On 30 September 2017, two new offences were introduced into criminal law by virtue of the Criminal Finances Act 2017 (“CFA 2017”). The new offences 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.
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?
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.
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.
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.
Using the guidance, 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?
Whether you have met the threshold to rely on the defence that, "reasonable preventative procedures", were either put in place or unnecessary, in the circumstances, is ultimately an issue which would be assessed on a case by case basis.
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"The Government recognises that any regime that is risk-based and proportionate cannot also be a zero failure regime. If a relevant body can demonstrate that it has put in place a system of reasonable procedures that identifies and mitigates its tax evasion facilitation risks, then prosecution is unlikely as it will be able to raise a defence."