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HMRC proposes stricter tax evasion penalties

HM Revenue and Customs (HMRC) has published draft legislation setting out tougher sanctions against companies that fail to prevent the facilitation of tax evasion, but has left out some of the more contentious elements which had previously been mooted.

The Government will make it a criminal offence for corporations to fail to take adequate steps to prevent evasion, as well as a tougher penalty regime for those that are seen to be enabling it.

Jason Collins, partner at Pinsent Masons, said: “HMRC has thankfully rowed back on the unworkable aspects of the definition of ‘agent’. Gone is liability for the acts of the staff of an intermediary.”

The Treasury’s draft legislation, named ‘Tackling offshore tax evasion’, was published on December 9. One welcome move is that the draft legislation has elevated the threshold for prosecution under the new strict liability offence, meaning its use will be limited to cases where the underpaid tax is £25,000 ($38,000) a year. The previously touted threshold was £5,000.

The legislation covers third parties providing services to a client of the organisation if the third party has an “element of control” over the provision of services.

Ministers have been pressured to throw support behind new anti-avoidance and anti-evasion measures such as this.

Danny Alexander, the former chief secretary to the Treasury, was a strong advocate for the push to apply stricter liability in the form of a criminal offence. Offenders may serve a six month sentence.

“We’re making it a crime if companies fail to put in place measures to stop economic crime happening in their organisations,” said Alexander when the new regime was introduced in March. “Tax evasion is a crime like any other. If people help a burglar, they are accomplices and criminals too. Now it will be the same for those that help tax evaders.”

The consultations for the draft proposal began in July with further discussions planned for early 2016.

HMRC said in the report that it is “mindful of the need not to overburden corporations by requiring them to put in place procedures that are not proportionate to the risk posed by their operations”.

Jon Preshaw, chairman of the Chartered Institute of Taxation, points out that HMRC already has the power to criminally investigate anyone with either UK or offshore untaxed funds in the case that they can show these were deliberately not declared.

“These are serious powers which HMRC should arguably be making greater use of, and we are unconvinced that this additional ‘strict liability’ offence is justified,” said Preshaw.

National Audit Office evaluation report on HMRC

A report by the National Audit Office, was released on December 16, has found that losses to tax fraud amount to £16 billion each year. 

Further reports are expected to follow that will evaluate the effectiveness of how HMRC deals with different aspects of tax fraud.

"HMRC clearly needs to think harder about how it tackles tax evasion, the hidden economy and criminal attacks," said Meg Hillier, MP and chair of the committee of public accounts, "The Committee will be examining HMRC’s work in this area throughout this Parliament."

It was reported that in 2014/2015 HMRC collected £26.6 billion in additional revenue from all its efforts in achieving better compliance.

"Time and time again we hear that government departments don’t have the data or information that they need to plan or evaluate their activities properly, despite them being responsible for setting up these projects or programs in the first place," said Hillier. 

"HMRC is no different in this respect. HMRC needs to use the powers and sanctions it has to make a public example of those who break the rules."

Public mandate for changes

The 2015 survey on the ethical behaviour of British business, published by the Institute of Business Ethics (IBE), has found that tax avoidance remains the top issue the British public thinks business needs to address.

Philippa Foster Back, IBE’s director, said: “The fact that tax still remains the top public concern is an example where business is not doing enough to address these issues.”

“Internal engagement is needed around the decisions and circumstances behind tax positions, then communicated externally,” he added.

Tax avoidance has been one of the top two issues since it was first introduced as a category in the survey in 2012, with 34% considering this an issue which needs to be addressed.

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