NCIS reportable

NCIS reportable

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If the tax authorities have not been deprived of any tax, but may have been deprived of an opportunity to assess a penalty, by reason of a taxpayer's compliance failure, is this reportable to NCIS? Does it make a difference if the penalty is discretionary v automatic? The question I guess I am really asking is: Does the lack of penalty constitute "proceeds of crime" where that lack derives potentially from the taxpayer's compliance failure?
Clint Westwood

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By User deleted
17th Oct 2004 11:35

I'm afarid that we will have to agree to disagree!

The offecne under Section 144 relates to the fraudulent evasion of Income Tax, so the offence must have related to that.

The benefit claims may have been aggravating circumstances, but they in themselves cannot result in a charge under section 144. They are maybe theft, common law cheat or false accounting but not the fraudulent evasion of income tax.

Consequently I am struggling to find another matter, on the facts published, other than the failure to notify under Section 7 which would have resulted in the charge.

I also don't accept that people who make money from trading are so so empty headed that it is reasonable to not suspect that they knew that they should tell the authorities.

Consequently I will continue to report FTN's, after all it is my freedom not yours at stake.

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By User deleted
09th Oct 2004 23:10

David ...
Sorry, I appreciate that you are far more experienced in this area than me, but I really am struggling with your view about section 7 TMA 1970.

In a recent case, Droger, the taxpayer pleaded guilty and was locked up for an offence arising from his failure to notify. I assume that you are leading his appeal?

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David Winch
By David Winch
10th Oct 2004 16:24

I have now looked up the case

hxj

I have now looked up some information about the Droger case.

I see that "Droger pleaded guilty to the charge that between January 2001 and September 2003 he was knowingly concerned in the fraudulent evasion of income tax by dishonestly failing to inform the Inland Revenue that he had taxable profits from his business 'Sheds Direct'."

This wording suggests very strongly to me that Mr Droger was charged under s 144 Finance Act 2000.

This section begins "A person commits an offence if he is knowingly concerned in the fraudulent evasion of income tax by him or any other person" and ends "this section applies to things done or omitted on or after 1 January 2001".

David
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David Winch
By David Winch
10th Oct 2004 12:49

You may think I am splitting hairs . . .

hxj

You may think that I am splitting hairs here but, whilst I know nothing of the case to which you refer, I do know that the taxpayer (or tax-not-payer!) would not have 'pleaded guilty' or been sent to prison for contravention of section 7 Taxes Management Act 1970.

He may well however have been sent to prison in connection with a failure to notify the Inland Revenue of his taxable income.

Probably he was charged with contravention of s 144 Finance Act 2000 or the common-law offence of 'cheat' or 'cheating the public purse'. Both of these are criminal offences. Common-law offences are offences which are not set out in any Act of Parliament but which are criminal offences because for centuries they have been regarded as criminal offences by the courts. (I may be wrong here, but I think murder is another example of a common-law offence.)

Both the s 144 FA 2000 offence and 'cheat' involve dishonesty by the accused (whereas a contravention of s 7 TMA 1970 can arise from mere negligence - this is a crucial difference).

'Dishonesty' is rather difficult to define in law. In a case relating to Barlow Clowes a judge in the Court of Appeal said:-

" However, dishonesty is an ingredient of many offences and does not necessarily depend upon a correct understanding by an accused of all the legal implications of the particular offence with which he is charged. The test is that laid down by this court in R v Ghosh [1982] 2 All ER 689, [1982] QB 1053, namely whether the accused was acting dishonestly by the standards of ordinary and decent people and, if so, whether he himself must have realised that what he was doing was, by those standards, dishonest.

In the recent case of R v Lightfoot (1992) Times, 3 November this court emphasised the clear distinction between an accused’s knowledge of the law and his appreciation that he was doing something which, by the ordinary standards of reasonable and honest people, would be regarded as dishonest. The fact that he did not know what was criminal and what was not or that he did not understand the relevant principles of the civil law could not save him from conviction if what he did, coupled with his state of mind, satisfied the elements of the crime of which he was accused. "

A dishonest omission, inaction, or failure to act, is regarded by the courts as a dishonest action. So failing to notify the Revenue of commencement to trade, if dishonest, can be a criminal offence under s 144 FA 2000 or common-law.

See also my recent posting on MLRO query.

I hope this helps.

David
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By User deleted
10th Oct 2004 22:09

David, I agree
that Droger was charged under Section 144 FA 2000. That charge arose as a reult of his failure to notify liability under Section 7 TMA 1970.

Consequently I may also be splitting hairs but I fail to see how an offence under Section 7 can be seen to be completely non-criminal.

If someone walks in off the street and says, by the way I have failed to notify then I have to have a suspicion that a criminal offence, under Section 144 FA 2000, has been committed by that individual. Even more so since the Droger case. There are proceeds of that crime, the tax saving.

Consequently I have to make a report.

Or looking at the reasonable person excuse, would a reasonable person say that failure to notify the IR was an honest action? I personally doubt it.

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David Winch
By David Winch
11th Oct 2004 08:22

Splitting hairs again . . .

hxj

I don't agree that the charge under s 144 FA 2000 arose from Mr Droger's failure to notify under s 7 TMA 1970.

In passing sentence, His Honour Roger Keene QC, labelled Droger "a dishonest rogue" and commented:

"You are thoroughly dishonest.... You set up a business which you had no intention of informing the Inland Revenue about and behaved in a fashion which meant that they would never know of your existence."

It was Droger's dishonesty, which could be inferred from this behaviour and from the fact that he was claiming and in receipt of State benefits whilst operating his profitable business, which led to the charge under s 144 FA 2000.

If he had been genuinely unaware of the requirement to notify the Revenue of the existence of his business he would have been liable to a civil penalty under s 7 TMA 1970 but not liable to prosecution under s 144 FA 2000.

If someone walks in off the street and says "I have been in business for a couple of years but have not got around to telling the taxman about it yet - can you sort it out for me", my own view would be that my new client was negligent and therefore liable to a penalty under s 7 TMA 1970 but (in the absence of any further information) I would not myself regard that as reasonable grounds for suspicion of a criminal offence. Accordingly I would not feel obliged to report the matter under PoCA / MLR (but I would make a clear file note as to why I took that view and did not report the matter).

(If at a later stage further information came to me which caused me to suspect that the client had indeed been dishonest I would then change my view and report to my MLRO / NCIS.)

I fully accept that another accountant might take the view from the beginning that there were reasonable grounds to suspect that the client was dishonest, and he would feel obliged to report under PoCA / MLR immediately after the first meeting. I would not criticise an accountant who did that.

It is a judgement we have to make.

That is one reason why I feel the judicial view of what is meant by 'dishonesty' has become important to accountants - and why I quoted this at some length in an earlier posting.

The question is not "is a failure to report an honest action" but rather "what was in the client's mind when he failed to report - did he himself realise that what he was doing (by failing to report) was dishonest?"

I hope this helps.

David
[email protected]

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David Winch
By David Winch
08th Oct 2004 19:55

Penalty v Fine

Clint

If it is a criminal offence then there will not be a penalty, there will be a fine. OK so both amount to money out of your pocket, but the wording tells you whether it is a criminal offence or not.

If it is a criminal offence then you must ask yourself are there any proceeds of the crime - such as a tax or NIC 'saving' or a lower rate of pay because the employee has no status or a 'saving' from an associated criminal offence (such as saving money by not providing, say, protective barriers, where this amounts to failing to comply with health & safety requirements).

However not getting fined for the offence does not itself amount to 'proceeds' of the crime.

If there is a criminal offence and there are proceeds then there is 'criminal property'. Even simple possession of criminal property is a money laundering offence.

If you have knowledge or suspicion of a money laundering offence as a result of information received in the course of 'relevant business' (e.g. accountancy services) then it is reportable.

David
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David Winch
By David Winch
11th Oct 2004 08:40

And another thing . . .

hxj

Perhaps I should also refer to s 340 (3) (b) PoCA 2002 which points in the same direction.

As you will know, there can only be money laundering where there is 'criminal property'.

Criminal property is 'property' (which includes money, tangible and intangible assets) which satisfies two conditions:-

1. It must be a benefit of criminal conduct - or represent such a benefit (in whole or in part, directly or indirectly)

AND

2. The alleged money launderer must know or suspect that it is so.

If our empty-headed client neither knows nor suspects that he has done anything wrong then there can be no 'criminal property' as far as he is concerned and it follows that he is not engaged in money laundering and he is not reportable under PoCA / MLR.

Of course, if he does know or suspect he is doing wrong the picture is altogether different.

It all depends on what is going on inside his head. This has to be inferred from his actions.

David
[email protected]

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David Winch
By David Winch
08th Oct 2004 11:52

Compliance failure

Clint

I think what you are indicating is that the client has failed to do something, or failed to do it within the relevant time limit, and has thereby rendered himself liable to a civil penalty.

For example a person who has not been issued with a tax return, but is liable to tax, may be required to notify his chargeabilty to tax to the Inland Revenue within 6 months of the end of the tax year. Failure to do so renders him liable to a penalty under s 7 TMA 1970.

However this failure is not an "offence" for the purposes of PoCA / MLR because a penalty is a civil matter not a criminal fine.

Essentially if the punishment for something is expressed to be a "penalty" or "surcharge" the conduct is not an "offence". Whereas if the punishment is expressed to be a "fine" or "imprisonment" or if the statute refers to the person being "guilty of an offence" then it is a crime (which is an "offence").

Something which is not an "offence" (which means what you and I might call a crime or a 'criminal offence') does not give rise to "criminal property". Where there is no criminal property there can be no money laundering and so no requirement to report under PoCA / MLR.

I read your question as indicating that the taxpayer has paid the tax due from him, so there would appear to be no possibility of a criminal tax offence such as tax evasion.

In these circumstances I think you can put the NCIS forms back in the drawer and move on!

[However if you are saying, for example, that businessman Mr X has employed Mr Y but paid him 'cash in hand' and treated the salary in Mr X's accounts as drawings - so that, in effect, Mr X has paid the tax on Mr Y's salary, then I think Mr Y is engaged in tax evasion (if he does not declare his earnings) and both Mr X and Mr Y are reportable to NCIS.]

AccountingWeb has produced a money laundering CD aimed at helping you understand this legislation and ensure your compliance - further details are available here.

If you are an MLRO you can get confidential one-to-one email support, information and NewsAlerts from my website www.mlrosupport.co.uk.

David
[email protected]

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By AnonymousUser
08th Oct 2004 15:36

Thanks David
When I first posted the query I had in mind what appear to be simple civil penalties, such as failure to give a form 42 notification, or getting a P11D wrong in respect of reimbursed business expenses that are contra'd with a personal expense claim, not subsequently corrected.

But a more interesting example has just cropped up: we operate a bureau payroll service for some of our clients. Our clients are responsible for obtaining satisfactory evidence that a new employee is entitled to work in this country. If a client fails to operate this requirement, and we suspect this (ie because client is unable to provide us with a NI No, and the employee has since left without trace), would this be reportable to NCIS despite that BR tax and NIC has been deducted? I have a feeling that the penalty of up to (I think) £5K for failure to comply in this instance may be a criminal offence.

If that is the case, then does the failure to come clean (and thereby effectively invite a penalty) constitute a ML offence that we are obliged to notify?

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