HM Revenue and Customs (HMRC) is consulting on the design of a proposed new strict liability criminal offence for those who fail to declare taxable offshore income and gains.
Under the plans, magistrates could be given the power to impose an unlimited financial penalty and a custodial sentence of up to six months.
In future, HMRC would only need to demonstrate that the income was taxable and undeclared, rather than that tax was deliberately evaded, as under the current rules. The use of strict liability in criminal law is controversial; in some cases, persons have been found liable even when they are not directly at fault, or have taken reasonable care to ensure compliance with the law.
The Government's view is that the offence should only apply to income tax and capital gains tax (CGT), but that this should be kept under review. A wider proposal could draw in inheritance tax, but it is thought that this would make the operation of the offence more complex.
The Government says that it is considering a de minimis threshold to ensure that strict liability powers are only used where the failure to declare taxable offshore income and gains leads to a tax loss over a certain amount. The Government's view is that the threshold should apply for each tax year, rather than in respect of a cumulative amount of potential lost revenue.
In his foreword to the consultation document, David Gauke, the Financial Secretary to the Treasury, wrote: "I accept that it is a tough sanction, and rightly so. Offshore tax evasion has been a blight for too long, and it is time that those who exploit offshore arrangements to avoid paying their fair share face the consequences of their actions."
The Government is interested to hear from tax and legal professionals and those involved in offshore investments, including taxpayers who may be affected by the new measure. The consultation will close on October 31, 2014.
Reacting to the announcement, law firm Pinsent Masons warned that under the plans an individual could be convicted even if HMRC does not have any evidence that they intended to evade tax.
James Bullock, Head of Litigation and Compliance at Pinsent Masons, questioned whether the proposed reforms are necessary. He said: "HMRC has more powers in its arsenal – and greater funding – than ever before and the tax-take through their investigations is at a record level. Considering the success that HMRC is having in cracking down on tax evasion, there doesn't seem to be the public policy requirement for these extra powers."
"The detailed proposals are more moderate than many had feared, but the principle remains that individuals shouldn't lose their liberty and be sent to jail because they have been careless or forgetful or allowed themselves to be misled over what taxes they had to pay. They can already be hit by massive fines."
According to Pinsent Masons, the offence will also potentially put non-domiciles at risk if the structures that they use to keep their wealth offshore are shown by HMRC not to work. If their income or assets are in future shown to fall within the UK tax regime then they could be found guilty of a criminal offence for having failed to declare that income. Pinsent Masons expects that non-domiciles who hold their assets in offshore jurisdictions may need to have their tax structures audited before the new offence comes into force.