Tough sanctions for lawyers and other advisers who enable offshore tax evasion came into force on Sunday despite considerable disquiet expressed by the Law Society and others.
The new powers will see individuals or corporates who take deliberate action to help others evade paying tax facing fines of up to 100% of the tax they helped evade or £3,000, whichever is highest. On top of this the taxman will also be able to publicly name the enabler.
This is the first time that HM Revenue & Customs can charge civil penalties on the facilitators of the tax evasion who provide planning, advice or other professional services or physically move funds offshore.
The UK is one of the first countries in the world to introduce this power, which was originally announced at Budget 2015 and legislated for in the Finance Bill 2016.
According to the Treasury response to the consultation on the measure, which was published last month, the regime captures those who enable avoidance and distinguishes them from those who simply provide second opinion advice to clients on arrangements designed or enabled by others, and those who recommend against the arrangement.
It only applies to advice provided from 1 January 2017.
In its response to the consultation, the Law Society expressed concern that punishing solicitors for giving honest advice on complex legal questions would hamper their ability to give any advice in the first place, increasing the risk taxpayers may unwittingly enter into unacceptable tax avoidance schemes.
It also objected to proposals to reverse the burden of proof in some cases, requiring the taxpayer or adviser to prove they took ‘reasonable care’ with their tax arrangements if they are challenged, as a lawyer would not be able to defend themselves without the client’s consent to waive legal professional privilege (LPP).
“No client should feel pressured to do so, and no penalty regime should rely on an assumption that clients will waive privilege,” it said.
In its response, the government said: “Whilst the government recognises that there are ways in which the terms and conditions under which advice may be given could be drafted to remove [the LPP] issue, it is appropriate to provide a way in which the lawyer could, in appropriate cases, show that they do not fall within the scope of the penalty provisions without disturbing LPP rights. This will involve them making a declaration.
“HMRC will consult on the wording of the declaration to ensure it is both robust and compliant with LPP. The declaration will be subject to a penalty for making a misdeclaration.”
This year will also see the government introduce a new corporate criminal offence of failing to prevent the facilitation of tax evasion.
Under the new rule being legislated for, companies will be held liable if an individual acting on its behalf as an employee or contractor facilitates tax evasion. Currently there needs to be proof that the board of directors is aware of and involved in facilitating the evasion.
This is alongside introducing a new requirement to correct past tax evasion, which will see anyone who has failed to correct past evaded taxes by 30 September 2018 hit with tough new penalties, and consulting on a new requirement for businesses and individuals who create complex offshore financial arrangements that bear the hallmarks of enabling tax evasion to notify them to HMRC.