TAX: An Introduction to UK-wide

Tax Overview – 2020 

Contributed by Harry Travers and Greg Mailer of BCL Solicitors LLP

Over the last few years, HMRC have made it clear that they intend to target tax avoidance, and also to increase the number of criminal investigations that they undertake. The view of many is that HMRC, whilst not saying so explicitly, wish to blur the distinction between avoidance and evasion.

They have recently made several high profile announcements, which led many in the industry to believe there would be a marked increase in the number of criminal investigations and investigations under Code of Practice 9 (COP 9).

On 30 September 2018, HMRC began to receive substantial information from over 100 countries under the Common Reporting Standard. The new offence of offshore tax evasion in Section 166 of the Finance Act 2016 came into force on 7 October 2017 in respect of tax year 6 April 2017 to 5 April 2018 onward. A little earlier, part 3 of the Criminal Finances Act 2017 had come into force creating the new corporate offences of failure to prevent the facilitation of tax evasion. Part 1 concerning unexplained wealth orders (requiring individuals to demonstrate how they obtained property valued at more than £50,000), came into force on 31 January 2018.

Additionally, as is well known, HMRC have also obtained documentation from both the Panama and Paradise Papers, and have received thousands of disclosures under the Requirement to Correct regime, in advance of the Failure to Correct penalties coming into force, together with 17,000 disclosures through the Worldwide Disclosure Facility.

Given the above, it has been somewhat surprising that HMRC have not, as yet, met their official target set in 2019, of 100 prosecutions from criminal investigations into serious and complex tax crime by 2020, let alone their previous target set in 2010 of a fivefold increase in criminal prosecutions. HMRC’s 2018/19 Annual Report acknowledges that they will not be able to deliver on the former ambition. They point to the fact that 5,400 full time employees have been diverted to Brexit preparations, which they say has “had an impact” on their wider plans.

Whilst difficulties relating to Brexit may somewhat account for the lack of recent high profile prosecutions, many practitioners believe that there are more fundamental problems. For instance, there may be perceived difficulties regarding the source of the material contained in both the Panama and Paradise Papers. Concerns have previously been raised in respect of the admissibility in a criminal trial of dubiously obtained material.

Of course, HMRC has previously sought to rely on confidential banking data stolen by ex-HSBC employee Herve Falciani in 2008. They received trenchant criticism regarding the admissibility and accuracy of such illegally obtained material and the lawfulness of using it. This may explain why HMRC has been oblique as to the origins of this new material, and also why it has not led to a flood of investigations as initially expected.

It is notable that the material contained in both the Panama and Paradise papers largely derives from two law firms/service providers, namely Mossack Fonseca & Co. and Appleby (Bermuda) Limited respectively. Much of the documentation is bound to be subject to legal professional privilege. Indeed, in April 2019 the multinational mining and commodity trading corporation Glencore International AG brought an action against the Commissioner of Taxation of the Commonwealth of Australia in the Australian High Court, seeking a return of any documents held by the Australian Taxation Office which had been obtained via the Paradise Papers, together with an undertaking not to refer to or rely on them in any way. The Claimant argued that the material was subject to LPP and that the remedy sought was crucial to avoid lawyer/client communications from being “prejudiced by eavesdroppers and thieves." The court declined to intervene but only, it would seem, on the narrow basis that the claimants had sought to found a cause of action on privilege, whereas privilege was according to the Court, more properly characterised as an immunity from disclosure. It is unclear therefore what effect this Commonwealth authority (of only persuasive authority in any event) may have on the admissibility of material from the Paradise Papers in either civil or criminal proceedings. What is useful for practitioners however will be the fact that according to the judgment, the managing partner of Appleby (Bermuda) Limited had stated that the material was "stolen", and the Australian Revenue authorities did not apparently seek to challenge that factual assertion. UK practitioners will be quick to point to the fact that HMRC, who have an acknowledged duty to act fairly, should not be relying on stolen let alone privileged material. The authors have previously gone further in suggesting that stolen material like this is criminal property within the meaning of s.340 POCA 2002, and thus arguably HMRC officers, in using it, would be entering into or becoming concerned in an arrangement that they “know or suspect facilitates the…use of criminal property." The writers are not aware of any immunity that would allow HMRC not to be subject to the law - in particular POCA 2002 (after all the Supreme Court recently held that even the Prime Minister in advising the Monarch on the exercise of a prerogative power was...) - but if the matter is litigated then perhaps HMRC will come up with something. In the meantime it surely must be borne in mind that it cannot be assumed that HMRC will be allowed to use stolen, let alone privileged material, against a taxpayer in either civil or criminal proceedings.

The fact that taxpayers can now be imprisoned for six months for mere carelessness in relation to offshore evasion is also a matter of huge contentiousness. Tax evasion is an offence of dishonesty, requiring the deliberate concealment of assets. HMRC will be aware that their investigations will be under significant scrutiny.

With regard to the corporate offences, it is notable that there are said to have been fewer than five ongoing investigations into the corporate offence of failure to prevent the facilitation of UK tax evasion. Nonetheless, it is anticipated that once the first prosecutions do take place, a raft of subsequent prosecutions will follow. Whilst HMRC is unlikely to meet the target announced in the 2015 budget of tripling the number of complex tax crime investigations by 2020, there will inevitably be an upturn in investigations given the information sources at their disposal, and the new powers and offences available to them.

As is well known, HMRC operates a (published) selective criminal investigation policy, reserving criminal investigation “for cases where HMRC needs to send a strong deterrent message or where the conduct involved is such that only a criminal sanction is appropriate”. Code of Practice 9 (COP 9) is used for the other cases. This part of the policy is somewhat meaningless and could be said to justify a criminal investigation in any case. After all it might be argued that the prosecution of any case sends a deterrent message; and that HMRC needs to deter tax fraud generally. It should be borne in mind, however, that over the past three decades HMRC’s policy has changed. The old Inland Revenue used to be a prosecuting as well as an investigatory agency. There used thus to be a prosecution rather than a criminal investigation policy. The policy was said to be selective so that not all cases of tax fraud were prosecuted, and the “criteria of selectivity” were said to be the “badges of heinousness”. On the face of it, if only some cases were to be prosecuted, it was fair that those should be the more serious cases to avoid the anomaly of more serious tax fraudsters being dealt with civilly and less serious offenders prosecuted. That approach was in turn upheld by the High Court in ex parte Mead and Cook [1993] 1 All E.R. 772. However, this approach has now apparently gone out of the window. HMRC’s current policy is apparently that any case of suspected fraud can be criminally investigated, with the result that the experience of practitioners is that the underlying conduct of those subject to COP 9 is often far more serious than that of those criminally investigated.

In the light of this criticism it must be said the fact that HMRC in their targets are referring to “complex crime investigations” is somewhat encouraging. After all it has for many years been thought that they pad up their criminal investigations targets by targeting “low hanging fruit”, thus creating the unfairness mentioned above.

As regards COP 9, there is still a misapprehension that entering into the Contractual Disclosure Facility offers taxpayers immunity from criminal investigation. In fact, under the CDF, the recipient of COP 9 is only given immunity from criminal investigation in respect of the specific disclosures made in relation to conduct that is accepted to be deliberate. HMRC does not give the taxpayer any indication as to the conduct that they suspect. This can be particularly invidious; if the taxpayer makes multiple disclosures which HMRC was not previously aware of, but fails to make a disclosure of the suspected behaviour, the taxpayer will have no immunity in respect of the latter. Worse still, the admissions made mean that the taxpayer is effectively a self-confessed fraudster, which can be taken into account in relation to any subsequent criminal investigation by HMRC in respect of the non-disclosed conduct.

In this context, tax fraud practitioners will need to analyse the propriety of HMRC’s actions, and to be at the cutting edge and have substantial experience of challenging HMRC when the need arises. For example, HMRC frequently rely on obtaining investigatory material by way of production order, despite the fact that there is a statutory requirement under Schedule 1, paragraph 2(b) of the Police and Criminal Evidence Act 1984, that other methods of obtaining any material should be considered before seeking a production order.

This approach can be particularly damaging, as notices of application for production orders are often sent to institutions such as banks or business partners, effectively notifying the recipients that HMRC suspects the subject of the notice of serious criminal activity. HMRC owes a duty of confidentiality to the taxpayer; by seeking information from third parties in this way, HMRC is signalling to those parties that they have an interest in the business or individual that the notice relates to. Clients will expect practitioners to take pre-emptive steps to protect them from such reputational damage, rather than simply dealing with production order applications after they have already been made. HMRC should be put on notice that they ought to exercise caution in exercising their powers in circumstances where the reputation of taxpayers can be damaged in this way.