02 October 2017 by Robert Salter
Organisations are in the firing line as a new criminal offence of failing to stop the facilitation of tax evasion is introduced.
A new corporate crime has been introduced in the UK: ‘The failure to prevent the criminal facilitation of tax evasion’. The legislation, originally proposed in 2015 and later becoming law as part of the Criminal Finances Act 2017, took effect from 30 September 2017.
Specifically, the legislation has created two new offences. These are the facilitation of UK tax evasion, which applies to all businesses, and the facilitation of foreign tax evasion, which applies to businesses with a UK connection.
The legislation covers all taxes and similar duties, including corporate tax, VAT, customs duty, PAYE and National Insurance (or overseas equivalents).
The facilitation of UK tax evasion offence applies to all businesses, wherever located in respect of UK domestic tax evasion. The legislation requires the following stages to be considered:
This offence applies to businesses that have a UK connection (for example, the organisation or associated person is in the UK) and relates to foreign tax evasion offences.
The offence by the taxpayer and the business (stages one and two above) would need to be considered a tax evasion offence under UK law. Moreover, the foreign jurisdiction concerned would need to have similar offences at both the taxpayer and associated person levels.
As well as companies, the offence applies to partnerships and LLPs, including accountants, tax advisers and law firms.
All these entities will be potentially liable for the actions of their employees and associated persons if they facilitate evasion, even if the senior management of the organisation was not involved or aware of what was going on.
The definition of ‘associated person’ is deliberately wide and, as well as employees and directors, would potentially include agents and contractors.
“The business will be in trouble if it cannot show that it took reasonable steps, and ensured that they were regularly monitored and re-assessed”
The criminal facilitation of tax evasions is a strict liability offence. As such, the primary defence is to show that the organisation had taken reasonable steps to prevent the offence occurring (or that it was reasonable not to have such procedures in place at the time the offence occurred).
The business will be in trouble if it cannot show that it took these steps, and ensured that they were regularly monitored and re-assessed for overall adequacy.
In some situations – for example, with larger, more complex businesses – HMRC may also consider what preventive procedures are planned for future introduction when an offence has occurred, and not purely the procedures that existed at the time of the offence.
The legislation does not define what reasonable preventative procedures would be. However, under the legislation, the chancellor is required to publish guidance in this regard. In addition, the chancellor is able to approve guidance prepared and published by others, such as professional bodies.
The purpose of the legislation is not to alter what is considered to be criminal, but rather to make businesses more accountable.
In addition, although there must have been a criminal act by a taxpayer – and the authorities would need sufficient evidence to charge them – the taxpayer does not have to actually be directly charged by the authorities in this regard.
The offence of criminal facilitation could still arise, even if the authorities decided not to pursue the offending taxpayer directly for tax evasion.
The associated person would also need to act in a deliberate and dishonest way for the offence of criminal facilitation of tax evasion to occur. Associated people acting innocently, or potentially even negligently, should not trigger this charge for the businesses concerned.
Consequences for those businesses found guilty of these offences can be extreme.
They include, for example, potentially unlimited fines and the confiscation of a business’s assets. In addition, clearly businesses need to be aware of the risks associated with negative publicity if they are found guilty.
Having said that, one also needs to realise that HMRC and the Treasury are keen to ensure that innocent employees are not affected unnecessarily by proceedings in this area.
They do not want otherwise successful businesses to fail because of these rules when it is not in the wider public interest.
“HMRC and the Treasury are keen to ensure that innocent employees are not affected unnecessarily by proceedings in this area”
As such, with the consent of judges, and where it is held to be in the public interest, deferred prosecution agreements (DPAs) may be entered into. DPAs are equivalent to a suspended sentence and would allow the relevant businesses to avoid prosecution, subject to the future maintenance of strict controls and conditions.
DPAs may help minimise the costs and risks for businesses, including those associated with negative publicity.
There are six guiding principles (as proposed by HMRC) that companies should follow:
The business will need to review the nature and extent of its exposure to the risk of criminal facilitation of tax evasion. HMRC has suggested that businesses in certain sectors (for example, financial services, lawyers, accountants) are likely to be particularly high risk.
Proportionate risk-based prevention procedures will need to be developed and implemented. These will depend upon the level of control and supervision that a business is able to exercise over a person acting on its behalf, and the proximity of that person.
Senior management must be willing and determined to foster a culture in which the facilitation of tax evasion is unacceptable.
Procedures should take an appropriate and risk-focused approach.
Prevention policies and procedures must be fully communicated throughout the business.
The business has a commitment to proactively reviewing its procedures in this regard and is committed to making any improvements that are appropriate.
This legislation poses a real danger for companies that do not establish a proportionate and robust system for controlling and minimising risks.
Companies need to consider closely what the hazards are and establish a proactive plan to address them, ensure staff are trained appropriately and maintain a regular system of review, alongside ongoing development.
It may be appropriate for company secretaries and other members of senior management to assess their internal resources closely and consider what support (if any) is needed from external advisors.
In addition, the legislation, and associated monitoring and systems, will require continuous commitment from the company secretary and other parts of the organisation, such as internal audit and the board.