Article by David Williams, Vice-Chairman, CIOT Technical Committee, published in the July 2001 issue of "Tax Adviser". In my article "Grabiner and Beyond" in this magazine for October last year, I reviewed some areas of current concern especially for tax advisers who practice in the investigation field. In this article I would like to look at a further related development, the Criminal Justice and Police Act 2001 (CJPA), and then to revisit one of the topics in my earlier article, under the general title of ‘Recovering the Proceeds of Crime’.
The Criminal Justice and Police Act 2001
The CJPA is a large piece of legislation sponsored by the Home Office, which received Royal Assent on 11 May this year, just before Parliament was dissolved prior to the General Election. It covers a very wide range of matters relevant to the criminal law, but in this article I will concentrate on a topic which was to have been included in the CJPA but, after much CIOT lobbying, was dropped just before the Bill became law. It would mean that tax advisers could no longer assure clients that information given to the UK tax authorities would not be passed to other agencies such as the police or to other states, whether or not there were tax treaty exchange of information provisions. It is relevant because the Government made it clear that if re-elected, they would wish to revive it in the new Parliament.
As the CJPA was originally drafted, it contained several clauses grouped together as Pt. 2 of the Bill, two of which (cl. 49 and 50 in the Bill in its penultimate state) caused the CIOT great concern. As an indication of the interesting legislative company one keeps when involved in these areas, Pt. 2 was juxtaposed with provisions attacking the placing of advertisement cards in call boxes by prostitutes. As this is a journal designed for family reading by the fireside, I am sure the editor would not wish me to digress any further along that path.
I can best indicate our concerns by quoting (with a few insubstantial stylistic changes) from the briefing paper which we sent to the Home Office, the Inland Revenue and several members of the House of Lords prior to the Committee Stage of the Bill in that House. The paper was mainly written from a direct taxation perspective, but VAT practitioners had equal concerns about the proposals as they related to the powers of Customs and Excise officials.
Taxation aspects of the Criminal Justice and Police Bill
The CIOT is particularly concerned about the provisions of Clauses 49 and 50 of the Bill.
Our members regularly represent clients who wish to disclose to the UK Inland Revenue possible omissions from their UK tax returns, or who have failed to make such returns. Such clients may be non-UK nationals, perhaps people who came to this country some years ago and did not immediately “join” the UK tax system. The Revenue encourages such people to come forward and disclose any arrears of tax, using the so-called “Hansard” procedure. This offers the opportunity for them to make a full and frank disclosure of any irregularities in their own tax returns and those of any businesses with which they have been involved, as part of a financial settlement including arrears of tax, interest and a negotiated penalty.
Foreign nationals are often understandably concerned about the impact which such disclosures may have in their “home” jurisdictions. Most tax practitioners who represent clients in this position have hitherto been able to reassure them that the Inland Revenue will not reveal information to that or any other foreign state, except where required to do so under the terms of a double taxation agreement or, where another EU member state is involved, the EU Mutual Assistance Directive (Council Directive 77/779). In both cases, only information relevant to the person’s tax position may be disclosed and the recipient state is obliged to use the disclosure only for its own taxation purposes. Even thus reassured, many clients are still reluctant to disclose matters to the UK Revenue, especially when they originate from countries with no democratic tradition and without a politically neutral civil service. They fear that harm could come to their families, friends, political allies or financial interests in the other state. Nevertheless, in most cases a combination of the adviser’s assurances and, it must be said, the wholly proper conduct of the Revenue officer involved does eventually allow a disclosure to be made and an appropriate financial settlement reached. As a result, arrears of tax are properly accounted for and the ‘informal economy’ has one member less for the future.
Our main concern over Clauses 49 and 50 of the Bill is that the existing obligations of secrecy undertaken by members of the tax gathering departments would be overridden by Clause 49, where a ‘crime’ as defined in Clause 50 may be involved. Solely on the authority of the department which holds the information (Clause 50(3)), and without any need for the consent of the client or any judicial tribunal, disclosure could be made by officials to the authorities of any state anywhere in the world. All that would be necessary to legitimise the disclosure is that it should be for the purposes of any criminal investigation, either actual or potential, or criminal proceedings (Clause 49(2)); this means an investigation of any ‘crime’ as defined, whether actual, alleged or merely suspected; and for there to be a ‘crime’ for this purpose it would only be necessary that conduct may have occurred which would be criminal under the law of the country where it took place (Clause 50). It would not matter that the conduct might not be a crime, nor even a matter on which a civil action could be founded, under English or Scots law; nor would it matter that even if it would be a crime in those legal systems, the penalty in the foreign state might be far more severe than it would be here.’
We went on to quote from a letter by the then CIOT President, Richard Mannion, to one of our Honorary Fellows, the former Lord Chancellor Lord Mackay of Clashfern, and a similar letter from me to the Inland Revenue. In those letters we gave two examples; these were, in fact, quoted in the Second Reading debate by Lord Cope of Berkeley on 2 April. The examples highlighted that there was no provision in the Bill as drafted which would stop the UK tax authorities, and we mentioned them again in our briefing paper:
‘(1) In an investigation into someone from, say, Iraq who is publishing a dissident magazine in the UK which contains criticism of Saddam Hussain, reporting that fact to the Iraqi government because such criticism is a criminal offence in Iraq (doubtless accompanied by very severe penalties and risks to the “offender’s” family resident there).
'In an investigation into, say, a Chinese national resident in the UK who also runs a business in China through which he might be evading Chinese tax, reporting that fact to the Chinese authorities even though tax evasion in China may in some circumstances carry the death penalty.
'Clearly in the first example the conduct would be neither criminal nor actionable in the UK [if it took place there]. In the second the conduct [if committed in the UK] might, if proved, be criminal in the UK but the penalty would be much less severe.
'We do not suggest that the Revenue or Customs and Excise would use their powers in this way on their own initiative, but if they received requests for information from the relevant foreign states there would no longer be any unlawful breach of taxpayer confidentiality if they complied with those requests.’
The Revenue response
We went on to quote from the Revenue’s reply to my letter mentioned above. This said, inter alia, that:
- The proposals were permissive in that they gave the Revenue (and Customs) the power, but not an obligation, to disclose information.
- They set out specific purposes – criminal investigations and proceedings – for which disclosure was permitted; disclosure for other purposes remained illegal.
- Nor could recipients use the information for other purposes (though how the UK authorities might control or prevent such misuse overseas was not stated).
- Further disclosure by recipients was also clearly limited to the purposes stated.
- The Government had stated under s. 19(1)(a) of the Human Rights Act 1998 that the provisions of the Bill were compatible with the European Convention on Human Rights (cynics might note a certain touching confidence in the power of words here).
- As a public authority within s. 6 of the Human Rights Act, the Revenue was legally obliged to exercise the new gateway provisions (note that at this stage they were not actually provisions but only proposals, but that may be pedantic) in a way which was compatible with the Convention; in particular, disclosures should only be made where the circumstances made them necessary and proportionate.
- The Revenue was legally required to comply with any limitations imposed by the Data Protection Act 1998.
- The Revenue would regulate and control disclosures of information through clear written procedures, including memoranda of understanding negotiated with the police and other law enforcement agencies, backed up by detailed training and guidance to the staff affected.
- In summary the Revenue believed that the ‘gateway provisions’ (note that little slip again) struck “a fair balance between customer confidentiality and the public interest in tackling crime”.’
Our briefing paper went on:
‘What especially concerns us about the Revenue’s reply (just paraphrased) is that the Revenue is in effect saying “Trust us to be fair”. There is no statutory sanction within this Bill which would protect the potential victims of disclosure to illiberal or inhumane foreign states. ... While we do not doubt the sincerity of the comments in the Revenue’s letter, we believe that it is undesirable that unelected officials should be placed in this position. We believe that this part of the Bill poses a threat to the continuation of the “Hansard” procedure which has served the Revenue well for many years. Any adviser would, if the Bill became law as drafted, be obliged to point out the risk of disclosures under Cl. 49 to the client. We think that it is all too likely that many clients would at that stage decide to remain silent and no UK tax disclosures would be made. The result would be to increase the level of undetected tax evasion and this cannot be in the wider public interest.’
Our paper concentrated on the foreign element, but we also noted that the Bill would allow much wider disclosure to the police and other agencies in the UK than was possible under the current arrangements, which allows information to pass only where very serious crimes (in practice murder and perhaps also treason or terrorism) are thought to be involved, or where disclosure is ordered by the courts. We noted that the fear of information passing outside the Revenue and being abused once it got outside, was perhaps less common in cases involving UK nationals with no offshore links, but was still likely to make people less willing to disclose tax offences even if they had no involvement in non-tax related crime. As I pointed out in a private briefing to a member of the House of Lords, it is not (with one notorious exception) the Inland Revenue but the police service which has endured a sequence of embarrassing corruption trials in recent years.
Finally, we set out the changes we believed were required, which were in summary:
- A power for the Secretary of State to prevent a disclosure by extending powers which were given to him in another part of the Bill to tax matters.
- A requirement, failing such action, for the relevant department to obtain leave from an appropriate judicial authority before releasing information – we suggested a circuit judge on the analogy of TMA 1970, s. 20D.
- A prohibition on disclosure to a state which is not a signatory to the UN Convention on Human Rights;
- A tightening of the definition of a ‘crime’ in cl. 50, so that it would not include offshore conduct which would not be criminal at all if committed in the UK, or if criminal in the UK, was punishable with a significantly harsher penalty offshore. This would have dealt with my Iraqi and Chinese examples above.
The sequel in the House of Lords
Our briefing was taken up enthusiastically by several Peers at Committee Stage in the Lords. It would take up too much space to quote from the debates, but it is right to acknowledge the large contributions made in particular by Baroness Noakes (better known to readers in her former incarnation as Dame Sheila Masters, a past President of the ICAEW) and Lord Cope of Berkeley, a former Treasury Minister. Baroness Noakes tabled a raft of amendments which covered similar ground to our proposals mentioned above, as well as adding some material of her own, which required that the judicial authority should not approve disclosure unless satisfied that the Revenue or Customs had reasonable grounds for believing that a crime had been committed, and allowed the judge to impose conditions and restrictions where appropriate. She also argued for a penalty for wrongful disclosures. I regret to say that in a letter to interested members of the House of Lords, the Home Office Minister in charge of the Bill, Lord Bassam of Brighton, described the suggested requirement for prior authorisation as ‘an unnecessary and bureaucratic hurdle’.
Although the Bill passed its second reading without amendment, our points had been well made and by the time it returned for its Committee Stage, the political scene had changed. The Committee reached Pt. 2, containing the offending clauses, on 8 May, the day on which the Prime Minister announced that polling day would be on 7 June, and that Parliament would be dissolved on 14 May. In its desire to preserve most of its Bill from the guillotine of the Dissolution, the Government agreed to the deletion of Pt. 2 in its entirety. The Bill was enacted accordingly.
The next step?
Before the election the Government indicated that despite its agreement to drop Pt. 2 of the Bill, it is likely to bring forward another CJPA early in the next Parliament. It is virtually certain that they will want to re-introduce the proposals in the deleted clauses, although they have indicated that they wish to consult widely about them. It is a matter of regret that they did not do so on their first attempt to deal with this difficult area, but the CIOT aims to be closely involved again next time.
No members, of course, would want their Institute to appear to condone criminal activity or to assist in its non-detection. Our concern is merely to ensure that if the information gateways are to be made wider, as there may well be good policy reasons for doing, the rights of those we represent should not be open to abuse either in the UK or elsewhere. Our lobbying is aimed at that goal and I would be delighted if members who have comments on this matter (or on the next topic) would write to me at the CIOT – sooner rather than later, please.
Recovering the proceeds of crime (revisited)
Some criminals, like (it would appear) Mr Ronald Biggs, spend their ill-gotten gains. Others, however, invest them, or launder them to use the current jargon, in the legitimate economy. Others again may carry on criminal activities which are themselves taxable trades or professions, though most of us will rarely if ever encounter this.
It was to address concerns over the retention of the proceeds of crime that the Government’s Performance Innovation Unit (PIU) issued a report in June 2000 called Recovering the Proceeds of Crime (see my October 2000 article). Last March the PIU published a further report with a draft Proceeds of Crime Bill.
There was no time for this Bill to be introduced in the last Parliament, but we can be fairly sure that time will be found in the newly elected one. It is, therefore, worth looking at the more fully developed scheme which is likely to appear.
First, the NCA has acquired a new name, the Criminal Assets Recovery Agency or CARA. This may be a term of affection in Italian but there the resemblance ends. CARA will have very substantial powers. Looking briefly beyond the taxation scene, CARA will have a Director and a staff of accredited financial investigators, who may be recruited from other agencies, such as the police or the tax gathering departments, or seconded from those agencies. Into CARA will be decanted the existing powers to recover assets thought to have derived from criminal activity.
In contrast to the disclosure powers originally envisaged in Pt. 2 of the Bill which became the CJPA , some of these powers will be subject to judicial control. They will include powers to summon people for interview (similar to the controversial powers of the Serious Fraud Office), to execute search warrants, to monitor certain bank accounts with the (compulsory) co-operation of financial institutions, and, as foreshadowed in my earlier article, to seek criminal and civil confiscation orders, the latter being a new concept. I do not have space to discuss these powers in more detail but an excellent outline can be found in an article by John Cassidy in "Tax Journal", 7 May 2001.
Turning to CARA’s tax functions, we find that the draft Bill contains a full-blown mechanism for the transfer of the Revenue’s tax administration powers to CARA where the Director has reasonable grounds to suspect that income or gains arising or accruing to a person are both taxable, and arise or accrue as a result of that person’s, or another’s, criminal conduct, whether wholly or partly, and whether directly or indirectly. A person includes a company. Not surprisingly, the Director is not required to inform the person in question of his action and there seems to be no appeal against it.
The Director then issues a notice to the Revenue specifying the ‘target’ and stating those ‘general Revenue functions’ which he wishes to assume. Service of the notice then vests those powers in the Director until he serves a notice of withdrawal. He must do this when what the draft Bill calls the ‘qualifying condition’ is no longer satisfied – the condition apparently being that he has reasonable grounds for suspicion as indicated above. Exactly how this ‘termination of suspicion’ is to be established, especially as it does not seem to be subject to outside control, is unclear.
Criminal conduct for this purpose includes anything which would be a crime in England and Wales, whether committed before or after the Bill becomes law, even if it occurred elsewhere (at least that is an improvement on the shocking provision dropped – for now – from the CJPA which included, in theory, any conduct which a dictator anywhere in the world deems to be criminal), other than a tax offence in the UK (which the Revenue will still deal with and prosecute if appropriate).
The potential width of this power makes one gasp. What – to take a worst case – is to stop CARA assuming Revenue powers in relation to an individual who has unknowingly received income which derives indirectly and in part from another’s criminal activity, outside the UK, many years ago? If a practitioner advises a person who, many years ago, might have inherited some money or assets derived, indirectly and in part, from funds accumulated, again indirectly and in part, by another person (quite possibly long dead) dishonestly abroad, even if the client had no knowledge of the fact, it seems that the client and, indirectly, the practitioner could find themselves in CARA’s grasp for as long as the Director needed to settle matters or remove his suspicions. The assets in question could include money which was not declared to the foreign tax authorities, since that would be an offence in the UK. The ramifications are obvious and deeply worrying. There is, surely, a need for some concept of the taxpayer being ‘knowingly concerned’ in whatever criminal activity there may have been.
The Revenue functions which CARA may assume are also very wide, including powers in relation to all the direct taxes, IHT, PAYE, NICs and even statutory sick pay, maternity pay and student loans. In effect CARA would become the ‘target’s’ tax district (no doubt with Special Compliance Office-type services at no extra charge!) for the duration of the notice. With the assumption of these powers would come the full panoply of CARA’s powers to seek confiscation orders and other intrusive powers as mentioned above, subject to statutory controls but still a pretty intimidating prospect, especially for someone whose involvement with criminal assets was indirect, partial, remote in time and place and unknowing.
It is of small comfort, in this context, to be told that CARA will also apply any Revenue concessions and practices which are relevant. Somehow one suspects that concessions will be the last thing on CARA’s mind.
Amid these frightening powers, the so-called sourceless assessment power which featured in my earlier article almost pales into insignificance, but it is still very much there in the draft Bill and will often be the main practical effect of CARA’s involvement. For the purpose of the exercise of the Director’s powers it is declared to be immaterial that he cannot identify a source of income, and an assessment made by him ‘must not be reduced or quashed only because it does not specify (to any extent) the source of the income’. The onus of disproof would indeed shift to the taxpayer. The accompanying notes blandly call this a provision which ‘does not change substantive tax law’. No doubt it does not from the standpoint of those unaffected, but from that of one of CARA’s ‘customers’ it certainly will.
There must also be substantial concerns that some or all of the draft Bill could collide with Human Rights issues. These do not appear to trouble those who drafted the Bill, but they will certainly interest lawyers specialising in those areas.
I would like to end with a quotation from my earlier article:
‘The tax system can already cope perfectly well with criminal activities which are themselves trades; no additional machinery is needed to assess and collect the tax. When the Revenue cannot prove, to civil standards of proof (the “balance of probabilities’), the existence of any taxable source or capital gains, but suspects that criminal acts have generated the relevant assets, the (June 2000) PIU Report itself offers a solution; this is surely for the Revenue to report the matter to the NCA (now CARA), which can then consider whether the evidence, again on a civil standard of proof, would support one of the proposed civil confiscation orders. This would relieve the individual of 100% of his assets rather than 40%. There would seem to be no justification for asking (CARA) to make a “no source” tax assessment in such a case merely to collect 40% ...
'Not only would the “no source assessment” power appear unnecessary; it could also increase the risks facing the innocent. In general before agreeing to new Government powers, one should imagine how they might be abused. Despite the assurances mentioned above, the “no source assessment” route could, one day, be used against someone who was in fact innocent of any criminal offence and had genuinely accumulated assets from a non-taxable source, such as loans from relatives, but could not prove it. In such a case at present, the onus is on the Revenue to convince the Commissioners that on balance the assets arose from taxable sources. Under the PIU proposal the onus could shift to the “taxpayer”. He might have a criminal record, but on this occasion he might be telling the truth ...
'If it comes to pass, all taxpayers will have to start keeping, indefinitely, evidence of any non-taxable sources of wealth about which they might one day be asked awkward questions. It may be too late to prove the genuineness of that legacy from Aunt Ada in 20 years’ time, when you have lost the papers and the solicitors who acted for her estate have long since disappeared into a merger after quite legitimately shredding files more than six years old.’
I am afraid that nothing in the March 2001 paper and accompanying draft Bill has allayed these concerns. The CIOT will certainly be involved in attempting to build in proper safeguards for CARA’s potential innocent victims.
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July 2001 by