Over the last 5 years the cost of economic crime is estimated by HMRC to have run into billions of lost revenue. To ensure corporate compliance with the Government’s objective to combat tax evasion two new offences were introduced into criminal law by virtue of the Criminal Finances Act 2017 (“CFA 2017”).
What are the new offences?
The new offences came into effect on 30 September 2017, and in summary they hold corporates accountable in respect of failure to put in place reasonable measures to:
- prevent facilitation of UK tax evasion by associated persons
- prevent facilitation of overseas tax evasion by associated persons
The focus of the CFA is on what steps have been taken by the company or partnership (“relevant body”) to prevent the “facilitation of tax evasion” by “associated persons”.
Unfortunately, the CFA defines an associated person quite widely to include, employees, agents and any person who performs services for and on behalf of the relevant body. The practical effect of this broad definition is that relevant bodies could be held criminally accountable for failing to prevent any facilitation of predictable criminal evasion of UK or overseas taxes facilitated by a broad range of associated persons.
For example the definition is wide enough to include sub-contractors and persons working in associated overseas offices. Consequently, a whole range of persons are now capable of leaving relevant bodies exposed to the risk of being in breach of the new corporate offences. Corporate entities operating in the financial, legal and professional service businesses are likely to be particularly vulnerable to falling foul of these new offences.
What will be classed as “failure to prevent facilitation of tax evasion”?
A relevant body will be considered guilty of any of the offences on a strict liability basis, if the following three stage criteria, is met:
An individual or legal entity must have criminally evaded the payment of tax under either UK or a foreign law.
Whilst acting in the capacity of a person associated with the relevant body, the criminal facilitation of tax evasion occurred.
The relevant body failed to prevent an associated person from committing the act of criminal facilitation.
Is there a defence to the offences?
Prior to the change to the law a relevant body could rely on lack of knowledge of the illegal activities carried out by unscrupulous employees or external associated persons. This excuse is no longer available. However, if a relevant body can demonstrate that it was not neglectful about its’ legal obligations under the CFA and that it did put in place, “reasonable preventative procedures” to deter the facilitation of tax evasion, this will be a defence to either offence. Additionally, liability can be defeated if it can be established that in the particular circumstances, it was unreasonable to expect the relevant body to have put in place procedures to prevent the facilitation of tax evasion. It is likely that there will be very limited and rare instances when the later defence can be relied on.
What are the sanctions?
Relevant bodies in breach of the offences are potentially at risk of criminal conviction, unlimited financial penalties and ancillary orders, such as confiscation orders. Apart from these sanctions, reputational damage and further repercussions with professional regulators, is likely to arise following any conviction. The Government have also indicated that it would prohibit a convicted relevant body from being awarded future public contracts.
In view of the sanctions, businesses can ill afford to take a blasé approach to the legal obligations imposed by the CFA in 2017.
Who will enforce the sanctions?
Failure to prevent UK tax evasion will be policed by HMRC, the Crown Prosecution Service, Crown Office, Procurator Fiscal Service and in Northern Ireland the Public Prosecution Service. Prosecutions in relation to failure to prevent foreign tax evasion will be handled by the Serious Fraud Squad or the National Crime Agency.
What can I do to protect my business?
Due to the far reaching implications in relation to; criminal conviction, reputational damage and financial penalties, immediate action should be taken to implement measures to protect against these offences. HMRC has issued guidance in a document entitled, “Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion”. The guidance provides illustrations of risks that might be present and gives suggestions of what preventative measures might be implemented to overcome these.
It should be noted that following the guidance will not necessarily be a, “sure safe” guarantee that a business will have a defence to any allegation of failure to prevent tax evasion. The onus is placed on each relevant body to carry out a critical risk analysis of its own business model and the persons associated with that, external and internal, national and international. The results from that analysis should then inform a bespoke proportional risk-based preventative procedure.
The guiding principles present in the Bribery Act 2010 are to some extent replicated in the new CFA 2017. However, the new tax evasion prevention measures should not be, “piggy backed” on by any existing Bribery Act procedures. New procedures should be drafted which address the following issues:
- What are the identified risks?
- Given the nature of the risks, what proportionate measures can be put in place to deter and prevent tax evasion?
- How can we demonstrate top-level commitment to the prevention of tax evasion facilitation by associated persons?
- What due diligence will need to be performed to ensure internal employees and external associated persons are not involved in tax evasion activities?
- How will we communicate and train employees to be aware of the new offence? Also, how will we explain our zero tolerance on tax evasion to external associated persons?
- How will we monitor and review the preventative measures that are in place?
As always, if you have a legal query please get in touch with the FSB Legal Helpline on 0345 0727727 and we'll be happy to assist you.