When the Queen's Speech was published in June it was generally criticised for its lack of content, despite being intended to cover two years rather than the usual one. A seeming obsession with Brexit left little room for other initiatives and, where other legislation has been introduced, the Government has been slow to highlight its implications for individuals and businesses. For example, on 1 January 2017, the Treasury announced plans to introduce a new corporate criminal offence of failing to prevent the facilitation of tax evasion. Under the new rule, it explained, companies will be held liable if an individual acting on its behalf as an employee or contractor facilitates tax evasion. Previously there needed to be proof that the board of directors were aware and involved in facilitating the evasion. In this article, Paul Clarke explains what happened to that proposal and reminds businesses that, despite the lack of publicity, they now have less than a month before the resultant legislation comes into force.

The lead-up

Plans to introduce a new offence did not suddenly appear out of a clear blue sky. In the March 2015 Budget, the Government announced that it would make it a crime for corporations to fail to put in place reasonable procedures to prevent their staff from criminally facilitating tax evasion. Two public consultations, launched on 16 July 2015 and 17 April 2016 by HM Revenue & Customs (HMRC), featured “guidance and legislation for a corporate offence of failure to prevent the criminal facilitation of tax evasion”. Having considered responses from a range of bodies including the Association of British Insurers, the National Farmers Union, the Serious Fraud Office, Virgin Money, and the Wine and Spirit Trade Association, HMRC said that clauses for the new corporate offences would form part of the Criminal Finances Bill.

The legislation

The clauses duly appeared in Part 3 of the Criminal Finances Act 2017 as the following sections (all available at www.legislation.gov.uk).

44 Meaning of relevant body and acting in the capacity of an associated person

45 Failure to prevent facilitation of UK tax evasion offences

46 Failure to prevent facilitation of foreign tax evasion offences

47 Guidance about preventing facilitation of tax evasion offences

48 Offences: extra-territorial application and jurisdiction

49 Consent to prosecution under section 46

50 Offences by partnerships: supplementary

Together with some “consequential amendments” to other legislation and certain definitions, these sections set out and explain the new corporate offences of failure to prevent facilitation of tax evasion in the UK and abroad. What they did not do was to bring those offences into force: that was accomplished by the Criminal Finances Act 2017 (Commencement No. 1) Regulations 2017 (SI 2017 No. 739) which were made on 12 July 2017. They set out that s.47 (requiring the Chancellor “to prepare and publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offences or foreign tax evasion facilitation offences”) was to come into force on 17 July 2017. The remaining provisions of Part 3 of the Act would then come into force on 30 September 2017.

The impact on businesses

From that date, companies, partnerships and LLPs can be held to account for the actions of their employees with regard to two new corporate offences of failure to prevent facilitation of UK tax evasion and of foreign tax evasion offences. At present, where a banker or accountant criminally facilitates a customer to commit a tax evasion offence, the taxpayer and the banker or accountant commit criminal offences but the company employing the banker or accountant does not. Even in cases where that company tacitly encourages its staff to maximise the company’s profits by assisting customers to evade tax, the company remains, as the Government put it when introducing the legislation, “safely beyond the reach of the criminal law”.

From the above deadline, however, it will be criminally liable if there has been a failure to prevent tax evasion by either a member of staff or an external agent. This will be the case even if the business was not involved in the act and was indeed unaware of it and, in the event of a prosecution and a conviction, it could be subject to unlimited penalties (in England and Wales: on summary conviction; in Scotland or Northern Ireland: to a fine not exceeding the statutory maximum). In the event of a conviction, corporations may also be prohibited for bidding for public contracts.

Proof of liability

A relevant body is guilty of the offence(s) if a person commits a UK (or foreign) tax evasion facilitation offence when acting in the capacity of a person associated with that body. This is the case even if the organisation has gained no benefit from the acts. However, the associated person does not commit a tax evasion facilitation offence when he or she inadvertently, or even negligently, facilitates another’s tax evasion. This is because the new rules target deliberate and dishonest behaviour. Furthermore, the facilitation by the associated person must be criminal under the existing law. In other words, their conduct must be currently capable of being indicted as a cheat of the public revenue, or as a statutory fraudulent evasion offence, such as those found in s.72 of the Value Added Tax Act 1994 or s.106A of the Taxes Management Act 1970.

It is worth noting that the Government made clear when introducing the Act that the associated person must commit the tax evasion facilitation offence in that capacity. It explained in the Explanatory Notes to the Criminal Finances Bill: “Where an employee criminally facilitates his or her partner’s tax evasion in the course of their private life and as a frolic of their own, they commit a tax evasion facilitation offence but not in the capacity of person associated with their employer. Therefore the employing relevant body does not commit the new offence.”

Relevant defences

Apart from the example noted above, of an employee indulging in “a frolic of their own”, there are other instances in which the organisation has a defence against prosecution. For example, with regard to foreign tax evasion offences, these are defined as conduct that is criminal under the foreign law in question and that would also be regarded by the UK courts as amounting to an offence of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of the tax. Thus a s.46 offence cannot be committed where the acts of the associated person would not be criminal if committed in the UK, regardless of what the foreign criminal law may be.

It is also a defence for the company or partnership to prove that, when the UK or foreign tax evasion facilitation offence was committed:

  • it had in place such prevention procedures as it was reasonable in all the circumstances to expect it to have in place; or

  • it was not reasonable in all the circumstances to expect it to have any prevention procedures in place.

Preventive action

At the time of writing (end of August 2017), the Draft Government Guidance issued in October 2016 remains the most recent available. HMRC said that it would keep this as a draft, and subject to change, until the relevant legislation was published so presumably we can expect a definitive version in the near future. HMRC has also promised to assist trade bodies in the formulation of more detailed sector-specific procedures. For the moment, Tackling Tax Evasion: Government Guidance for the Corporate Offence of Failure to Prevent the Criminal Facilitation of Tax Evasion can be found at www.gov.uk. It is designed to be of general application and is formulated around the following six guiding principles:

  1. Risk assessment.

  2. Proportionality of risk-based prevention procedures.

  3. Top level commitment.

  4. Due diligence.

  5. Communication (including training).

  6. Monitoring and review.

It should be noted that departures from suggested procedures within the guidance will not mean that an organisation does not have reasonable procedures, as different prevention procedures may also be held to be equally reasonable. In addition, a small organisation and a large multinational organisation may implement the principles in very different ways: what is reasonable for a small business in a low-risk sector may, HMRC points out, be entirely unreasonable for a large business in a high-risk sector.

However, it goes on, even strict compliance with this guidance will not necessarily amount to having reasonable procedures where the relevant body faces particular risks arising from the unique facts of its own business that remain unaddressed. Ultimately only the courts can determine whether a relevant body has reasonable prevention procedures in place to prevent the facilitation of tax evasion in the context of a particular case, taking into account the facts and circumstances of that case.

Reasonable prevention procedures for lower risk SMEs

There is a section in the HMRC guidance which aims to help smaller firms to put in place prevention procedures relevant to their capacity and the level of risk they face. This suggests that they should undertake a risk assessment of the products and services they offer, as well as internal systems and client data that might be used to facilitate tax evasion, including by “sitting at the desk” of employees and other associated persons, considering the motive, means and opportunity for facilitating tax evasion.

They should then consider some of the “hallmarks of fraud” including the following.

  • Are there staff who refuse to take leave and do not allow anyone else to review their files, or are overtly defensive over client relationships?

  • Do existing processes ensure that for higher risk activity at least a sample of files are routinely reviewed by a second pair of eyes?

This section of the guidance also recommends having terms in contracts (with employees and contractors) requiring them not to engage in facilitating tax evasion and to report any concerns immediately.

Last reviewed 6 September 2017