A ruling by England’s senior family judge in 2003 reveals a new hazard of getting divorced – that your solicitor or your soon-to-be-ex’s lawyer will shop you to the authorities for not paying all your taxes.
Dame Elizabeth Butler-Sloss confirmed that barristers and solicitors negotiating divorce settlements risk committing a criminal offence if they fail to report to the National Criminal Intelligence Service (NCIS) any suspicion that some family assets result from tax evasion or social security fraud.
The ruling, which had been anxiously awaited by divorce lawyers, applies as much to the plumber paid partly in cash as to the millionaire with a string of offshore accounts.
The judge warned that the effect will be to create “serious delays” in hearing family cases.
Dozens of divorce cases had been put on hold pending yesterday’s judgment. Lawyers fear there will be more do-it-yourself divorce settlements as couples seek to avoid a possible Inland Revenue investigation by not involving solicitors.
Divorce lawyers were slow to realise that the Proceeds of Crime Act, which extended anti-money laundering legislation originally targeting drug traffickers to “criminal property” generally, applied to the transfer of assets from a person to their ex-spouse on divorce.
The act makes it a crime to be involved in an arrangement which might facilitate “the acquisition, retention, use or control of criminal property” by another person – including an ex-spouse.
Family court rules, which require full disclosure of assets by both parties, often reveal some tax evasion – the fruits of which fall into the category of “criminal property”. One solicitor estimates that as many as 50% of “big money” divorce cases involve unpaid taxes.
Many divorce lawyers did not realise the act made it a criminal offence for them to negotiate a settlement or make a court application without notifying NCIS if they suspected tax evasion.
Dame Elizabeth said the coming into force of the Proceeds of Crime Act last February had caused “immense confusion and disruption” in family cases.
The ruling was made in the case of a couple named only as Mr and Mrs P. 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 £19m.
After seeing the financial details provided by Mr P and taking an accountant’s advice, Mrs P’s barrister and solicitor suspected tax evasion by Mr P. The lawyers made a report to NCIS, who told them they could not tell their client or her husband that they had made the report, for fear that 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 that a report had been made.
The judge said the act applied to all “criminal property,” whether worth £10 or £1m. “Parliament clearly intended this to be the case,” she said.
She said there were big implications for NCIS, which is obliged to respond quickly to tell the lawyers whether they can go ahead with the transaction.
“Whatever may be the resource implications, the legal profession would appear to be bound by the provisions of the Act in all cases, however big or small,” she said.
“If this approach is scrupulously followed by the legal advisers, the result is likely to have a considerable and potentially adverse impact upon NCIS and would create serious consequential delays in listing and hearing family cases, including child cases.”
Mark Harper, a family law partner in the law firm Withers, said: “Did the government intend the legislation to have this effect? Of course people should pay their taxes, but was it really intended it should have such an impact on the divorcing public?”
Philip Way, of the Solicitors Family Law Association, said: “This is a very helpful decision. It makes it easier for the family lawyer to honour obligations to clients, the court and the state pursuant to the act.”
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