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1 HMRC: Tackling offshore tax evasion: Civil Sanctions for enablers of offshore evasion Strengthening civil deterrents for offshore evaders A new corporate criminal offence of failure to prevent the facilitation of evasion A new criminal offence for offshore evaders The Law Society's responses October The Law Society. All rights reserved.

2 Introduction 1. This response has been prepared by the Tax Committee of The Law Society of England and Wales ( the Society ). The Society is the professional body for the solicitors profession in England and Wales, representing over 160,000 registered legal practitioners. The Society represents the profession to parliament, government and regulatory bodies and has a public interest in the reform of the law. 2. The Law Society welcomes this opportunity to respond to HMRC's series of four consultations entitled Tackling offshore evasion released on 16 July The Law Society has collaborated with the Fraud Lawyers Association ( the FLA) to produce responses to all four consultations on offshore evasion. Specifically, the Law Society has prepared responses below to Strengthening civil deterrents for offshore evaders and Civil sanctions for enablers of offshore evasion. The FLA have prepared responses to A new criminal offence for offshore evaders and A new corporate criminal offence of failure to prevent the facilitations of evasion. The Society and the FLA have agreed to mutually adopt each others responses as all comments and concerns of both representative bodies have been sufficiently covered in the respective papers. Strengthening civil deterrents for offshore evaders General Comments 4. The Society is generally in support of the introduction of measures which are effective in reducing tax evasion, and which form part of an overall coherent policy to effect behavioural change in the long term. The Society is supportive of maintaining clear distinctions between cases of deliberate evasion and other cases. Option 1: Increasing the minimum level of penalty for offshore disclosures 5. The Society remains unconvinced as to the introduction of divergent penalty regimes in cases of offshore evasion as compared with domestic evasion. These are regimes which relate to deliberate action, and the penalty should be related to the degree of culpability and co-operation of the taxpayers involved rather than the countries in which the evasion is based. 6. The real question here is whether the introduction of higher minimum (as opposed to maximum) penalties will have the deterrent effect which HMRC believes, or whether they simply reduce flexibility which assists HMRC to effect behavioural change with taxpayers who come forward and seek to regularise their affairs. The Society would rather see a pragmatic approach which achieved both a deterrent effect and which discriminated effectively between taxpayers who genuinely wish to become compliant and fully disclose matters to HMRC, and those who do not. This is much more likely, in the Society s view, to achieve the desired effect of encouraging taxpayers to change than blanket minimum penalties. Option 2: Amending the factors taken into account in calculating the reduction for disclosures 1

3 7. Notwithstanding the introduction of the Common Reporting Standard (CRS) and other measures, the Society believes there is likely to remain a place for the introduction of specific disclosure facilities in the future. These have been demonstrably effective in collecting past tax and reducing evasion going forward, and in particular give those a chance who would not otherwise come forward through fear of the consequences to come forward and regularise their affairs to do so. We do not think it is helpful to rule out such facilities going forward, and nor do we see it as incompatible with the approach set out in the current set of consultations. We believe Ministers should retain an open mind on such issues, and be prepared to use methods which have been proven to be effective in the past. 8. In relation to Option 2, we believe the primary focus of reductions for disclosure should be the encouragement of taxpayers to come forward and disclose. Although it might be popular to make the requirements for maximum reductions tighter, we question whether this will achieve that objective. Option 3: An additional asset-based penalty for the most serious cases of offshore evasion 9. The Society believes that any penalty regime needs to be proportionate to the overall amount of tax, interest and other penalties involved, as well as taking into account the culpability of the taxpayer and the circumstances of the evasion as a whole. We also doubt that an asset-based penalty, which has no relation to the tax involved, is compliant with the Human Rights Act. 10. The suggestions made in this Option of a flat-rate 10% penalty of assets would undoubtedly give rise to practical issues of the time it is to be determined (for example in the case of fluctuating investments or accounts) but more importantly will result in the application of potentially extremely large penalties where the asset involved is worth a great deal, even if the tax is not, and indeed vice versa. We fail to see, on the basis of the suggestion in Option 3, how such a regime could be applied in a sensible and proportionate way. 11. The Society does not object to higher levels of penalty for the most serious cases of evasion (noting our points about distinctions between onshore and offshore evasion above). We cannot however support an asset-based penalty in the form suggested in this consultation for the reasons given above. Option 4: A new special penalty to be awarded by the Upper Tribunal in exceptional cases 12. The suggestion in this Option that such a penalty might be similar to that involved in a confiscation order is misconceived. In cases of confiscation, the value of the assets involved is that which is derived from or used in the criminal activity. A special penalty of the type discussed in Option 4 goes much further than that. The assets in question may be perfectly legally acquired assets, and there has been nothing illegal in their use. It is the tax in relation to them which has been evaded. This is not enough, in the Society s view, to justify rendering assets to be subject to confiscation. Just because a taxpayer may have evaded (for example) tax in relation to the sale of a house (here or abroad) does not make it justifiable to seize the whole proceeds of the sale where neither the house, nor 2

4 the proceeds, have any criminal link. There may be situations where the nonpayment of tax has allowed the value of assets to increase (such as where money has been reinvested which would otherwise have been paid in tax), and in those cases there may well be a case for an asset-value linked penalty. Civil Sanctions for enablers of offshore evasion General Comments 13. The Society is generally in support of the introduction of measures which are effective in reducing tax evasion, and which form part of an overall coherent policy to effect behavioural change in the long term. We believe in this context it makes sense to have a civil regime which sits alongside the new proposed criminal regime. 14. We believe this regime should only operate as part and parcel of proceedings against the tax evader themselves. Effectively, we would expect it to be part of the same investigation, and to be consequent upon successful action against the tax evader themselves. We give answers below to the specific questions raised in the consultation document. Q1: What are your views on the use of the term enabler to describe any third party who provides such services, whether or not they are aware that they are doing so? 15. The Society considers that the most important point will be to draft the legislation in such a way that it is completely clear who is and is not within the ambit of the provisions. This could be done in a number of ways, although ultimately it seems to us that the most important thing is to focus on the behaviour and knowledge of the enabler rather than the category of service provided. This should require actual knowledge of the intention to evade by the evader, with evasion then having occurred. We note that there is no requirement to demonstrate that the service provided actually enabled the tax evasion to be carried out, rather the assumption is that any of the services provided in connection with the evasion in question in fact enabled the evasion. The regime might more accurately be described as services knowingly provided in connection with tax evasion. We will need to examine legislation in order to ensure that there is sufficient clarity and certainty around this concept. Q2: Does the list above reflect your experience, from dealing with disclosures for example, of the ways in which evaders have been assisted by third parties? If not, how has your experience differed? 16. We believe the list is broadly drawn and covers all the likely services which might be provided in connection with evasion. Q3: What are your views on approach to using behaviours and services, as outlined in this Chapter, to define an enabler? Q4: Do you find this categorisation of behaviours and services clear and comprehensive? Please explain your answer. 3

5 17. We will have to review this in the light of any legislation which is produced. See our answer to Q1 above. We note that some of the examples refer to historical positions. It will need to be made clear what the position is as regards actions taken prior to the introduction of the regime, and we would not expect it to be retrospective in the sense of applying to any actions taken before the legislation is effective. Q5: Do you agree that these are the relevant civil sanctions that apply to enablers? Q6: Do you agree with our conclusions on the scope of existing sanctions? Please state your reasons. 18. The Society has no comments to make on this part of the consultation. Q7: What are your views on these conditions? Should any be removed or changed, or further conditions added, and if so why? 19. The Society believes it is essential for this regime to operate effectively, practically, and fairly that it only applies to deliberate behaviour. To extend the regime to careless behaviour requires a wholly different level of consideration and would require a wholly different level of response from those providing services to taxpayers (as the MLR requirements themselves demonstrate). 20. We believe that Condition 2(iii) should be removed and that an enabler should only be subject to a penalty where the evader has themselves been subject to a criminal or civil penalty. We imagine with many of these services it will be relatively unlikely that an enabler has only assisted one person who has evaded tax, and therefore this should not be an undue problem for HMRC. Qs 8 to 18: Penalties 21. The Society believes that the penalty regime should be more flexible than suggested in the consultation document. We agree that a system which is proportionate to the tax evaded is appropriate, but we would suggest that more flexibility be introduced to deal with different fact patterns which may indicate different levels of culpability on the part of enablers. We agree that a reduction is likely to be appropriate where enablers are co-operative with HMRC. Q19: Do you agree these safeguards are sufficient? Are there any others you consider to be appropriate? 22. In the Society s view, given we believe the amount of the penalty should be based flexibly, we think the grounds for appeal are likely to be wider that those suggested in the consultation document. Qs 20 to 23: Naming deliberate enablers 23. The Society has considerable concern about the objectives of naming enablers, and the use of potential public approbation as a general deterrent in civil tax matters. We believe the appropriate punishment and deterrent for the enablers should be the penalties imposed in respect of their actions. This is not least because even deliberate enabling of the type considered in the consultation document will cover varying degrees of seriousness, from isolated incidents to 4

6 situations where the enabling may be endemic in a business. The proposals are not comparable with the measures for serious defaulters in our view. We do not therefore support the proposals in the form set out in the consultation documents. 24. The Society considers that there may be an argument for the details of extremely serious enablers to be published in the public interest, but that, in our view, is the only justification for such publication. 25. We would suggest it may be better to delay the introduction of any publication measures until HMRC has had an opportunity to see how the regime operates in practice. Such measures could then be the subject of further consultation based on that experience. A new corporate criminal offence of failure to prevent the facilitation of evasion 26. The Society confirms the adoption of all comments made by the FLA in its response (annexed as A ) to this consultation. A new criminal offence for offshore evaders 27. The Society confirms the adoption of all comments made by the FLA in its response (annexed as B ) to this consultation. If you have any comments or queries, please contact John Baldry (John.Baldry@templetax.com) or Renee Turner (Renee.Turner@lawsociety.org.uk) 5