Tax evasion has become a priority at the highest level of government with the UK Prime Minister, David Cameron recently urging British Overseas territories which operate low tax regimes to “get their house in order” and sign up to international treaties on tax. The UK is expected to push for a tighter tax regime at the G8 Summit in June 2013 and the European Parliament is to debate ways to tackle tax evasion, ahead of an EU Summit on the issue. José Manuel Barroso, President of the European Commission commented in May 2013 that the EU can become a leader in the international fight against tax evasion.
Tax advice is big business. In April 2013, the Public Accounts Committee (“the Committee”) produced a report on “Tax avoidance: the role of large accountancy firms” following a hearing that took place in January 2013 where evidence was taken from Deloitte, Ernst & Young, KPMG and PwC. The Committee produced figures that the value of providing tax services to companies and wealthy individuals was worth almost £2 billion in the UK to the four firms, and almost $25 billion globally with the majority of their business coming from tax advice - this would include some tax neutral advice but much would be advice aimed at minimising the tax of wealthy individuals or corporations pay. In addition, the advisory relationship between government and large accountancy firms inevitably raises the perception, if not the reality, of undue influence in these arrangements.
The four firms stated they no longer sell the type of very aggressive avoidance schemes that they sold ten years ago and have put in place internal guidelines on where the line between tax planning and aggressive avoidance lies, however the Committee report notes that this does not stop them selling schemes with as little as a 50% chance of success if challenged in court.
The distinction between tax avoidance schemes, i.e. methods designed to minimise one’s tax liability, and tax evasion can often be down to the way that a scheme is executed. Such a distinction may be easy to establish where there have been false representations or false documents used in the process, however, the key component is whether there was a dishonest intention not to pay tax. In many cases of cheating the public revenue, the initial investigation will be of tax avoidance structures which have been set up purely for the purposes of reducing or extinguishing a tax liability. Where such a scheme is effective as a matter of tax law and therefore no liability can be established, it cannot be fraudulent as a matter of criminal law. Where the scheme is ineffective as a matter of tax law, the issue would be whether the defendant knew the effect of the scheme would be to avoid paying tax which was in fact due or whether there was a mistaken belief that the scheme was effective. In many such cases, tax and legal advice may have been sought but such advice may be undermined of the structures or execution of the scheme was not conducted in line with any advice received.
There is a clear government agenda to reform international tax laws as well as ensuring that domestic powers are used to combat tax avoidance and evasion. The trend in the UK is of increased cooperation with overseas jurisdictions. HMRC’s advice to those who use tax avoidance schemes or other sophisticated tax arrangements is to review those arrangements and report any tax irregularities to them in order to be treated with leniency. It is clear that those who do not will run the risk of facing criminal investigation. All the indicators suggest the risk of facing criminal investigation and prosecution have increased for investors, companies and their advisors.