Panama Papers – what does the leak mean for professional advisers?

The headlines have been full of stories about the so-called Panama Papers since their release 10 days ago.

No-one yet knows who is behind the release of over 11.5 million documents spanning nearly 40 years from the Panamanian Law Firm, Mossack Fonseca, but one thing is for certain – they have created quite a stir.

The papers name 12 national leaders and have since seen the resignation of the Icelandic Prime Minister and the naming of celebrities, professional advisory firms and MPs with links to the Panamanian Law Firm.  But away from the cyber security issues which the release highlights, what does the leak mean for professional advisers who advise on off-shore structures designed to avoid tax?

Where are we with off-shore structures?

It is thought that UK investors have access to around 4,000 off-shore trusts with a combined value of £1.9 trillion.  This is a big market and within this context its worth re-capping on what the government has done to date to deal with off-shore structures.

HMRC has offered tax-payers the opportunity through off-shore disclosure facilities to volunteer information about outstanding tax liabilities on off-shore assets. Disclosure facilities were available until 31 December 2015 for the Isle of Man, Guernsey and Jersey for the period April 1999 to 31 December 2013 and also for Liechtenstein owned assets held on 1 September 2009.  It is understood that HMRC has collected nearly £1.6 billion from tax-payers voluntarily coming forward.  In total the government has said that it has recovered around £2 billion in off-shore tax since 2010.

One of the reasons for the tax disclosure facilities was to offer tax-payers the opportunity to "come clean" before HMRC is granted access to wide ranging data on tax issues over the next 12 months.  To date 90 different countries have signed up to disclose data including the nature of investments abroad and bank account details, together with names, addresses, annual balances and details of income (dependent on the account).  HMRC will be using its Connect computer program (an analytical and sorting computer system introduced in 2009) to assess this data.  

The Finance Bill 2016 also included provisions for:

• A new criminal offence for those that fail to take adequate steps to prevent the facilitation of tax evasion; 

• Tougher financial penalties for offshore evaders, including a penalty based on the value of the asset on which tax was evaded as well as wider public naming of offshore evaders;

• A new penalty regime for those who enable tax evasion, based on the amount of tax evaded and public naming of evaders;

• A new criminal offence to make prosecution easier by removing the need to prove intent where a large amount of tax has not been paid on offshore income and gains.

All UK companies and LLPs from 6 April 2016 are also now required to maintain a list of their ultimate beneficial owners and this information is to be included in returns to Companies House from June 2016.

What’s the impact for professional advisers?

Clearly a lot has been done and is being done to “crack-down” on taxpayers who use off-shore arrangements for tax evasion.  Increasingly, certain sections of the media have sought to use the language of 'morality' to argue that all forms of tax avoidance should be outlawed (tax avoidance legally mitigates tax as opposed to tax evasion which is illegal).  These issues, coupled with the volume of new legislation in this area, leave a potential minefield for advisers.

So what impact are the Panama Papers likely to have on professional advisers?  Most would agree that a professional adviser – whether a lawyer, wealth manager or accountant – instructed by a taxpayer to advise on how best to structure their tax affairs is under an obligation to advise on the options available, which may include off-shore options where appropriate.  You can imagine a claim being made by a former client against a professional adviser if it was thought that that adviser had failed to advise on an off-shore option that could have mitigated large amounts of tax and which the former client later says they would have adopted.  

But how far does a professional adviser now have to go to warn not only of the risks of the off-shore option failing (because, for example, of a later interpretation adopted by HMRC) but to advise of the reputational and other risks which may arise later down the line?  Does this duty of care vary dependent on whether you are advising an MP, celebrity or Joe Bloggs?  Can a professional adviser exclude any obligation to consider off-shore options given the potential ramifications for the firm itself and potential money laundering issues? (Notably the FCA and SRA has written this week to firms named in the Panama Papers.)

A timely reminder of the duty to warn

In a timely recent case involving an off-shore employee benefit trust (EBT) (Ian Paul Baker v (1) Baxendale Walker solicitors (A Firm) and (2) Paul Baxendale Walker [2016] EWHC 664 (Ch)) the High Court considered advice provided in 1998 in relation to an EBT scheme designed to save capital gains tax.  HMRC later challenged the EBT scheme and a settlement was reached where Mr Baker agreed to pay over £11 million.  Mr Baker later issued proceedings against his legal advisers from 1998.  

The High Court found that the solicitors' advice in relation to the EBT scheme was not itself negligent in recommending the scheme.  However, the solicitors were negligent for failing to have raised the possibility that the scheme could be challenged by HMRC and that if a challenge was made, that it would be necessary to defend the arrangements in legal proceedings where there was a possibility that the EBT scheme would not be upheld.  

Mr Baker lost on causation (the High Court found he would have invested even if the warnings had been given) and so his claimed failed.  Given the Panama Papers the case is a timely reminder for professional advisers within the off-shore (and wider tax) areas to ensure that advice includes warnings about possible later challenge by HMRC.  

It is arguable that the recent well publicised issues relating to off-shore Panamanian structures may have extended a professional adviser's duty of care to warn of potential reputational hazards alongside the possibility that HMRC may later challenge an off-shore structure.  However, this should not be seen as "bad news" for professional advisers, the recent case of Ian Paul Baker and the Court of Appeal's decision in Mehjoo v Harben Barker [2014] EWCA Civ 358 arguably show the courts hardening against negligence claims made by taxpayers against their professional advisers in relation to claims arising out of complex tax avoidance schemes.

Mehjoo supports professional advisers' limiting their retainer and it is also worth reiterating the Court of Appeal's finding that it was enough in that case for the accountants to have raised the possibility of there being other tax saving schemes to mitigate capital gains, without having to advise specifically on those schemes.

What Next?

The use of off-shore structures is not going to go away, neither are broader issues over tax avoidance generally.    If a professional adviser fails to provide the correct advice they may face a claim from a former client arguing that they would not have entered into a particular scheme to save tax had they been fully advised.