Tax evaders to feel full force of the law

New legislation brings the possibility of jail sentences for those who aren’t upfront with HMRC about assets held overseas

Paradise lost? A Briton with a holiday home in Tuscany is worried that her Italian current account could be the cause of a tax attack (Getty Images)

A new criminal offence is due to hit the statute book next year under which people who engage in tax evasion abroad could get a criminal record, fines and a jail sentence. The offence, an innovation in tax law, will put evasion on a par with certain driving offences, holding firearms without a certificate and cruelty to animals.

It will be “strict liability”, meaning that all the prosecution will have to do is prove that the individual had income or gains in offshore locations and did not disclose them to HM Revenue and Customs (HMRC). The burden of proof will be on the defendant; there will be no need for prosecutors to show that the person in the dock had any dishonest intent. Draft legislation was published this week as part of the Finance Bill.

This – and other measures being introduced – will probably lead to a “significant increase” in the number of prosecutions and convictions, according to David Sleight, a white-collar crime expert at the law firm Kingsley Napley. People who are preparing to file their tax returns by the deadline of 31 January might want to be particularly careful that they make all the necessary disclosures if they have deposit accounts or other assets that produce income or gains abroad.

The other new measures include the replacement of the present disclosure regime for irregularities abroad (the Liechtenstein Disclosure Facility) with one that is far more severe. Under the LDF, which closes on the last day of this month, there are no criminal prosecutions – but that changes under the new scheme.

While the disclosure facility tends to affect the very wealthy, the new Common Reporting Standard will mean far more people are on HMRC’s radar. The standard, due to become operational in September 2017, brings together over 90 countries (including the US and most European Union states) that will automatically and systematically share details with each other of the assets and income of individuals.

There is also a corporate criminal offence due to come in next year related to tax evasion.

We do not know how effective these measures will be – and with HMRC cutting its network of offices by 90 per cent and restructuring, there is room for scepticism. “Over the last decade, governments have pledged many millions of pounds to counter tax evasion and avoidance, and yet there is little or no evidence to indicate that HMRC has made any serious inroads into reducing the ‘tax gap’,” says Gary Gardner, tax dispute specialist at the accountancy firm Blick Rothenberg.

“The latest commitment to raise £7.2bn from tackling evasion and other non-compliance over five years, by giving HMRC £800m, does seem particularly ambitious given the backdrop of the recently announced office closure programme, which will result in an unprecedented retrenchment in presence and headcount.”

And even the new “strict liability” offence does offer taxpayers a get-out if they can show they had a “reasonable excuse” for not making a disclosure. Nevertheless, the traffic is going in one direction. HMRC is under significant pressure from its taskmasters at the Treasury to increase the number of scalps and to reduce evasion. It has said that it will be using its technology much better to catch people who are cheating. If it delivers on that promise, it will have become a far more effective force.

Links: HMRC – gov.uk/government/organisations/hm-revenue-customs; Liechtenstein Disclosure Facility – gov.uk/government/publications/offshore-disclosure-facilities-liechtenstein

Case study: "I hold an Italian bank account"

Joanna has a bank account in Italy – one of the countries described by HMRC as a “partner tax administration” last year. Along with Australia, France, Germany, Spain and some other territories, Italy is collaborating with the UK to share details as efficiently as possible.

“It is only a current account and I try to keep the minimum in it,” says the UK-based book-keeper. “The last thing I want to do is earn €5 in interest.”

She and her partner will be going to a family holiday home in Florence for Christmas. Used to staying there two or three times a year, Joanna (not her real name) opened the account five years ago. She has considered closing it because she is keen to avoid any problems with the tax authorities. But the account is very convenient and could be useful in future as she might spend more time in Italy.

She has decided to write to HMRC to tell them about the account. “I would be surprised if they went after someone like me,” she says. “But I do know that the Italian authorities can give the small fry a very hard time. If the Italians reported me, I might have to spend a lot of time proving that I wasn’t cheating.”

Gary Gardner of Blick Rothenberg says: “If the bank account is not interest-bearing and no other unreported income was received, there would be no need to inform HMRC. This is because there would have been no offence or failure for tax purposes.“