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Strict Liability: a Round-head’s view of criminality

This post was provided to us by Thomas Eggar LLP. (now part of Irwin Mitchell), one of the top 100 UK law firms. They currently employ nearly 500 people across 6 offices in Chichester, Gatwick, London, Newbury, Southampton and Worthing, providing creative legal and business solutions for commercial organisations.

 

Whether your travel involved rail (the noblest form of transport), air or the fiendish car, we hope you enjoyed your thomas eggar logobreak. Apart from sun and sand, summer breaks can also involve catching up on reading. Thomas’s reading was surprisingly varied given his inability to use a kindle.

“Necessity hath no law. Feigned necessities, imaginary necessities, are the greatest cozenage men can put upon the providence of God”. So said Oliver Crowell. Thomas’s take on this was along the lines that if something needs to be done, any attempt to use law to prevent it being done is a mere obstruction to the arrangements intended by God.

One can see Cromwell’s point. The problem with his stance is not the logic; it is the premise that he knows what arrangements God has in mind. Accept the premise and the ends, of ensuring that God’s arrangements are implemented, justify some pretty extreme means.

Moving on 350 plus years, and it is a brave civil servant or politician who claims to have direct access to God’s intention. What they often do claim is that their actions are simply putting into effect the wishes of a righteous public. In the field of tax, the last few years has seen a highly effective PR campaign that tax avoidance is morally unacceptable albeit that actual criminality only applies to its evil twin, tax evasion.

Much ink has been spilt on trying to define what “avoidance” is and whether any attempt to organise one’s affairs in such a way that one is not paying the maximum possible amount of tax should be seen as morally reprehensible. If the focus should be on ‘aggressive’ or ‘abusive’ tax planning, questions then arise as to how best to define the point at which tax planning becomes unacceptable (for example the GAAR rules); what reactions are justified by the State (for example the new Follower Notices and their cousins Advanced Payment Notices); and what steps should be integrated into the system to guard against an overmighty State (for example the limited safeguards in the right to make ‘representations” on the receipt of such notices).

And don’t get Thomas started on the high-handed way rules are suddenly changed as in the reinterpreting of what constitutes a remittance on security for loans.

The campaign on “tax avoidance” has been intended to justify an increase in state power relative to the powers of roundheads helmetthe citizen and, in particular, to take away the citizen’s right to appeal to the courts. Like Oliver Cromwell, HMRC do not want shilly-shallying about what is legal to be allowed to get in the way of the state’s interpretation of what is proper behaviour. HMRC are our new Roundheads. They have a role in writing new rules which are explicitly based on acceptable behaviours, deciding whether the behaviour of citizens has been up to scratch, and applying new and draconian penalties if it has not.

The one small mercy is that at least this guilty until proven innocent application of justice has been limited to the civil rather than the criminal code. But no longer. While you were lounging in the sun pondering why they put umbrellas in pina coladas, HMRC were publishing a consultation document introducing a new criminal offence of “strict liability”.

The Forward to the document accepts that it is a “tough sanction”. However, as it is aimed at offshore tax evasion, the document argues that tough sanctions are justified. Why evading tax using offshore jurisdictions should be morally worse than evading tax entirely within the UK is not entirely clear to Thomas but then he is just a tax engine. Perhaps the latter category of offenders who offend entirely in the UK are deemed more patriotic than those using offshore jurisdictions. In any event, the crucial point about “strict liability” is not that nastier things happen to you if you are found guilty, it is that the burden upon the state to achieve a criminal conviction is eased. In bringing a criminal charge the State normally faces the need to provide evidence that you are guilty, that you intended to do something bad. The “strict liability’ proposal turns this principle on its head. The proposal is that if a tax liability arises involving offshore assets, then by definition you have broken the rules and that act alone “warrants the imposition of criminal sanctions”.

The consultation document is explicit: “The Government has therefore decided to introduce a new strict liability summary criminal offence of failing to declare taxable income and gains arising offshore. This means that the prosecution would need only to demonstrate that a person failed to correctly declare the income or gains, and not that they did so with the intention of defrauding the Exchequer” (section 2.14)

Areas where consultation is sought may not provide much comfort to the reader. The Government accepts that it might be appropriate to set a de minimis limit but wonders whether this should include the concept of “potential lost revenue”. It accepts that the mere prospect of a criminal conviction is likely to provide a significant deterrent in itself but wonders whether the sanction of financial consequences should be imposed as well as or instead of any custodial sanction.

Apart from the consequences of being found guilty, the Roundhead tendency of HMRC is apparent when they ponder what sort of defences should be available to the accused. They point out that the prime defence is if the person can prove that he is compliant rather than non-compliant. They go on to wonder whether it should be a defence if the taxpayer could show “reasonable care” and what would that mean? Also, would it be a defence if the person could show that appropriate professional advice had been taken and acted upon? HMRC raise these questions but they chillingly note that such defences might make it more difficult to secure convictions while of course the purpose of introducing the new offence is to make conviction easier.

It will be 2015 or 2016 before the new legislation is in force. However, on past experience, it is likely to have an element of retrospectivity. Advice and actions being taken now are likely to be exposed to scrutiny in future tax enquiries. Any element of non-compliance could be considered under the new “strict liability” regime. One example of this is the way people need to identify and rectify in a very tight time-frame the consequences of the rule change on security for loans using offshore monies. Given the complexity of the legislation, it is going to be easy to be non-compliant and the default position on non-compliance is criminality. This should influence the taxpayer whose affairs involve offshore jurisdictions. It will no doubt also concentrate the minds of advisors.

For those who, by inclination or circumstance, do not hold any offshore assets, the above is no cause for rejoicing. At worst, it is an indication that the State is moving to consider a failure to get one’s tax affairs in order as a criminal offence. At best, it is indicative of a harsh application of civil penalties when one’s self-assessment is inaccurate.

Oliver_Cromwell_BWAs Oliver Cromwell almost said, praise the Lord and pass the musket.

Household Tip

Staying on the Oliver Cromwell theme, the Protector’s regime was pretty sure about what was right and what was wrong and was understandably unsympathetic to witches. The question was how to identify witches who could sometimes look sneakily like ordinary citizens. Since the starting point was that the accused was both evil and sneaky, it was important that the accusers were not unduly hindered in achieving justice. Welcome to the ducking stool approach to criminal justice. If you survived you were a witch, if you did not you were buried in the churchyard. A modern reader might wonder whether there was a Catch 22 element to this but records indicate there were few complaints. And this takes us to our household tip.

When one comes back from holiday, one occasionally finds items in the fridge, the provenance of which is uncertain, for example, eggs. Are they still (just about) fresh or have they passed that point and become stale? Adopt the ducking approach.

Put dubious eggs in a bowl of water. Those that are stale will rise to the surface. Those that are not, will not.

If you find eggs to be fresh, do not relax. The HMRC approach to criminal justice is that you can’t make an omelette without breaking eggs.

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