The emergence of the so-called “Paradise Papers” has highlighted once again the conundrum faced by Parliament in legislating in response to the lawful avoidance of tax in offshore tax structures. The Paradise Papers are only slightly smaller in scale to that of the Mossack Fonseca “Panama Papers” in early 2016 (1.4TB of data compared with 2.6TB from Mossack Fonseca.) Like the Panama Papers, a law firm (Appleby) is at the centre of the scandal. Unlike Mossack Fonseca, Appleby appears to be denying that any papers were “leaked” from the firm, but that they have instead been the victim of a sophisticated and illegal hacking operation which compromised their systems.
The outrage precipitated by this latest disclosure, which implicates the Duchy of Lancaster, Apple, Facebook and Bono as well as a myriad of other well-known companies and individuals, is largely the result of distrust of offshore tax havens. As many have struggled with austerity since the global financial crisis, the use of lucrative and opaque structures by the ultra-wealthy is not a welcome concept to the ordinary person on the street.
However, it is important to evaluate what exactly is the primary focus of the outcry. At the moment, it is apparent that most of the structures identified in the Paradise Papers are those which enable the legitimate avoidance of tax. This is to be contrasted with the unlawful evasion of tax. The difference between the two concepts continues to be a source of confusion even for HMRC and those well-versed in the complexities of tax law. Essentially the difference is one of legality; tax evasion exists where there is a deliberate manipulation of the tax regime in order to gain an advantage which was never intended by Parliament. The value of those who advise in relation to “tax-efficient investment structures” is their expertise in navigating the grey area between the two, to the financial benefit of their clients.
The reaction of Parliament to the Panama Papers scandal was, in part, to fast-track legislation (the Criminal Finances Act 2017) designed to hold corporate bodies criminally liable for the facilitation of tax evasion by an associated person acting for or on its behalf. Simply put, a corporate body is now criminally liable if it fails to prevent such facilitation without having reasonable prevention procedures in place. The legislation is not retrospective, so cannot be used as the basis for any prosecutions which may be appropriate arising from the latest disclosure. In any event, on the basis of the information disclosed so far in the Paradise Papers, it does not appear as though the Criminal Finances Act 2017 could have made it easier to prosecute wrongdoers even if it had been applicable. Why is that?
First, if the offshore tax structures exposed by the Paradise Papers were to be classed as “avoidance” rather than “evasion” (which certainly seems to be the case) then the first test of the new offence would not be satisfied. If there was evidence of criminal evasion, then the second question would be whether the evasion was criminally facilitated by a person acting on behalf of the corporate entity. This would require evidence of that person being knowingly concerned in the aiding, abetting, counselling or procuring of the tax evasion, as well as evidence of that person acting for or on behalf of, the company and not on a frolic of their own.
To the extent that any foreign (non-UK) tax could be said to have been evaded, there would be two extra hurdles to prosecution. HMRC would have to prove that (a) the corporate was incorporated under UK law, (b) carried on business in the UK or (c) that an element of the facilitation occurred within the UK. Furthermore, and most crucially in the case of the Paradise Papers, both the original evasion offence (by the taxpayer) and the facilitation offence (by the associated person) would have to be offences both in the UK and in the relevant overseas jurisdiction.
Given that even the newest laws would not go far enough in terms of satisfying the public wrath directed at sophisticated tax avoidance, it will be a matter for Parliament as to whether the existing avoidance/evasion thresholds should now be overhauled. The introduction in 2016 of strict liability offences of failure to give notice of being chargeable to tax, of failing to deliver a return, and of making an inaccurate return (Finance Act 2016 ss. 106B-D) may signal an increased willingness to eliminate the requirement of dishonesty from certain tax related offences and thereby increase the onus on the taxpayer to ensure full and frank declarations to HMRC.
However, widening the scope of strict liability offences relating to individuals would be a bold legislative move given the inherent complexities of tax law. It would risk criminalising negligent or reckless offending by those who do not have the benefit of sophisticated wealth managers or advisors. It is a natural reaction to perceived unfairness or inequality to look to the criminal law for remedy, but great care should be taken not to assume that further reactionary offences on the statute books will address the underlying problem. In fact, remedy is more likely to be found in reducing or eliminating the secrecy associated with offshore structures. Transparency in these regimes would, given the uproar caused by the Paradise Papers, act as a direct deterrent to their use by any individual or company with a reputation to uphold.
In responding to the scandal, the Prime Minister stated that she wanted “greater transparency” and for “people to pay the tax that’s due.” The financial secretary to the Treasury, during urgent questions in the Commons, was similarly equivocal, commenting that “HMRC will continue to bear down with vigour on any tax avoidance or evasion activity, wherever it may be found.” It was noted by the government that efforts have indeed increased since the Panama Papers to ensure greater levels of reporting and accountability, especially in respect of Crown dependencies and overseas territories. Registers of beneficial ownership accessible by HMRC will apparently be expedited across further overseas jurisdictions in the wake of the Paradise Papers, although the prospect of these registers being made public is likely to be a step too far. This is in addition to domestic provisions for Unexplained Wealth Orders, also contained within the Criminal Finances Act 2017, which operate to identify “red flag situations” and enable UK authorities to investigate individuals who are unable to justify the source of their wealth.
The combination of these enhanced powers and information sharing may in the long term result in a greater interrogation of high net worth individuals and their financial affairs. In the short-term, those individuals should expect greater reticence or introspection by those professionally engaged to advise them on their tax affairs. Given the apparent susceptibility of offshore firms to data leaks or hacking, tax advisers will need to be more confident than ever before that their advice will not expose their clients to investigation, either for criminal tax evasion or for “aggressive” tax avoidance which is capable of incurring financial penalties despite falling short of a criminal offence.