Failing to prevent the facilitation of tax evasion

2 Oct 2017

empty boardroom chairs

The new corporate offence of failure to prevent the facilitation of tax evasion came into force on 30 September 2017. The legislation, which is part of the Criminal Finances Act 2017, makes it a criminal offence if a company, partnership or other ‘legal person’ fails to take reasonable steps to prevent its employees or associated persons from facilitating tax evasion.

The offence covers:

  • UK tax evasion – this applies to all ‘legal persons’ (eg companies, partnerships, LLPs etc) regardless of whether or not they operate commercially (ie it includes charities), wherever they are located, if the facilitation of UK tax evasion has occurred.
  • An equivalent offence under foreign law – this applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion. This includes UK legal persons as above, foreign legal persons with a place of business in the UK, and foreign legal persons where the act of facilitation has taken place in the UK.

The new rules will be of particular concern, given HM Revenue & Customs’ (HMRC’s) focus on tax avoidance by high net worth individuals.

What is it?

The legislation (supported by the accompanying guidance issued by HMRC on 1 September 2017) states that a ‘relevant body’ is liable to the new offence if ‘associated persons’ facilitate tax evasion. The onus would then be on the relevant body to prove that reasonable steps were in place to prevent the facilitation of tax evasion occurring. An organisation is guilty regardless of whether management were aware or not.

For the purposes of the legislation:

  • ‘Relevant body’ refers to incorporated bodies and partnerships. A trust is not a relevant body for these purposes.
  • ‘Associated persons’ refers to any employee, agent or other person who performs services for or on behalf of the relevant body. The associated person can be an incorporated body.

Given that the definition of associated persons includes intermediaries and agents, the legislation is very far-reaching. The concept of persons who “perform services for or on behalf of the relevant body” is deliberately broad, so as to capture the wide array of individuals and enterprises that are able to facilitate tax evasion.

This is a strict liability offence, meaning that all that is needed for a relevant body to be deemed liable is for the following two conditions to be satisfied:

  • A taxpayer must commit the criminal offence of tax evasion; and
  • There must be criminal facilitation of that tax evasion by an associated person of the relevant body.

It is not necessary for any tax to actually be successfully evaded, or for the taxpayer themselves to be prosecuted for tax evasion. If, however, the taxpayer’s actions are restricted to non-compliance with local filing obligations and the actions do not represent tax fraud, there will be no corporate offence committed by the relevant body further up the chain. It should be noted that legal tax planning is also not criminalised by the Act.

If both of the above conditions are satisfied then the relevant body will have committed the offence of failing to prevent the facilitation of tax evasion unless it can prove that reasonable preventive procedures had been put in place.

How does it apply to you?

The onus is therefore on each relevant body to put into place realistic measures that would support any challenge that they had failed to prevent the facilitation of tax evasion. If it is not possible to prove that reasonable steps were taken, the penalties for the relevant body/organisation can include:

  • A criminal conviction
  • Unlimited financial penalties
  • Confiscation orders
  • Serious Crime Prevention Orders

The offence also brings considerable reputational damage.

The six guiding principles

The actions which would be considered ’realistic measures’ and ’reasonable steps’ are not defined in the legislation and are likely to be a subjective area. A business’ level of what might be termed evasion facilitation risk will depend on various factors, including its size and the particular activities it undertakes, and, although there are likely to be common approaches within particular industries or sectors, there cannot be a one-size-fits-all solution. HMRC’s guidance does, however, set out six guiding principles to assist in the formation of such measures. These do not represent a comprehensive list of all possible actions, but they do provide some indication of what could represent reasonable steps on any challenge.

We are likely to see this develop over the coming years, driven by HMRC challenges and case law.

The six guiding principles are as follows:

Risk Assessment

A risk assessment should drive responses to the legislation, and HMRC recommends an annual, documented risk assessment should be carried out. Any relevant body needs to determine whether associated persons have the motive, means and opportunities to criminally facilitate tax evasion. It is impossible to determine whether existing controls are sufficient, and develop a strategy to ensure compliance with the legislation going forward without first analysing where the risks lie. The nature and extent to which relevant bodies face exposure to the risk should be considered.

Proportionality of risk-based prevention procedures

The prevention procedures to be implemented should be proportionate to the tax evasion facilitation risks faced. Excessively burdensome procedures are not required, but formal policies must be adopted and practical steps must be taken to apply these policies, eg HMRC recognises that the risk of this offence being committed by charities is low, but they are still caught by the legislation and are required to ensure policies are in place.

Top level commitment

The guidance requires senior management to be involved in the development of preventive measures, including effective communication from the top and endorsement position across the organisation. A senior management approved culture should be adopted whereby actions that facilitate tax evasion are deemed unacceptable.

Due diligence

The guidance requires satisfactory due diligence to be undertaken based on the level of risk of an offence being committed. Due diligence procedures undertaken should be documented to support decisions made and actions taken.

Communication

A relevant body must ensure its policies are clearly articulated. This may mean specific tax evasion training for associated persons in order to effectively communicate the skills required to identify illegal acts and the procedures to be followed if this occurs.

Monitoring and review

The risks faced evolve over time. For this reason, any prevention procedures must be monitored and reviewed in order to make changes and improvements.

Recommended first steps

This legislation is new and it is every organisation’s responsibility to ensure they take time to review, document and adapt their business processes to minimise the risk of committing the corporate offence. For some businesses – particularly those already subject to the Money Laundering Regulations – this may mean refining current processes to ensure that they meet these requirements. For many businesses, however, this will be the first time that they have had to consider this type of risk assessment and assurance process.

HMRC’s guiding principles give some basis for what they consider to be reasonable steps but this is, as yet, untested. They have, however, indicated that, at the very least, a business risk assessment should be undertaken and documented by every organisation on the introduction of the legislation, and this should be reviewed (and additionally documented) at least annually thereafter.

HMRC’s approach

The legislation is part of HMRC’s increased focus on combating tax evasion and, to coincide with the introduction of the legislation, it has provided contact details and guidance on how relevant bodies can self-report on committing the offence in return for reduced penalties. Advice is highly recommended before any report is made on this basis. HMRC has also made its fraud hotline provide the platform for suspected offences to be reported by other parties.

How can Saffery Champness help?

With a risk assessment a recommended minimum first step, we can work with you to review the processes currently in place, highlight risk areas and assist you with the documentation and communication of these procedures to relevant employees.

We can also help apply adaptations to processes. We already have experience of working with legal advisers to include clauses in specific contractual relationships with regard to this legislation.

In summary

What you need to know:

  • From 30 September, a company or partnership could commit a criminal offence if they have not taken reasonable steps to prevent an employee or associated person from facilitating the evasion of tax.
  • As a first step, all organisations should document a risk assessment of their exposure in this area.

For more information regarding any of the issues raised here, please speak to your usual Saffery Champness partner.

DOWNLOAD PDF

Loading