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08 Nov 2017

Don’t expect prosecutions to come from the Paradise Papers

Britain tripled the number of civil and criminal investigations linked to the Panama Papers over the past year, from 22 to 66, according to a statement in September from HM Revenue & Customs. Should we expect to see a similar flurry of investigations arising from the Paradise Papers?

If we are talking about criminal investigations, the answer is probably no. This is not because stolen data cannot be used as evidence in a prosecution. There is no principle in English criminal law that says that unlawfully obtained evidence causes forensic unfairness to a defendant.

The problem is that the Paradise Papers have exposed arrangements which, on the face of it, have enabled the lawful avoidance of tax. This must be contrasted with the unlawful evasion of tax.

Both may be regarded as morally reprehensible, but they are legally distinct. Evasion exists where there is a deliberate manipulation of the tax regime to gain an advantage that was never intended by parliament. It is an essential component of most criminal tax offences.

Parliament’s reaction to the Panama Papers was, in part, to fast-track the Criminal Finances Act 2017, which holds corporate bodies criminally liable for the facilitation of tax evasion. The law came into force just over a month ago. But it isn’t retroactive, and in any event there is no suggestion to date that Appleby, the offshore law firm that suffered a data hack resulting in the release of reams of tax information, or any other professional implicated in the Paradise Papers was engaged in the criminal facilitation of tax evasion.

The likely absence of criminal prosecutions will do little to appease the public anger directed at the offshore tax business. How should parliament respond?

It could introduce more strict liability tax offences: namely, criminal offences that can be committed without intention. To some extent that has already happened. The Finance Act 2016 created a strict liability offence of failing to deliver a tax return.

But extending strict liability offences into all areas of taxation and eroding the concept of evasion is fraught with difficulty. Not least the risk of criminalising the negligent or reckless behaviour of those who do not have the benefit of sophisticated advisors.

Prosecuting existing criminal offences or introducing new crimes is unlikely to be the answer. Instead, parliament will hope that HMRC can force lucrative tax settlements from the Paradise Papers using its armoury of civil powers and information-sharing arrangements.

Looking to the future, HMRC can reasonably expect the offshore tax industry to become more self-policing. Even the slightest risk of corporate criminal liability under the Criminal Finances Act 2017 will effect a behavioural change in favour of less aggressive tax arrangements.

Overseas tax advisers will also be concerned that their work is increasingly susceptible to hacking, with all the ensuing moral opprobrium heaped on them and their clients.

This article was originally published in The Times Law Brief.

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