“Our message to taxpayers is clear: if you are hiding undeclared income offshore, HMRC is closing in on you.” (David Gauke MP, HMRC policy document “No Safe Havens”, published April 2014).
In recent weeks these words have come back to haunt Mr Gauke. HMRC has been widely accused of timidity and, in some quarters, outright incompetence in its handling of the HSBC data it received in 2010. For many critics, the HSBC scandal is proof of an unhealthy intimacy between Government and big business, the result of which is said to be a two-tier justice system in which the rich and well-connected escape the full force of the criminal law.
Is this criticism of HMRC justified?
Because it received the data from the French tax authorities under the UK/France Double Tax Convention, HMRC could only have used it for the purposes of assessing, collecting and enforcing unpaid tax, including the bringing of criminal prosecutions. To date, however, HMRC has initiated only one prosecution based on the data; all other completed cases have been settled using civil methods. HMRC would have needed the consent of the French tax authorities to pass the data to other bodies in the UK which are empowered to investigate and prosecute non-tax offences, including money laundering. If the French tax authorities are to be believed, HMRC seemingly gave no consideration to this option. Moreover, HMRC seems to have failed to alert the police or Serious Fraud Office to the data in order that they could make their own requests to the French tax authorities.
On the face of it, therefore, HMRC seems to have been cautious about the viability and prospects of success of a prosecution.
What explains HMRC’s caution?
The most likely explanation stems from the fact that the HSBC data was stolen. To base a criminal prosecution (of a tax or non-tax offence) on evidence which is unlawfully acquired would not have been straightforward. Such a prosecution would have given rise to three issues which may have inhibited HMRC:
1) The defence would doubtless have argued, under section 78 Police and Criminal Evidence Act 1984, that the data should not be admitted as evidence because it would have an adverse effect on the fairness of the proceedings. Whilst one can see the logic of this argument, there is no authority in English law which holds that the admission of unlawfully obtained (including stolen) evidence causes forensic unfairness per se (unlike, for example, the position in respect of evidence obtained by torture). On balance, therefore, it is probable that a Court would not have been troubled about admitting the data.
2) HMRC may have been unable to corroborate the reliability of the data through independent evidence, and was consequently concerned about constructing a criminal case based exclusively upon it. The extent of the investigative work conducted by HMRC currently remains unclear. However, one worrying fact that has emerged is that HMRC did not even attempt to question the whistleblower so as to assess his credibility, despite his claims that he contacted HMRC. This suggests that any investigative work conducted by HMRC may have been perfunctory.
3) HMRC may well have felt that it was in danger of compromising its duties to act fairly and in the public interest by using the unlawfully obtained evidence of a whistleblower who was himself a suspect in a Swiss criminal investigation. Such a stance would have been understandable. However, the counterargument – that HMRC has a public duty to investigate and prosecute the most serious cases of tax evasion so as to deter future offending – appears to have been underestimated.
HMRC lost its nerve
Faced with these perceived issues, it seems that HMRC lost its prosecutorial nerve and retreated into the safety net of its default enforcement mode for overseas tax evasion – the Liechtenstein Disclosure Facility (LDF). The LDF is a civil procedure by which a taxpayer can repay tax (together with interest and penalties) in return for immunity from prosecution, provided there is no evidence that the undeclared monies derived from criminal activity. On can see why it might have made commercial sense – and would be consistent with HMRC’s primary raison d’etre as a revenue gathering body – for the tax to be recovered civilly using the LDF rather than launching prosecutions which HMRC perceived to be problematic.
If that was the rationale which explains the paucity of prosecutions, HMRC is open to legitimate criticism. According to press reports, a significant number of the HSBC account holders had engaged in premeditated tax evasion of substantial sums of money with professional assistance. Whilst much of this tax was recovered, the decision to settle the vast majority of these cases using the LDF would have flown in the face of HMRC’s own criminal enforcement policy (in force since 2010) to prosecute the most serious cases of tax evasion – “seriousness of conduct” being one of the principal criteria justifying criminal investigation.
An important question also arises as to whether the LDF was used appropriately. In recent weeks, HSBC has publicly distanced itself from what it has described as due diligence and compliance failures in its Swiss subsidiary. Many press reports have gone further and alleged that a substantial number of HSBC account holders derived their funds from criminal activity. As noted above, the LDF should not have been offered if there was evidence that the undeclared monies derived from crime. It is tempting to wonder whether HMRC glossed over this problem, fearful that it could not recover the tax through any other means and perceiving the criminal route to be fraught with problems.
So did HMRC use the LDF inappropriately?
In recent weeks, HSBC has publicly distanced itself from what it has described as due diligence and compliance failures in its Swiss subsidiary. Many press reports have gone further and alleged that a substantial number of HSBC account holders derived their funds from criminal activity. As noted above, the LDF should not have been offered if there was evidence that the undeclared monies derived from crime. It is tempting to wonder whether HMRC glossed over this problem, fearful that it could not recover the tax through any other means and perceiving the criminal route to be problematic.
Overall, therefore, it would appear that HMRC developed an exaggerated sense of the problems inherent in a criminal prosecution, and so gravitated towards the LDF as a safer, more familiar means of settling so many of these cases.
More prosecutorial activity to come?
In response to public and political pressure over the HSBC scandal, one can expect a wave of more ambitious prosecutorial activity from the UK’s authorities in the forthcoming months. Those taxpayers who settled their HSBC liabilities may have immunity under the LDF, but this immunity extends only to tax evasion, and not to any underlying crime. Moreover, HMRC now has an opportunity to counter the criticism and take action, in HSBC and other cases, against those elements of the professional offshore industry which are complicit in tax evasion and which benefit from no LDF immunity – the dishonest accountants, tax consultants and bankers.
No safe havens
As the HSBC case demonstrates, these professional advisors will frequently perform relevant acts within the UK which would justify a UK prosecution on jurisdictional grounds. Taking this bold step against the architects of these crimes would fulfil the promise of HMRC’s much-vaunted policy on offshore tax evasion – that there should be “no safe havens”.
Does an accused have the right to know what materials they will be cross examined with prior to trial?
September 27 2022
Exercising your right to silence: what does this mean for your defence?
August 31 2022
SRA update: financial penalties and a stronger approach to policing bad behaviour?
August 26 2022