The new near-strict liability criminal offences in relation to overseas tax matters
Regulations have quietly been passed such that, from 6 April 2017, any individual taxpayer who fails to disclose, or accurately to report, a liability to income tax (“IT“) or capital gains tax (“CGT“) on overseas income, assets or activities will be liable to criminal sanction. In contrast to the previous position, an offence will be committed even if the taxpayer has not acted dishonestly, but only if the tax liability for the relevant year exceeds the threshold of £25,000; only if that liability relates to an overseas matter; and only if the tax in question is IT or CGT (so, for instance, inheritance tax is not within scope).
It is important to note that, whilst it is only overseas matters which are within the scope of this offence, this means any non-UK income, assets or activities, i.e. the offence is not restricted to matters relating to so-called “tax havens”. However, the £25,000 threshold is calculated only in relation to overseas assets which are not reportable to HMRC under the OECD Common Reporting Standard, which is a very wide and important limitation. Since a large number of jurisdictions have adopted the Common Reporting Standard, and will therefore report the relevant assets to HMRC thereunder, there will be only a few jurisdictions caught by this offence, although a notable jurisdiction which would be caught is the United States.
The current maximum penalty is a six month custodial sentence (and this will, in due course, increase to twelve months). Even if one avoids a custodial sentence, a fine is likely to be imposed, but the mere finding of criminal culpability would, in itself, be hugely damaging (and create complications for intermediaries).
The precise offences
There are three offences (contained at sections 106B, 106C and 106D Taxes Management Act 1970, respectively) being:
- Failing to notify HMRC of liability to IT or CGT (or both) (i.e. failing to inform HMRC that you should be filing a return);
- Failing to deliver a tax return in relation to income tax or capital gains tax, having been notified of a requirement to do so, in circumstances where the return would disclose an IT or CGT liability (or both); and
- Making an inaccurate return, where an accurate return would have disclosed an IT or CGT liability.in each case where the tax is chargeable on, or by reference to, overseas income, assets or activities and if the total liability exceeds £25,000 for the tax year in question.
The earliest date the offence at 1 above can be committed is 6 October 2018 (i.e. 6 months after the end of the tax year commencing 6 April 2017). The earliest date the offence at 2 above can be committed is 6 April 2020 and in the case of 3 above is 31 January 2020.
The above legislative provisions were inserted by section 166 Finance Act 2016 but only recently brought into effect on 7 October 2017 by the Finance Act 2016, Section 166 (Appointed Day) Regulations 2017 (S.I. 2017/970). The £25,000 threshold was set by The Sections 106B, 106C and 106D of the Taxes Management Act 1970 (Specified Threshold Amount) Regulations 2017 (S.I. 2017/988) (the “STA Regulations“), which come into force on 3 November 2017.
It is important to note that the £25,000 threshold applies differently depending on the offence committed. In the case of the offences at 1 and 2 above (failing to give notice; failing to file a return), the threshold relates purely to the total UK tax “chargeable” for the year. So, for instance, you might have a UK tax liability of £30,000, credit for foreign tax paid of £29,000, and thereby may only have net UK tax to pay of £1,000. But you could still be within the scope of offences 1 and 2, if you fail to file a return, because the initial UK liability is likely to exceed £25,000 until you claim the credit on a tax return. However, the offence at 3 above (inaccurate return) is only committed if the understatement of tax exceeds £25,000. So, if you have a UK liability of £30,000 and only report a liability of £29,000 (honestly but mistakenly), you should not be within the scope of this offence (but may be subject to other civil penalties).
In any event, by far the most important limitation on this offence is that, in determining whether the £25,000 threshold is exceeded, one only looks at income, assets and activities in jurisdictions not participating in the OECD Common Reporting Standard. So, for instance, failing to report the gain on a sale of a French holiday home should be outside the scope of the offence (though you may still be exposed to other penalties). By contrast, failure to report income from a US portfolio of securities will be caught, unless the amount of tax at stake falls below the threshold and/or unless a defence is available.
In relation to the offences at 1 and 2 above (failure to notify of chargeability and failure to deliver a tax return), there is, in each case, a defence if the taxpayer can “prove” a “reasonable excuse” for failure to notify of chargeability or to deliver the tax return. In relation to the offence at 3 above (inaccurate return), there is a defence if the taxpayer can “prove” that they “took reasonable care to ensure that the return was accurate”.
Therefore, whilst these offences had originally been announced as “strict liability” offences, that is not quite the case. However, as soon as there has been any tax non-compliance in relation to an overseas matter, the onus then switches to the taxpayer to prove that they have discharged a duty of care. In other words, it is “guilty until proven innocent”.
Previously, in order to be guilty of a criminal offence in relation to a misstatement of tax liabilities, a taxpayer had to have acted dishonestly and the Crown had to prove this beyond a reasonable doubt. Now, not only can a taxpayer commit an offence despite having made a completely honest mistake, but the Crown does not need to prove the offence beyond a reasonable doubt – the onus is on the taxpayer to show a reasonable excuse or reasonable care (as the case may be).
What constitutes reasonable care and/or a reasonable excuse?
The offences are new, and so we do not yet know how these defences will be interpreted by the courts.
However, the term “reasonable care”, is also used in the current penalty regime (contained at Schedule 24, Finance Act 2017). A taxpayer is exposed to the medium range of penalties for inaccuracies in a tax return which are “careless”, and they are “careless” if the inaccuracy is due to the taxpayer’s failure to take reasonable care. The relevant case law has indicated that taxpayers will, almost always, be found to have taken reasonable care if they have relied on the advice of a competent professional adviser (see, for example, Carrasco v Revenue and Customs Commissioners  UKFTT 731 (TC)).
Additionally, with regard to the meaning of “reasonable excuse”, Finance Act (No.2) 2017 will bring in higher civil penalties, after 30 September 2018, in respect of, broadly speaking, overseas irregularities for tax years up to and including 2016/17 (i.e. before 6 April 2017). In the case of those penalties, there is a defence of “reasonable excuse”, and the statute provides certain circumstances in which a taxpayer expressly did not have a reasonable excuse. Those provisions might be of some assistance in determining whether or not, for the purposes of this new offence, a person has a reasonable excuse (or took reasonable care). Of particular note under those provisions is that, for example, it is only a reasonable excuse to rely on professional advice if the adviser had the appropriate expertise to give the advice; if the advice took into account all the taxpayer’s relevant circumstances (on a full appreciation of the facts); and if the advice was addressed to (or given to) the taxpayer and not someone else.
Therefore, it is now, more than ever, incredibly important for any UK resident person, who has substantial assets outside the UK, to take bespoke advice from experienced and reputable advisers. The interpretation of the relevant taxing provisions is often subject to debate and, where HMRC take a different view of the legislation, it is very important to be able to justify whichever interpretation was taken. This is either so that, if questioned, you can persuade HMRC that your interpretation was correct or, otherwise, that you at least had a reasonable excuse for believing it to be correct. If you choose to proceed without full and proper advice, you are potentially at risk.
The risks for intermediaries
The good news for intermediaries is that the trustees of a settlement, and the executors or administrators of a deceased person, are specifically exempt from these offences (section 106E(1) TMA 1970).
However, any intermediary holding funds or assets referable to a taxpayer who is guilty of one of these offences will potentially be holding the proceeds of crime. This would, no doubt, give rise to issues from a local regulatory perspective and, more importantly, may expose the intermediary to the commission of money laundering offences.
Therefore, any intermediary with concerns as to the UK tax position in relation to assets under management should approach the relevant persons and encourage them to take suitable advice. If unsuccessful in persuading individuals to seek advice, intermediaries should themselves consider appointing advisers in relation to specific structures and/or assets. Otherwise, the intermediaries themselves could be at risk.
Intermediaries will, in parallel, need to consider their position in relation to the so-called “enabler” penalties and the corporate offence of failure to prevent tax evasion. They may well need their own independent advice on those matters in any event.
Despite the wide drafting of this new offence, its practical impact ought to be limited due to the above restriction regarding the OECD Common Reporting Standard, in that it is only assets in a relatively small number of jurisdictions which will bring you within the potential scope of the offence. However, US taxpayers living in the UK will need to take particular care.
The Explanatory Memorandum to the STA Regulations (at paragraph 4.6) states that the insertion of the “reasonable excuse” defences is designed to “ensure that only serious failures are within the scope of the offences.” However, the statute does not itself expressly provide for any particular degree of severity. So, it will be very important to see how HMRC applies, and the courts interpret, the offence.
In any event, our expectation is that prosecutions under this new offence would (where available) be taken only sparingly, and the real intention is, together with other recent measures, to hold a Sword of Damocles over the heads of taxpayers with substantial assets in parts of the world where they cannot be readily detected by HMRC.
It is true that this measure, together with other penalties for overseas irregularities, provides a further need to reflect on whether the jurisdiction and holding structure for your assets remains suitable. Where there are substantial assets at stake and where you seek to preserve your good reputation more generally, it would be prudent to consider these points together with the UK tax position. If your assets are held in an affected jurisdiction and you suspect there to be any discrepancy in your UK tax affairs, you are potentially “guilty until proven innocent” of an offence which carries a custodial sentence. Therefore, it is very important to obtain full advice from a qualified professional, in order both to understand your position and with regard to demonstrating the defences of reasonable excuse or reasonable care.