery/penalty, and on the other hand the “political animal” model, which acknowledges the moral decision by taxpayers to comply with the law voluntarily, without any consideration of the potential benefits of failing to comply.

The current set of proposals seem directed squarely at the ‘rational’ model, geared as they are entirely at increasing the penalties for those who have been found to have broken the rules. Given that the deliberate evaders targeted by these measures are likely to align more with the “rational” than the “political” model, such focus seems sensible. However, the measures which are ultimately adopted should therefore also operate so as to deter deliberate actions, and care must be taken that any deterrent effect is genuine and not structured so as to inadvertently catch those who would intend to comply but due to genuine mistake or reliance on others find themselves in breach of a rule which they in fact support.

Incorporation of inheritance tax into the broader offshore evasion regime is a sound concept in principle, but care will be needed in design and operation to ensure a proportionate and manageable regime.

Developing the range of offences within the broad umbrella of “offshore evasion” so as to recognise and differentiate between differing levels of intent to hide and deceive, and adjusting the penalty regime accordingly, will likewise operate to strengthen implementation of the broader policy objectives, but again care will be needed not to distort taxpayers’ decisions or drive unintended and undesirable behaviours.

Equally, the updating of the categorisation of offshore territories to reflect the significantly changed environment following the widespread implementation of the CRS is a logical step.


Specific comments

Extending the scope of penalties for offshore non-compliance

Option 1 - Extending the scope of the offshore penalties regime to Inheritance Tax

1. Do you consider it appropriate to extend the offshore penalties regime in the case of offshore assets which are part of the death estate and liable to IHT? If you do not, please say why.

Overall, the arguments are probably evenly balanced. The analysis of penalties is that they exist to reflect the risk/reward aspect of the system, and have no relevance to the voluntarily compliant taxpayer. The financial reward of hiding offshore funds is no greater than the reward of hiding onshore funds so the gearing of the penalty functions purely as a reflection of the likelihood of discovery. The reduced risk of discovery for offshore funds is offset by the higher penalty. Equally, from the exchequer perspective, there will lower recovery rate of the fines “due”, so each one needs to be higher to balance the impact of the behaviour.

It is worth remembering that civil penalties are always subject to abatement for cooperation etc., so the 200% would only ever be a ceiling. There is a clear distinction between cases such as Case Study 1 on the one hand and Case Study 3 on the other. The temptation to try to evade will be greater where the likelihood of detection is lower, so the alteration of risk profile by increasing the potential downside has a clear logical basis.

Given the prevalence of inheritance tax cases among offshore evasion statistics, it does seem appropriate that the potential for application of the enhanced offshore regime to such cases should be available. However, the factors which have historically influenced the cautious approach to bringing IHT within the offshore regime remain valid, and care must be taken to ensure an appropriate role for discretion and safeguards within the relevant provisions.

2. Do you consider it appropriate to extend the offshore penalties regime in the case of transfers of assets into offshore structures which give rise to IHT? If you do not, please say why.

Concealment of lifetime transfers is more likely to be deliberate. It is also more likely to be in respect of a significant sum of money. If the sums involved are sufficient to trigger an immediate charge then the failure to take qualified advice is at the very least cavalier if not negligent. “Inadvertent” concealment is unlikely; deliberate concealment is again potentially more attractive as a result of the reduced likelihood of discovery, so the same considerations apply as for death charges in terms of setting the quantum of penalty.

It is worth remembering in this context that transfers giving rise to a lifetime charge are comparatively rare, and almost invariably implemented only by those with considerable wealth. The triggering event for a death charge will inevitably affect all individual taxpayers at some point, and it is far more likely that an individual may have inadvertently structured their own estate within their own lifetime in a way that gives rise to complications than it is that they will have inadvertently divested themselves of a large proportion of their estate, so as to give rise to a lifetime charge. It is therefore particularly important that the safeguards in respect of the two classes of transfer are thought through carefully, and the potentially wide disparity between types and motivations of taxpayer who may find themselves caught up within the provisions should be taken into account.

There would however be no need to implement separate regimes for the two classes, as the category requiring greater safeguards and discretion would naturally be the larger class, of death charges. Those where the presumption of conscious advice and financial imperative would hold true, and which might therefore merit a simpler, less ‘forgiving’ regime, are those which do not need a simpler regime. The desired level of deterrence should be available simply by clarifying in guidance that the extent to which taxpayers can expect HMRC to extend their discretion in the case of suspicious lifetime transfers will be considerably smaller than for death charges.

3. Do you agree that offshore penalties for IHT should be calculated using the same classification for territories as applies for IT and CGT? If you do not, what factors should a new classification take into account and why?

There are different disclosure rules around deaths in different territories. Certainly it is the case that transmission of funds and information will often be more problematic in the aftermath of a death. It does not necessarily follow that the “banding” of territories for complexities arising following a death would align to that for the disclosure of information procedures. However, it seems unlikely that there are any jurisdictions which would make it impossible for a taxpayer/executor to properly deal with the estate, or at the very least disclose its existence to HMRC, even if full and proper calculation and payment of the tax due may be problematic. Mitigation of penalties based upon facts of the case and the best efforts of the parties will always be available on a case by case basis.

Moreover, having a separate classification for IHT would be to add complexity, so unless there is an overwhelming reason for it, in view of the scope for mitigation of penalties, adding that complexity is perhaps unlikely to be justified.

Overall, aligning the IHT territory banding to IT & CGT makes good sense. However, it is important to bear in mind that the implementation of the CRS agreements will shift those bandings, and as more territories fall into the CRS band so the overall picture of “appropriate” banding will increase.

4. Do you agree with our view about the location of assets in relation to a death event? If you do not, what could constitute a better approach?

If the location of the assets is determinative of the IHT treatment it seems reasonable to use it also for the penalty basis.

5. Do you agree with our view about the location of assets in relation to transfers of value? If you do not, what could constitute a better approach?

Given that the basis for enhanced penalties is the enhanced difficulty of identifying and tracing evasive transactions, and penalties will be due in respect of deliberate behaviours, looking to the ultimate hiding place, which is perhaps the best indicator of the perpetrators degree of intent, seems reasonable.

With this in mind, where the physical and legal locations of assets are split it would enhance the deterrent effect were HMRC able to choose whether to characterise the asset by reference to its physical or legal location (looking through the legal vehicle if necessary to the substance of the asset); it seems perhaps likely that in clearly deliberate cases HMRC will look to the highest classification territory that is appropriate.

Option 2 - Extending the offshore penalties regime to cover inaccuracies in category 1 or category 2 territories where the proceeds are hidden in higher category territories

6. Do you accept the principle that penalties should be strengthened to take account of where the proceeds of evasion are hidden? If you do not, please say why.

The conscious decision to shift funds offshore in the context of tax evasion will almost invariably have been taken with an intention to make it more difficult for HMRC to trace the funds and recover the tax properly due. There are a range of reasons why such behaviour should be discouraged, ranging from the ‘level playing field’ to the more remote economic argument that funds which remain in the UK will at least in some way contribute to local economic activity in a fashion that funds hidden offshore cannot.

In the context of civil penalties designed as a deterrent, the motivation is financial and the penalty regime should be structured with this in mind. The balance of risk and reward should clearly discourage any attempt to hide proceeds, as this compounds the initial offence and offers a clear indication of the perpetrators antisocial intent.

7. Do you agree that the extension of offshore penalties should apply to cover all inaccuracies arising and failures relating to category 1 or category 2 territories where the proceeds of that non-compliance are hidden in higher category territories? If you do not, please say why.

Subject to the same analysis as above about the qualitative difference introduced by the conscious hiding, this would appear reasonable.

8. Do you favour the introduction of such a statutory rule? How else might the link between non-compliance and offshore funds be demonstrated?

An outright presumption that offshore funds are the proceeds of non-compliance would be a step too far. Apart from anything, the non-compliance may be non-UK non-compliance, and it would not be right for the UK to usurp the taxing rights of other states in relation to such property. Accordingly, the precondition that UK non-compliance has been demonstrated is an absolutely fundamental requirement.

The difficulty here is that it is likely to encourage precisely the sort of non-productive and dissembling behaviours that the regime is supposed to deter. The canny evader will look to create a paper trail from legitimate income to the offshore funds with a view to demonstrating the ‘compliant’ nature of the offshore funds. However, this additional burden itself may operate as a disincentive to the evader, and function as an additional deterrent.

The attribution of burden of proof will be of critical importance, as is the point that as a civil offence this need only be demonstrated to a balance of probabilities. Having demonstrated to the balance of probabilities that there has been UK evasion, HMRC should then be put to proof that the funds held offshore do, on balance of probabilities, represent the outcome of that evasion.

9. Which of the above two methods for ascertaining the category/ level of penalty do you consider to be the best way of applying the extension to offshore penalties? Please say why.

Stability and certainty are two of the three most important fundamentals in tax system design, the third being simplicity. There is of course a tension between the three, as simplicity is often incompatible with certainty, and whichever direction the balance shifts, stability will be compromised.

However there is no particular need to pursue simplicity in respect of evasion cases. Certainty and consistency are more relevant, given the interaction of evasion actions with the rule of law. The timescale and underlying complexity of typical offshore structures is also relevant.

Retaining the existing model of pro rata apportionment is the preferred option.

10. Do you agree that current safeguards would be sufficient? If you do not, in what way would they be inadequate and how should they be amended?

A proportionate extension of the safeguards would leave them no less inadequate than is currently the case

Deterring taxpayers from deliberately moving offshore assets to continue evading tax

11. Do you agree that there should be strengthened sanctions for those who deliberately move assets with the intention of continuing to evade tax? If you do not, please say why.

Phrased as it is the question begs a positive answer. There is no good reason to effectively reward non-compliant behaviour by allowing any advantage to accrue from it. Any such advantage should at the least be extinguished, and ideally discouraged through additional sanction.

However, as HMRC concede, there is a possibility that the movement of funds is not undertaken as a response to transparency measures but may actually be a consequence of other legitimate pressures. While there may not be significant economic fallout from undue legislation in this area, there is as always the legitimacy of the tax system as a whole to consider. Even where provisions are aimed at those who have deliberately set out to impoverish the exchequer and compounded their wrongdoing through subsequent actions, the rule of law should be respected, and provisions designed so as to comply with all relevant constitutional principles.

Option 3 - Introducing a new offshore surcharge to complement the offshore penalties regime where offshore assets have been deliberately moved to continue evading tax

12. Do you consider that option 3 meets the policy objectives set out above? If you do not, please say why.

It appears that the design of the penalty would catch all unpaid years, ie both before and after the ‘triggering’ movement of funds. This seems logical. The purpose of moving the funds is to render discovery of all years less likely in the mind of the evader. Accordingly, the penalty can reasonably be applied to all those years.

However, care must be taken not to introduce an unnecessary element of retrospection in the provisions. While the taxpayer will clearly be in control of their own actions prospectively, additional penalties should not apply in respect of years prior to implementation of the provisions.

Option 4 - Extending the 20 years assessing time limits where offshore assets have been deliberately moved to continue evading tax

13. Do you consider that option 4 meets the policy objectives set out above? If you do not, please say why.

Option 4 certainly has a significant attraction to compliant taxpayers as a symbolic deterrent. As HMRC acknowledge, it would only operate in limited cases – however it would send a clear message that deliberate concealment is taken seriously, and is so far outside the norm of responsible behaviour in society that it justifies the suspension of the normal rules of behaviour by the tax authorities.

The language of the consultation seems to suggest that options 3 and 4 would be considered as alternatives, rather than cumulatively. However they do not necessarily appear incompatible.

Extension of the time limit beyond 20 years would though add a potentially significant burden onto prosecutors in attempting to gather admissible and conclusive evidence of wrongdoing at so great a distance in time. Gathering details of transactions in such long running cases is already problematic, and while in the distant future it may be the case that the proliferation of computer records and archiving may render tracing assets easier, the other measures already under consideration will by then have reduced evasion to such an extent, and penalties are already in any event so potentially punitive, that the need to look back further than 20 years is likely to be rare.  19 years of cumulative taxes at a marginal rate of around 40%, plus interest and penalties of 200%, will almost invariably amount to a very significant proportion of any capital remaining, and especially where there is any element of capital taxation in the underlying offences. The additional recoveries to the exchequer of assessing additional years are unlikely to make a material difference to the evader, and given the costs of assessing are unlikely to be economic for the state. The effect would be purely symbolic, verging on Pyrrhic.

Option 5 - Increasing the quantum of offshore penalties to reflect the number of times offshore assets have been deliberately moved to continue evading tax

14. Do you consider that option 5 meets the policy objectives set out above? If you do not, please say why.

The difference between options 3 and 5 is that 3 is a “movement penalty” independent of whatever else is penalised, whereas 5 is a "movement escalation” where existing penalties (whatever they may be) are augmented. The latter methodology perhaps more accurately reflects the perception that movement is an aggravating feature of existing misconduct, rather than a separate category of misdemeanour.

15. Do you have a preferred calculation method for option 5? If you do, please say which one and why.

Applying the augmented penalties to all years after introduction of the measure would be preferable as a deterrent. The taxpayer should be aware each time they move that they are voluntarily assuming an additional risk in respect not only of putative future benefits but also in respect of the existing crystallised benefits. (It will also of course be simpler). Applying the penalty only prospectively fails to acknowledge the role of moving funds protecting the advantages already accrued.

16. Do you have a preference between options 3, 4 and 5? If you do, please say why.

A blend of 3 and 5 – a fixed additional penalty applied to all years in respect of every movement – so multiple shifts would result in multiple additional penalties. The taxpayer would have more certainty than under option 5, where the movement augmentation would simply be a factor in the overall calculation. The individual might perhaps be more likely to assume that they might, one day, come clean, and get all their penalties remitted, in which case an augmentation of already mitigated penalties would have no impact, so moving the funds would have no downside. This may not of course be the analysis which HMRC would work on, but may well appeal to a tax evader. However, if the movement penalty is independent of the main penalty regime, and is effectively a “strict liability” penalty then the negative impact is certain and quantifiable from the moment it is perpetrated. The clarity of punishment will enhance the deterrent effect.

17. Do you agree that current safeguards would be sufficient? If you do not, in what way would they be inadequate and how could they be amended?

There is no particular novelty in the process for the new penalties, so existing safeguards should cover their application.

Updating the offshore penalties regime to reflect the new global standard in tax information exchange

Option 6 - Introducing a new category into the table of Designated Territories

18. Do you consider it appropriate to update the offshore penalties regime to reflect the new global standard? If you do not, please say why.


19. Recognising the step change in automatic exchange of information standards, which method do you consider better achieves the policy objectives set out above and please say why?

The new band for CRS and equivalent countries can be effectively treated as being equivalent in transparency to the UK. Current Category 1 countries, which are slightly more troublesome for HMRC to review, could reasonably attract a slight loading, say 110%.

However, the mere fact that public opinion has shifted should not drive the deterrent structures of the tax system. It should be borne in mind that the majority of significant evasion will be in respect of taxes due at the current marginal rate of 40%. A penalty loading of 200% would therefore see an individual having to repay 120% of the original income, plus interest on that original amount. While there may be some symbolic value in being able to point to an even higher percentage as a ceiling for the penalty loading, it would in practice be feasible to impose only in respect of the wealthiest taxpayers, and even then only for income tax; inheritance and capital gains taxes would almost always generate situations where imposition of the full penalty would all too often result in the individual being legitimately able to argue hardship.