An automatic exchange of financial information with other tax authorities overseas (the “Common Reporting Standard”) is also now underway which will allow HMRC access to thousands of offshore account details, previously out of reach.
The new offence
Section 166 of the Finance Act 2016 inserts new sections 106B to 106H into the Taxes Management Act 1970.
The offences will apply if a taxpayer fails to notify HMRC of their liability to tax, fails to file a return or files an inaccurate return. They only apply to income tax and capital gains tax (although this will be reviewed at a later date), and to all offshore income and gains, not just to under-declared investment returns. They do not apply retrospectively but will apply in respect of the tax year in which the offences are introduced.
A minimum annual threshold amount of £25,000 of under-declared tax has been set (which HM Treasury can increase by secondary legislation).
For those individuals who have failed to declare UK income or capital gains offshore, even by mistake, it could have significant implications including prison. Conviction can result in a fine or prison sentence of up to 6 months (with the maximum custodial sentence to be raised to 12 months in due time).
Corresponding civil penalties will be taken into account when fines are set to ensure that those subject to civil penalties are not liable to tougher sanctions.
Stakes are raised in the tax investigation landscape
In the aftermath of the Panama Papers scandal, MPs from the Public Accounts Committee provided a damning indictment of HMRC’s performance in tackling tax evasion. With losses from tax fraud estimated at a staggering £16bn and a tax gap of £34m, HMRC faced fierce criticism for letting “big multinationals off the hook”, achieving “woefully inadequate” numbers of prosecutions for offshore evasion and leaving “an impression that the rich can get away with tax fraud”.
As a result, HMRC pledged in its business plan for 2015-2020 that it would invest £800m into tackling tax evasion and non-compliance. It set itself a clear goal to raise an additional £5bn a year by 2019 to 2020. To achieve this it intends to increase the number of prosecutions into “serious and complex tax crime”.
There is no doubt that HMRC now has better tools in its armoury to meet its target. However, in our view, HMRC must be careful to ensure that its limited resources are deployed selectively, in order to gain the maximum benefit in terms of tax take and public confidence.
It will be tempting for HMRC to target smaller companies for failure to prevent tax evasion offences, on the basis that they may not have adopted any prevention procedures at all. Such “easy wins” are unlikely to assuage public concerns that large corporates are treated differently to small and medium sized businesses. Equally it may not necessarily help the UK tax gap if HMRC uses preciously slim resources to assist in investigations where tax has been evaded from foreign jurisdictions.
On the individual front, HMRC can gain great headlines from prosecuting celebrities and footballers for their involvement in sham film finance funds. But what about the less well-known, wealthy individuals who take sophisticated advice (and those who provide such advice)?
HMRC will need to choose its battles wisely. It will be keen to demonstrate that the new legislation at its disposal does have teeth but if it takes the easy path of pursuing low hanging fruit it may not achieve its stated aims and as such, fail to temper negative public opinion. While HMRC is serious about aggressively clamping down on all forms of tax evasion, it will be held to account for such.
And, as we know, advisors need to be alert too, as HMRC has this constituency in its sights.
David Sleight is a partner and Edmund Smyth is senior associate at Kingsley Napley LLP