MacDougall & Co
Divorce lawyers must report tax evading couples
Lawyers negotiating divorce settlements must report suspicions they have of any family assets resulting from tax evasion, a senior family judge has ruled.
In a move that adds to the hazards of divorce, Dame Elizabeth Butler-Sloss said barristers and lawyers who fail to report any tax dodging or social security fraud to the National Criminal Intelligence Service (NCIS) risk committing a criminal offence. She confirmed that solicitors must report their clients for any suspected tax irregularities, however minor.
Failure to do so would leave the lawyer open to prosecution under the Proceeds of Crime Act. The Act carries a maximum penalty of 14 years' jail, and is aimed at cracking down on money-laundering by placing a new duty on lawyers, accountants and other professionals to report any suspicious transactions.
A High Court ruling in the case of P v P  EWHC 2260 involved the wife's solicitors suspecting that the £19m matrimonial assets included proceeds of crime.
Mrs P, 52, is divorcing her 50-year-old husband after a 24-year marriage. She told her lawyers the couple's assets could be worth more than £19 million. After seeing the financial details provided by Mr P and taking an accountant's advice, Mrs P's lawyers suspected tax evasion by Mr P. They made a report to the NCIS, which told them they could not tell their client, or her husband, they had made the report, for fear this would constitute the offence of "tipping off" under the Act.
But Dame Elizabeth ruled that unless the lawyers were acting from an improper purpose they were entitled to tell their own client or their opponent a report had been made.
This appears to be different from advice given to accountants and tax advisers that they cannot "tip off" their clients that a report has been made.
The judge warned that the long-term effect of the Proceeds of Crime Act will be to create "serious delays" in hearing family cases. Dozens of divorce cases had been put on hold in anticipation of yesterday's judgment.
Family court rules require full disclosure of assets by both parties, and often reveal some tax evasion. One solicitor estimated that as many as half of "big money" divorce cases involve unpaid taxes.
Lawyers have reacted with alarm at the ruling, saying it would be a "nightmare" and could frighten off divorcing couples from going to solicitors at all.
It has always been the case that what is said between lawyer and client is confidential, but putting lawyers in the position where they must report minor tax irregularities will undermine that ancient understanding.
Accountants and tax advisers face a similar problem, where trust between client and professional will be damaged.
Concerns have been raised that couples will now do their own divorces to keep secret financial deals that could otherwise lead to litigation. Wives might also use the threat of undisclosed tax as a weapon to force beneficial settlements from wealthy husbands, it is thought.