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Why HMRC will struggle to gain convictions from the Panama data leak

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HMRC has promised to bring tax evaders to justice following the Mossack Fonseca leak, but influential figures from the tax community believe this won’t become a reality. We break down why the taxman will struggle to gain convictions following one of history’s biggest data leaks .

HMRC doesn’t have the resources to cope with all the data

The taxman is in a period of transition.

Plans to get rid of 137 local offices and hundreds of jobs in favour of regional centres are already in force, and with CEO Lin Homer set to be replaced by Edward Troup and MoD permanent secretary Jon Thompson later this month, HMRC may be ill-equipped to deal with the 11 million leaked documents that are soon to come its way.

“We know that even before the Panama leaks, HMRC was unable to follow up on many of the hundreds of millions of tax evasion cases in the Channel Islands,” highlighted Jolyon Maugham QC of Devereux Chambers.

“That has to raise profound concerns about whether HMRC will be able to cope with the enormous workload likely to be thrust upon it by the biggest tax data leak in history,” continued Maugham, who believes incoming HMRC leaders Edward Troup and Jon Thompson have a “major headache” when they become executive chair and CEO of the government department.

“If you’re Edward Troup you may be a little less robust than Lin Homer as we all know he’s under-resourced to tackle HMRC’s existing workload. What Troup will no doubt point to is the legislative measures that the government is introducing, for example strict liability offences for evasion, but they won’t apply to historical cases like this one, so HMRC simply don’t have the resources [to deal with the leak].”

HMRC may struggle to use stolen data to prosecute tax evaders

As of yet, we don’t know who stole the 11 million documents from Mossack Fonseca, but it’s clear that the taxman will be looking to acquire the data to help with any criminal investigations it may pursue. Experts have warned that HMRC must be careful about what evidence they are using when going after tax evaders.

“In the past criminal lawyers have questioned whether HMRC are able to use stolen data to prosecute tax evaders under section 78 of Proceeds of Crime Act because it is illegal,” explained Rebecca Busfield, partner at Watt Busfield Tax Investigations.

“There is also a risk that the data may have been altered and may not meet the strict requirements of a criminal trial. HMRC are likely to require additional corroborating evidence to support their investigations and it may still be difficult to obtain from Panama due to their banking secrecy laws.

George Bull, senior tax partner at RSM agrees with Busfield’s thinking, and adds that the rules about admissibility of evidence are “complex”, and that HMRC can’t take it for granted that a court will accept evidence based on what looks like stolen information.

Prosecutions are too expensive

In the past HMRC has tended to avoid criminal prosecutions for tax evasion because of the lengthy trials and high costs involved, but following the solitary conviction HMRC obtained during the Swiss HSBC trial, the pressure will be on the department to secure multiple prosecutions.

Despite this, experts believe that HMRC will continue to claw back evaded tax through voluntary disclosures.

“Culturally, HMRC has not sought prosecutions for offshore tax evasion. It has made a deliberate policy choice to pursue yield through things like the Liechtenstein Disclosure Facility (LDF) to offer amnesties from prosecution rather than pursuing them,” said Maugham, who disagrees with the way HMRC operate in this area.

“I think it’s the very wrong thing do, I think it’s unjust that the wealthy should escape prosecution for evasion,” added Maugham, who in his own blog mentioned that as of November 2015, there have only been 11 prosecutions for offshore tax evasion in the past five years in the UK.

HMRC hasn’t got a time machine

Even if HMRC decides to pursue convictions following the leak, it will only be able to pursue cases of tax evasion dating back up to 20 years.

“HMRC are allowed to look back twenty years where there has been deliberate tax evasion in relation to income tax, capital gains tax, corporation tax, VAT and National insurance,” explained Busfield.

So even if tax has been evaded it’s likely that anything older than 20 years may not be collected.

Tax evaders may be too scared to disclose their offshore tax irregularities voluntarily

A number of tax experts have advised that anyone who is worried by the Fonseca  leak come forward to HMRC and disclose any irregularities voluntarily, but now the LDF no longer exists, some tax evaders may not come forward straight away, in fear of potential jail time.

On top of the Contractual Disclosure Facility (CDF), HMRC is soon to unveil a new, tougher disclosure facility which unlike the LDF, will not offer tax evaders criminal immunity and will, according to Bull, likely “involve a minimum penalty of 30 per cent of the tax underpaid”, so it may take a while before some of the implicated come forward.

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