Article by David Williams, the Chartered Institute of Taxation Chairman of the Tax Policy Sub-Committee.
Published in the November 2001 issue of Tax Adviser.
Imagine that you have a problem on your conscience. A few years ago you had £100,000 in a building society account, which came from a legacy from a favourite aunt. Then the society turned itself into a plc, and you received £15,000 worth of shares in the new plc which you immediately sold. Somewhere, you forget exactly where or when, you read or heard that this money was not taxable. You spent some of it on a good holiday and invested the rest.
A few weeks ago, you were talking to a friend who is a Chartered Tax Adviser specialising in tax (they do have friends!). The talk got round to your ‘tax-free’ windfall. Your friend looked rather serious and told you that it was not tax-free after all, but subject to capital gains tax (CGT). It so happened that in that year you had already used up your CGT allowance and so, said your friend, you owe £6,000 of tax to the Inland Revenue.
Troubled by this, you decide to consult your friend’s firm officially and ask what you should do now. Will the Revenue find out about this, you ask? Possibly not, says your friend, but professionally speaking that isn’t the point. Your tax return was wrong and you should tell the Revenue about it and offer to pay the tax. They will charge you interest and perhaps levy a penalty, but the sooner you tell them the smaller this will be, especially if your tax affairs are otherwise in order. But if, having been advised, you stay silent, the penalties if the Revenue ever find out could be much bigger, and you could be prosecuted for tax evasion.
You decide that you don’t want to run that risk. You instruct the tax advisers to act for you and they arrange a disclosure of the facts to the Revenue. After some correspondence and a meeting with the tax inspector which you would prefer to forget, nothing else proves to be wrong with your tax affairs and the whole thing is settled by a payment of tax, interest and a penalty. The Inspector initially wanted a penalty of 30 per cent of the tax, or £1,800, but after negotiation he reduces this to 15 per cent or £900. You aren’t exactly thrilled by this, but you know that you were legally in the wrong and to get the thing off your mind you agree to pay up. After that, all concerned live, relatively at least, happily ever after.
Now roll the clock forward to, say, January 2003. The facts are the same. You consult the tax advisers as before. Now, however, you find yourself hearing something very different and rather alarming. As soon as you sit down in the tax adviser’s office, before you have explained what you want to talk about, you are handed a slip of paper which, you are told, the firm feels obliged to show to all new clients before discussing any tax matter with them. Under the Proceeds of Crime Act 2002, says this notice, the firm is obliged to report any suspicion or knowledge of tax evasion, or reasonable grounds for such suspicion or knowledge, to the National Criminal Intelligence Service (NCIS) because it is a criminal offence. You ask what all this is about. You are told that the warning has to be given before the discussion starts even if the meeting turns out to be about something else altogether; if it was given after you had disclosed possible tax evasion (assuming you did), the tax adviser could be committing the offence of ‘tipping off’ and would be liable to up to five years’ imprisonment.
Are you sure you want to carry on with the meeting? You have vaguely heard of NCIS and know that it is staffed by policemen. You thought that you were going to talk about squaring up your tax with the Revenue, a process ending with writing a cheque and salving your conscience. Now you feel like a criminal and wonder whether you might just stay silent and take your chance. You wander off, perhaps looking anxiously over your shoulder.
A nightmare from the world of 1984 perhaps? Not so, unfortunately. Back in the real world of 2001, in the next few weeks the Proceeds of Crime Bill will be starting its progress through Parliament. It contains provisions which, by 2003 if not before, could well have exactly the result I have outlined. People who would once have steeled themselves to confess errors in their tax, ranging from sheer muddle through to more serious evasion, in the belief that they would not be prosecuted provided that they told the full truth and paid what was due plus a penalty, may now decide to keep quiet.
So what, you may ask? Tax evasion is already a crime and people are prosecuted and sent to prison for it. Yes, but only, as a rule, in very serious cases where they have deliberately concealed matters or lied under investigation; in 1999/2000 there were only 55 Revenue prosecutions. The rest have, if the amounts were as small as those in my story above, ‘confessed’ to their local tax office and reached a settlement with the Inspector there, or in larger cases have reached a settlement with the Revenue’s Special Compliance Office (SCO) using the so-called Hansard procedure. The name reflects the fact that since at least the 1940s, the Revenue has operated a policy, explained by successive Chancellors of the Exchequer in Parliament and published in Hansard, whereby while not offering an immunity from prosecution for tax evasion, they will, where appropriate, conclude a financial settlement in return for a ‘full confession’. If anyone thinks this is a soft option, they should ask those who have been through it or those who advise them.
The Proceeds of Crime Bill puts the future of that procedure in considerable doubt. Many people will think twice, rightly or wrongly, before ‘confessing’ if they believe that a policeman rather than a tax inspector will come to call on them. The Bill contains no let out for ‘minor’ offences such as the one in my story.
The bill is also aimed at much more, of course. It is aimed at preventing criminals enjoying the proceeds of their offences with impunity, including those who have committed dreadful crimes such as drug dealing or terrorism, and especially at stopping them laundering those proceeds through financial institutions and apparently genuine business deals. Especially after the events of 11 September 2001, no-one can dispute the need for tough legislation in this area. Nor do reputable tax advisers wish to see financial crimes treated with any special leniency just because they involve only money and not violence.
The fact remains, however, that we have a very complex tax system where it is easy to getsomething wrong even with the best of intentions and the best advice. The
Revenue’s policy of encouraging voluntary disclosures recognises that, and the fact that people will be franker in putting things right if they can believe that they will not go to prison provided they tell all in full. If they no longer have that confidence, one of two things will happen – either much more tax evasion will escape detection, or the Revenue will have to devote much bigger resources to many more prosecutions.
If they do, our tax system will have undergone a huge cultural change in the direction of confrontation, and tax inspectors will be seen as policemen. I personally believe that would be disastrous, but if it does happen, it should do so as a result of a transparent debate in Parliament and not as the by-product of ill- targeted legislation.
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November 2001 by