Paradise Papers – Paradise Lost?

So another set of financial documents has been leaked (the fifth in four years), once again bringing the tax arrangements of the rich and famous into the view of we mere mortals. This time some 1,400 GB of data containing 13.4 million records have been leaked in what is known as the Paradise Papers.

Doubtless by now, many of us will have heard about VAT free purchases of jets, Lithuanian shopping centres, and sitcom stars receiving vast sums as loans (fun fact: anti-avoidance legislation came into force to nullify that particular arrangement in the year the show in question first aired).

Without going into the details of individual Paradise Papers leaks, which have been widely reported, it is interesting to consider some of the implications of the court-of-public-opinion’s approach to these leaks, as well as self-aggrandising statements from various politicians.

It is clearly agreed that some individuals or corporations have deliberately set out to avoid taxes, however it is quite likely that others have merely passed their financial affairs to their advisers. Yet, we increasingly see the opinion that high net worth individuals should be aware of the minutiae of their financial affairs, rather than merely passing them to their appointed advisers.

This seems slightly at odds with the convenience culture and globalised nature of supply chains that we are currently experiencing. Therefore, it could, by extension be argued that we should each be aware of each step of the supply chain that brings a lamb cutlet from the field to our diner plate – or that we are all personally culpable for the presence of horse meat in our supermarkets a few years ago.

Continuing the above example, the farmer, abattoir, meat inspector and supermarket have long since been culpable for failings in food standards. This has not always been the case for tax.

Historically there has been a gap in the supply chain. The necessary powers to pursue those promoting avoidance structures were limited; it was easier to pursue someone who had entered into a scheme than it was to pursue an individual that was, say, promoting a piece of aggressive tax-planning which had long since been deemed avoidance under case law and legislation.

Powers have now been introduced to target the promoters of tax avoidance schemes, as well as those who enable offshore evasion.

Most recently, the Criminal Finances Act 2017, made companies and partnerships criminally liable if they fail to prevent tax evasion by their staff or agents – regardless of whether they were aware of the act. Whilst this dovetails nicely with the public opinion that we are culpable even in the absence of intent or knowledge, it appears that this is rather more intended to remove what our friends across the pond call plausible deniability.

What will be interesting to watch in the coming months is how HMRC seeks to apply legislation to the recent Paradise Papers leaks – this information covers many years and HMRC may pursue affairs dating back up to twenty years.

Doubtless, task forces are currently ploughing through the various leaks of the past few years. At the same time, automatic information exchange agreements have now been entered into by a substantial number of countries, with initial exchanges of information occurring this year. Consequently, HMRC has a vast amount information at its disposal.

Adopting a moral stance is not necessarily sufficient to secure historic taxation revenue – legislation is not static and evolves over time. For example the transfer of assets abroad code, which seeks to prevent the avoidance of UK taxation by transferring assets abroad, has now been with us for many years. However, recent budgets have seen the instruction of further legislation, including targeted anti-avoidance rules, to tackle perceived avoidance involving offshore structures. Some, but not all, of this is effectively retrospective in scope – so although we may now be aware of morally dubious transactions dating back to, say, 2002 the Revenue doesn’t necessarily have the right or powers to pursue them. Although this is not to say that those powers may not be enacted in the future.