Offshore tax evasion has received substantial scrutiny in recent years. The United Kingdom’s 2016 Finance Act empowers U.K. regulators to sanction lawyers, accountants, and other advisors who assist with offshore transactions that are utilized to evade income, capital gains, and inheritance taxes. The purpose of this article is to provide an overview of the new law and its implications for financial professionals who may work with UK-affiliated businesses and individuals.
The United Kingdom has considered legislation to impose civil penalties on so-called “enablers” of tax evasion since 2015. The legislation was ultimately passed as part of Section 162(1) and Schedule 20 of the 2016 Finance Act and brought into force by Her Majesty’s Treasury immediately prior to the new year. The primary purpose of the new law is to allow regulators to levy civil penalties against deliberate enablers of offshore tax evasion in connection with income, capital gains, and inheritance taxes.
In announcing its new powers, Treasury expressed a desire to create a “level playing field for the vast majority of people and businesses who play fair and pay what is due.” It also emphasized that the U.K. is one of the first countries in the world to specifically target enablers of offshore tax evasion.
Who is covered
The law is broad in scope and does not apply to any specific class of professionals. Rather, it is directed towards any person “who has encouraged, assisted or otherwise facilitated conduct … that constitutes offshore tax evasion or non-compliance.” The breadth of the language would tend to suggest that lawyers, financial advisors, and accountants as well as non-professionals who take any part in offshore tax planning could be subject to the law’s penalties. The alleged enabler needed not be located on U.K. territory.1
There are, however, two conditions that must be satisfied before civil penalties can be assessed. First, alleged enablers must know that their assistance is being used, or is likely to be used, for purposes of offshore tax evasion. This condition would rule out penalties for professionals and non-professionals whose services are unwittingly used in connection with clients’ offshore tax evasion. Second, the client must first be convicted of a relevant criminal offense, found civilly liable, or enter into an agreement concerning the offshore tax evasion with Her Majesty’s Revenue and Customs. Hence HRMC is required to conclude its action against the alleged offshore tax evader before pursuing penalties against secondary actors who may have assisted the evader.
Severe penalties and negative publicity
Although lawyers, accountants, and other professionals are subject to codes of conduct that prohibit them from assisting clients to commit illegal acts, HRMC is now able to directly impose substantial financial penalties on enablers of offshore tax evasion. The penalties are the higher of 100 percent of the Treasury’s lost revenue from the tax evasion or £3000 and are dispensed in the same manner as tax assessments. If the amount of lost revenue exceeds £25,000, the HMRC is able to publicize enablers’ names, addresses, and nature of their businesses, and other information. Financial professionals who are named by HRMC could also then be subject to professional discipline from professional bodies.
The rationale for these severe penalties is that they are needed to increase tax compliance by targeting those who knowingly aid and abet tax evasion. Nevertheless, as set out in the next section, an additional goal appears to be to incentivize lawyers, accountants, and others to provide client information that regulators can use to prosecute difficult-to-detect offshore tax evasion.
The penalties described in the previous section can be reduced if enablers disclose their role in offshore tax evasion or offer assistance to an investigation that leads to charges. In the case of unprompted disclosure or assistance, the enabler’s penalty can be reduced to the higher of 10 percent of lost revenue or £1,000 whereas prompted disclosure or assistance can be reduced to the higher of 30 percent of lost revenue or £3,000. In all cases, the enabler must be prepared to provide HRMC access to relevant records.
Equally important is that enablers who choose, prompted or unprompted, to either disclose or cooperate with an investigation are able to avoid having HRMC identify them. Indeed, if HRMC agrees to reduce a penalty to the maximum extent allowed, it cannot then publish the enabler’s information.
Between the possible reduction in penalties and ability to keep involvement in alleged offshore tax evasion from being publicized, financial professionals now have strong incentivizes to cooperate with HRMC when they work with clients whose use of offshore transactions is likely to be scrutinized. An interesting and as-of-yet-unanswered question is how the law’s reporting rules accord with the confidentiality obligations of lawyers and other professionals, especially in situations where the client’s alleged tax evasion could plausibly be viewed as legitimate tax avoidance.
What lays ahead?
The U.K.’s targeting of so-called enablers is part of a larger effort to clamp down on offshore tax evasion. Indeed, the U.K. government has already announced plans to introduce legislation that would levy significant fines against taxpayers who have used certain offshore interests in the past to diminish their liabilities and fail to correct their returns. Another proposed law targets businesses that market complex offshore arrangements. As Treasury has noted, it has recovered £2.5 billion from offshore tax evaders since 2010, and it clearly believes that additional revenue can be recovered in future years.
What differentiates the anti-enabling law is that it appears specifically designed to create a schism between financial professionals and their U.K.-affiliated clients. Lawyers, accountants, and other professionals may refrain from advising offshore tax avoidance techniques that they regard as lawful for fear that they will be subject to penalties for assisting with tax evasion as well as public shaming for their involvement therein. They will also have strong financial and reputational incentivizes to cooperate with regulators in instances where clients may have used offshore strategies of which regulators do not prove. Clients, for their part, may be more reluctant to share information and documents with advisors for fear that any information or documents they share could eventually be provided to HMRC.
There is no doubt that some taxpayers in the U.K. and elsewhere, use offshore arrangements to evade their payment obligations. However, the U.K.’s decision to specifically target enablers is bound to affect both the type and quality of advice that financial professionals are able to provide to U.K.-affiliated clients, even if it achieves its goal of discouraging offshore tax evasion.
- The government conceded in a 2015 communication that it would be more difficult to pursue civil penalties against enablers located outside of the U.K. but indicated that it hoped to do so with the assistance of international partners. See HMRC, Tackling Offshore Tax Evasion: Civil Sanctions for Enablers of Offshore Evasion, p. 8 (Dec. 2015), available at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/483365/Civil_sanctions_for_enablers_of_offshore_evasion_-_summary_of_responses__M7012_.pdf.