Divorce lawyers told to report tax dodges

Lawyers negotiating divorce settlements must tell the authorities if they suspect that any family assets result from tax evasion, a senior judge has ruled.

In a move that brings a new hazard to getting divorced, 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.

The ruling applies equally to the family who pay a builder or nanny partly in cash, and 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 in anticipation of yesterday's judgment-Lawyers fear more "do-ityourself" divorce settlements as couples seek to avoid an Inland Revenue investigation by not involving solicitors.

Dame Elizabeth has made clear that the Proceeds of Crime Act, which extended an anti-money laundering law aimed at drug traffickers to "criminal property" generally, also applies to the transfer of assets during a divorce.

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.

Dame Elizabeth said family cases had been hit by "immense confusion and disruption" after the introduction last February of the Proceeds of Crime Act. Many divorce lawyers had not realised it made it an offence for them to negotiate a settlement or make a court application without telling NCIS if they suspected tax evasion.

Yesterday's 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 £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 yesterday 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. The judge said the act applied to all "criminal property", whether worth £10 or £1 million.

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?"