In order to persuade persons who may have undeclared funds held offshore, HMRC has run a series of voluntary disclosure facilities. These have provided a range of benefits to encourage disclosure. However, the end of the Liechtenstein Disclosure Facility in December 2015 brought an end to the guarantee of non-prosecution. With effect from April 2017, merely holding undeclared offshore income and gains will be a criminal offence.

HMRC has already received the first tranche of data under the UK’s agreements with the Crown Dependencies and British Overseas Territories (CDOT), which was exchanged in September 2016. This includes information from the Channel Islands, Isle of Man and the British Virgin Islands. In September 2017, HMRC will then receive the first batch of data under the Common Reporting Standard (CRS) which will cover 54 countries in the first year and a further 47 in 2018.

By 2018, most of the world’s major financial centres will be covered by CRS. This will include a number of centres which have traditionally had very strong privacy laws, such as Austria, Israel and Singapore.

Given that CDOT and CRS both drill down to the underlying individual ‘controlling persons’ of passive investment companies and trust structures, this information will finally enable HMRC to gain access to valuable information in relation to who is sitting behind, for example, BVI Trusts or passive Bermudan companies. As both forms of agreements refer to an ‘individual controlling person’, merely placing a corporate entity within the ownership chain will not be sufficient to frustrate the aims.
From April 2017, holding undeclared offshore income will be a criminal offence

The data that HMRC receives under the Automatic Exchange of Information (AEOI) agreements will be processed through its ‘Connect’ software. This is military-grade technology that maps this data and compares it with other information that HMRC receives from UK banks, credit card providers, auction houses, salary details and social media, among other information. The system will then highlight inconsistencies as cases for enquiry. Connect contains several billion records, which is more than is contained in the British Library. By 2011, it had brought in an estimated yield of £1.4bn, which has paid for its estimated cost of £45m many times over.

HMRC is utilising the processing power of Connect to support its targeting of the companies it considers to have helped facilitate the abuse of the UK tax system. Legislation is now progressing through Parliament to introduce a corporate criminal offence of failure to have procedures in place to prevent the facilitation of tax evasion, whether against the UK or an overseas tax authority. It is anticipated that Royal Assent will be granted in the first half of 2017, with the powers commencing from 1 September 2017. This will help HMRC to target large organisations where they would not be able to prove that there was a ‘controlling mind’.

For an offence against the UK Revenue, HMRC will need to demonstrate beyond reasonable doubt that:

• the individual has committed deliberate evasion of UK tax
• an employee or agent of the company helped to facilitate the evasion, and
• the company has failed to put procedures in place to prevent this.

HMRC does not actually have to secure a conviction against the first two levels. It merely has to prove to a court that these have occurred. Accordingly, evidence from an individual’s disclosure under the Liechtenstein Disclosure Facility (which had a guarantee of non-prosecution) could be used to  then take action against the companies which helped to facilitate the evasion.

HMRC has already confirmed that it will seek to prosecute cases even if the company has no actual footprint in the UK. If the company does not attend court to defend itself, then there is provision in UK law for a trial in-absentia. Prosecution would almost certainly result in the company being barred from other overseas markets, such as the US and elsewhere in the EU.

Linked to the UK offence, the powers will also enable the UK to prosecute instances where the corporate has helped to facilitate evasion of overseas tax. The entity involved must have a permanent establishment in the UK (including a branch or subsidiary) and the overseas country must ask HMRC to prosecute on its behalf. However, this marks a major departure for how the UK treats tax evasion offences.

A defence against both offences is that the company has adequate procedures in place to prevent the facilitation. HMRC has already indicated that these can leverage off those procedures that firms will have developed to comply with their obligations under the Bribery Act. However, given the significant negative publicity that would arise from the launch of a prosecution, it is evident that a number of firms are already seeking to de-risk their business model.

Previously, HMRC has prosecuted by exception, concentrating on recovering missing yield. However, the new corporate offence, when combined with the strict liability offence for persons holding undeclared offshore income and gains, demonstrate a new willingness by HMRC to significantly increase the number of prosecutions. This is reinforced in the level of political and media pressure that is evidently being placed on HRMC, for example in relation to the relatively low number of prosecutions that arose from the bank data that was stolen from HSBC in Switzerland in 2010.

Enablers of tax avoidance

Separately, HMRC is also using the information it is receiving to target the companies it considers to have been enablers in the chain of tax avoidance schemes. The consultation on the proposals closed in September 2016, with the intention of introducing the penalties 2017.

The proposals were very widely drafted and could potentially bring firms that have provided bank accounts or other routine services within the scope. The onus will then be on companies to prove on the balance of probabilities that it would be reasonable that they could not have understood the underlying purpose behind the transaction.

While full details have yet to be confirmed, the consultation paper does indicate that penalties could be up to 100% of the total tax lost to HMRC through a defeated avoidance scheme. If a scheme has many members, the sums involved will probably be substantial. It is evident that firms will need to reconsider the effectiveness of their anti-money laundering/‘know your customer’ controls to ensure that they can appreciate the purpose behind transactions or accounts. Staff training and awareness will also be absolutely critical.

About the experts

Ali Kazimi MCSI is a senior tax adviser with over 25 years’ financial services industry experience. He is the managing director at Hansuke. Prior to this he held successive leadership roles within Big Four firms, including head of international M&A tax for Deloitte Middle East and head of tax at Barclays Global Investors (now BlackRock).

Rob Smith is a senior consultant at Hansuke. His specialist financial services tax experience includes eight years at DLA Piper and 15 years working with the Inland Revenue/HM Revenue & Customs prior to joining Hansuke.

Taking the lead

HMRC is investing significantly more than the private sector in technology that will enable it to track down not just individual tax evaders, but their advisers, financial institutions and other bodies that have helped them to facilitate this.

HMRC has already acquired significant information from voluntary disclosures from which they can identify the companies that have been providing the necessary advice and support. The significant amount of additional data that HMRC will be receiving under CDOT and CRS, together with a statutory requirement on individuals to correct returns that have omitted offshore income and gains, will only increase the information.

The political will exists to crack down and HMRC now has the technology to do so. The first shots in the latest war on tax evasion and avoidance are about to be fired. Companies will need to ensure that they can protect their reputation.