Author: Azizur Rahman
9 March 2015
5 min read
Aziz Rahman examines the legal pitfalls that can accompany attempts to minimise the tax that individuals and companies pay.
Twenty one years ago, a certain brand of wood stain started advertising itself with the slogan “It does exactly what it says in the tin.’’
Not the most exciting catchphrase, admittedly, but it worked. It caught on with the public and became a commonly used phrase to indicate something that was straightforward, dependable and worth spending money on.
The product is still strong, people still use the phrase and it is still a signal that something is reliable if not especially exciting. Unsurprisingly, however, it is not a phrase that is used very often in financial circles. There may be many reasons for this. I would suggest that one is that financial products are usually a more complex package than a tin of wood stain. Another might be that financial schemes by their very nature don’t lend themselves to glib slogans and phrases; as the potential outcomes are likely to be more varied than those involved in treating your garden fence. And a third reason, unfortunately, is that a number of financial schemes that have come to light in recent years have done so because they are doing the complete opposite of what they are supposed to be doing.
As a result, HM Revenue and Customs and other state bodies are taking an especially close look at anything that does not seem to be what the tin might indicate. Cases are working their way through the courts involving hundreds of millions of pounds while investigations continue into many other investment projects that have aroused suspicion. Investigators are putting the schemes, their creators, promoters and investors under the microscope.
At Rahman Ravelli, we have accumulated many years of experience and chalked up an impressive record of success in the full range of tax fraud cases. Whether it has been cases involving hundreds of millions of pounds or the most high-profile prosecutions, we have approached them in the same methodical, proactive manner in order to build the strongest possible defence for our clients.
We are fully aware that financial advisors who persuade people to invest in tax schemes increasingly have to justify their judgement to the authorities. For some, the mistakes of the past are catching up with them. But those working in the financial advisory sector that wish to avoid the fate of some of their unfortunate colleagues must start doing their homework before they recommend any schemes to any potential investors:
Does the scheme under discussion make sense?
Is it genuinely doing what it says on the tin?
Is there proof of real investment in the scheme? If so, is that investment actually being used for what it is supposed to be used for?
Can anyone produce evidence of how the investment is being used? Or is it all a paper exercise designed to reduce people’s tax liabilities?
To some financial advisors, such questions may seem unnecessary. They will argue that they have invested in schemes that have provided steady rewards for years and they will see no need to start making enquiries so late in the day. It is an understandable argument but, as recent court cases have shown, many schemes that have functioned for years without any problems have been judged illegal.
Just last month, MP Margaret Hodge, chair of Parliament’s spending watchdog, the Commons public accounts committee, fired a warning shot against such schemes.
“It is crazy that only those who put their money into tax avoidance schemes are properly punished, and not those who design, promote and sell them,’’ she said. “It is a whole grubby industry from which shameless tax advisers and promoters are making big bucks.’’
The MP called for the government to punish those who create and advise on tax avoidance schemes, adding that there needs to be “a powerful deterrent that says if you are involved in designing or selling these products you will face criminal prosecution.’’
The veteran Labour MP’s call is not an isolated one. The 2015 Finance Bill includes tougher civil sanctions for those with taxable accounts offshore and measures to strengthen the disclosure of tax avoidance schemes. It remains to be seen whether the Bill will eventually include a strict liability offence for those who fail to declare taxable offshore income. Last October, 51 countries promised to pass on financial data to each other after signing an agreement to crack down on tax evasion. This agreement is seen as a major attempt to tackle the elaborate scheming that is carried out to ensure people do not pay the tax they should.
In December 2014, EU states and the European parliament agreed to update anti-money laundering rules in a bid to stop anonymous organisations or shell companies being used to help people evade taxes, finance terrorism or launder money “Creating registers of beneficial ownership will help to lift the veil of secrecy of offshore accounts and greatly aid the fight against money laundering and blatant tax evasion,” said Krisjanis Karins, an EU lawmaker involved in putting the agreement together.
The effectiveness of such developments remains to be seen. But in the UK we have already seen a series of cases coming to court and stern words from the Chancellor of the Exchequer about the “scourge’’ of tax evasion and the need to treat anyone involved like “a common thief’’. Whether such words are pre-election tough talk to please the taxpayers will not be known for some time.
But regardless of whether the aforementioned initiatives are successful or the politicians back their words with actions, the issues of both tax avoidance and tax evasion are high on the authorities’ agenda. It would be wise for advisers to carry out the due diligence checks we outlined earlier – both on financial schemes they are currently involved in and on those they are considering recommending to clients.
In recent years, HMRC has been given tens of millions of pounds in extra funding to track down tax that is owed. By the end of the last financial year, the number of new tax avoidance schemes registered had fallen by almost 75% on the figure from four years earlier. Two years ago, the government introduced the General Anti-Abuse Rule (GAAR) to tackle abusive tax avoidance schemes that could have been judged acceptable under existing legislation. From April 2010 to March 2014, HMRC prosecuted 2,650 individuals for tax crimes; including high-profile financial and legal experts in their fields.
HMRC likes to make the most of its successes. But there is no doubt that it does not always “get its man’’. The rhetoric coming out of HMRC, however, shows that the issue of tax and its non-payment is being taken very, very seriously – and it is casting its net very wide to prosecute those it believes are responsible. Prosecutions are up in recent years, as the tax man is favouring the criminal rather than civil route, and this is a trend that is unlikely to be reversed in the near future.
With this in mind, anyone whose role involves creating or promoting such schemes needs legal guidance to ensure they are acting within the law. Not making sure of this means running the risk of prosecution, conviction, loss of assets, damage to reputation and a total collapse in your client base.
With HMRC out looking for more and bigger convictions over non-payment of tax, the financial advisor has to tread incredibly carefully. Due diligence, an ongoing commitment to compliance and access to appropriate legal representation at the earliest possible stage are essential if you are to avoid the suspicions of HMRC.
HMRC is increasingly keen to know what is in the tin when it comes to financial schemes. All those involved in them need to be able to lift the lift the lid on their affairs without fear of finding something unpleasant.
Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.