Corporate tax evasion - make sure you’re prepared

The Criminal Finances Act 2017 came into force on 30 September 2017. Part of the Act means that companies and partnerships can be criminally liable where they fail to prevent those who act for, or on behalf of, the business from criminally facilitating tax evasion. There is however a potential defence against this offence by the business putting into place a system of reasonable prevention measures. The punishment for the offence includes unlimited financial penalties. The Act doesn’t change what tax fraud is, just who may be liable.

Contents:

An overview
So what is the offence?
Is there any defence against such a charge?
What offences are caught?
Sanctions under the Act
So what does this really mean for my business?
What procedures does my business need to implement?
Six guiding principles
Suggested reasonable prevention procedures for lower risk SMEs
So where does this leave us?
Risk assessment checklist
 

An overview

There are three stages that apply to both the domestic and foreign tax evasion facilitation offences. There are additional requirements for the foreign offence but we only cover the UK tax evasion offence here.

• Stage one: the criminal evasion of tax (including NIC) by a taxpayer (either an individual or a legal entity) under existing law.
• Stage two: the criminal facilitation of the tax evasion by an ‘associated person’ of the ‘relevant body’ who is acting in that capacity.
• Stage three: the ‘relevant body’ failed to prevent its representative from committing the criminal facilitation act.

Stage one and two do not create any new offences. These are already criminal offences. Only a ‘relevant body’ can commit the new stage three offence, so it applies to incorporated bodies (typically companies) and partnerships, not individuals. The new offence is a strict liability offence which means that if stages one and two are committed, the relevant body will have committed the new offence (subject to claiming a defence).

So what is the offence?

The offence created by the new rules is the failure to prevent facilitation of UK tax evasion offences.

A relevant body (B) is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B.

Meaning of relevant body

A ‘relevant body’ is subject to the new rules and this means a body corporate (including a LLP) or partnership (wherever incorporated or formed).

A partnership means per the Partnership Act 1890, a limited partnership registered under the Limited Partnerships Act 1907 or a firm or entity of a similar character formed under the law of a foreign country.

And who acts in the capacity of an associated person?

A person (P) acts in the capacity of a person associated with a relevant body if P is:

• an employee of a relevant body who is acting in the capacity of an employee;
• an agent of a relevant body who is acting in the capacity of an agent (i.e. has authority to act for someone else); or
• any other person who performs services for or on behalf of a relevant body who is acting in the capacity of a person performing such services (e.g. a subcontractor).

Is there any defence against such a charge?

It is a defence for a relevant body to prove that, when the UK tax evasion facilitation offence was committed, it had such prevention procedures in place 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.

‘Prevention procedures’ means procedures designed to prevent persons acting in the capacity of a person associated with a relevant body from committing UK tax evasion facilitation offences.

What offences are caught?

‘UK tax evasion offence’ means an offence of cheating the public revenue or an offence under the law of any part of the UK consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

A ‘UK tax evasion facilitation offence’ means an offence under UK law consisting of:

• being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person;
• aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or
• being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

Sanctions under the Act

A relevant body guilty of an offence under these rules is liable to a financial penalty, possibly unlimited.

So what does this really mean for my business?

What the law takes a long time to say is that there is a penalty for a company or partnership which fails to prevent facilitation of UK tax evasion offences by employees, agents or persons acting on the business’s behalf.

 

To quote HMRC: ‘The legislation aims to tackle crimes committed by those who act for or on behalf of a relevant body. The legislation does not hold relevant bodies to account for the crimes of their customers, nor does it require them to prevent their customers from committing tax evasion. Nor is the legislation designed to capture the misuse of legitimate products and services that are provided to customers in good faith, where the individual advisor and relevant body did not know that its products were intended to be used for tax evasion purposes.’

What procedures does my business need to implement?

Part of the new rules requires The Chancellor of the Exchequer to 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.

This has now been published by HMRC at https://goo.gl/iiHspg

This guidance explains the policy behind the new offences and is designed to help relevant bodies understand the types of processes and procedures that they can put in place to prevent associated persons from criminally facilitating tax evasion.

One thing that is important to understand from the guidance is that it is intended to be illustrative and cannot cover every form of risk that a relevant body may face. HMRC state:

‘The guidance is not prescriptive or a one-size-fits-all document. It is not a checklist of things that all relevant bodies must do to reduce their risk of liability under the corporate criminal offences, and should not be used as such. The guidance should be considered and applied in a risk-based and proportionate way. This includes taking into account the size, nature and complexity of a relevant body when deciding whether a certain example of good or poor practice is appropriate to its business. The guidance therefore needs to be used to inform the creation of bespoke prevention procedures designed to address a relevant body’s particular circumstances and the risks arising from them. Nor is this guidance intended to provide a safe-harbour: compliance with the guidance will not render a relevant body immune from prosecution.’

Six guiding principles

As can be seen, it is therefore important to follow the spirit of the law and apply the guidance properly. The guidance is designed to be of general application and is formulated around the following guiding principles:

• Risk assessment
• Proportionality of risk-based prevention procedures
• Top level commitment
• Due diligence
• Communication (including training)
• Monitoring and review

HMRC make an interesting point that: ‘The prevention procedures that are considered reasonable will change as time passes. What is reasonable on the day that the new offences come into force will not be the same as what is reasonable when the offence has been in effect for a number of years. The Government accepts that some procedures (such as training programmes and new IT systems) will take time to roll out, especially for large multi-national organisations. HMRC will therefore take into consideration the prevention procedures that were in place and planned at the time that the facilitation of tax evasion was committed. At the same time the Government expects there to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force. In addition, HMRC expects reasonable procedures to be kept under regular review and to evolve as a relevant body discovers more about the risks that it faces and lessons are learnt.’

Doing nothing is clearly not an option.

Suggested reasonable prevention procedures for lower risk SMEs

The new rules apply to any relevant body but a multi-national business will obviously have a different risk profile to a smaller business. Helpfully, HMRC’s guidance offers the following help to SMEs:

 

‘An SME should first undertake a risk assessment of the products and services it offers, 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. Consider some of the hallmarks of fraud or fraud ‘red flags’ when undertaking the risk assessment, for example:   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? Then consider tailoring existing processes and procedures accordingly to prevent and detect potential tax evasion facilitation – this could include: Having a commitment to preventing the involvement of those acting on the relevant body’s behalf in the criminal facilitation of tax evasion, which might be demonstrated by issuing a prominent message from the board of directors (or the leadership team) against all forms of tax evasion Having terms in contracts (with employees and contractors) requiring them not to engage in facilitating tax evasion and to report and concerns immediately Providing regular training for staff on preventing the facilitation of tax evasion, which may form part of wider financial crime detection and prevention training. Having clear reporting procedures for whistle-blowing of suspected facilitation of tax evasion offences Ensure their pay and bonus policy/structure encourages reporting and discourages pursuing profit to the point of condoning tax evasion Having regular reviews of the effectiveness of prevention procedures and refining them where necessary Monitoring and enforcing compliance with prevention procedures An overview of its strategy and timeframe to implement its preventative policies.’

 

So where does this leave us?

The rules are already operational, so whilst business owners needn’t be having too many sleepless nights, policies and procedures need to be established sooner rather than later. The guidance gives some helpful pointers towards what is required, so there is no excuse for not grabbing the bull by the horns and getting the systems in place.

 

Risk assessment checklist

1. Review the current activities of your business 

While it is not possible to provide an exhaustive list of all risk factors, we have summarised some of the key factors for small and medium-sized businesses to consider below. Add to this list as applicable for your firm.

• Is this a small, medium or large-sized business?
• Is it part of a group? Does it have complex operations?
• Does the business operate outside of the UK?
• Does the business make use of subcontractors or agents?
• Is the business involved in any joint ventures?
• Is the business about to enter into a new business relationship?
• Is the country in which the business operates high risk by perceived high levels of secrecy or use as a tax shelter?
• Is the business involved in a trade sector where there is a higher risk of facilitating tax evasion than others, such as financial services, tax advisory and legal sectors?
• Do the types of transaction which the business is involved in give rise to higher risks, for example, complex tax planning structures involving high levels of secrecy, overly complex supply chains, or transactions involving politically exposed persons?

HMRC guidance ‘The relevant body assesses the nature and extent of its exposure to the risk of those who act in the capacity of a person associated with it criminally facilitating tax evasion offences. The risk assessment is documented and kept under review.’

 

2. Proportionality of risk-based prevention procedures

 

When considering the proportionality of reasonable prevention procedures, sit in the place of your employees, subcontractors, etc. and consider:

 

• Do any associated persons have the opportunity to facilitate client tax evasion?
• Is their work subject to monitoring or scrutiny, for example a second pair of eyes?
• How likely is detection of any facilitation?

• Does the reward and recognition system and business culture incentivise or dissuade potential criminal facilitation of tax evasion, or whistle-blowing when tax evasion is uncovered?
• What are the consequences of wrong-doing?

• What means of criminally facilitating tax fraud do your associated persons have?
• Are there particular products, services or systems that could be open to abuse and used to criminally facilitate tax evasion?
• Do those in high risk roles receive regular fraud training and how vigorously is compliance with training evaluated or monitored?

Clearly, the exact prevention procedures will differ for each organisation but they are likely to include common elements:

• Has the business got a clearly articulated risk assessment on which the procedures are based?

• Is there a top level commitment to preventing the involvement of those acting on the business’s behalf in the criminal facilitation of tax evasion?
• Is an overview of the strategy and timescale to implement prevention policies in place?
• Are there checks in place to monitor and enforce compliance with those new procedures?
• Is there a process in place for reviewing procedures for effectiveness?
• Is there a clear process for reporting wrongdoing?

There is an important reference in the guidance to changing the contractual terms and conditions of persons associated with the relevant body to reflect the new rules and procedures. Has this been done in relation to employees, subcontractors, agents, etc.?

HMRC guidance ‘The new offences do not require relevant bodies to undertake excessively burdensome procedures in order to eradicate all risk, but they do demand more than mere lip-service to preventing the criminal facilitation of tax evasion.’

 

3. Begin to plan for any necessary updates to your staff handbooks, for example, your human resources manual

Consider how you can demonstrate to all staff and the key people who do business with you that you do not tolerate the facilitation of tax evasion within your business. You may wish to consider including/updating the following:

• A clear global policy that indicates that the facilitation of tax evasion will not be tolerated in your business;
• Your disciplinary and grievance policies to reflect the action that will be taken should the facilitation of tax evasion occur, for example, to refer to the facilitation of tax evasion as an example of gross misconduct;
• Your whistleblowing policy and procedure, so those who come across the facilitation of tax evasion in the business know what to do and how to raise their concerns in a safe and confidential manner;
• Revisions to contracts of employment to explain your anti-facilitation of tax evasion policy and associated procedures, for example, to make reference to gross misconduct;
• Revisions to associated third party contracts, for example, agency and supplier contracts;
• Covering this subject in your induction procedures;
• Other:

4. Top level commitment

HMRC want to see the business and its senior management making a zero-tolerance state with regard to tax evasion:

• Communication and endorsement of the business’s stance on preventing the criminal facilitation of tax evasion; and
• Involvement in the development and review of preventative procedures.

Has a formal statement by senior managers been made by the business to:

• Commit to zero tolerance towards the criminal facilitation of tax evasion?
• Lay out the consequences for persons associated with the relevant body for breaching the relevant body’s policy on the facilitation of tax evasion?
• Commit not to recommend the services of others who do not have reasonable prevention procedures in place?
• Lay out of the benefits of rejecting the provision of services to enable tax evasion (reputational, customer and business partner confidence)?
• Articulate the relevant body’s main preventative procedures?

HMRC guidance ‘The top-level management of a relevant body should be committed to preventing persons acting in the capacity of a person associated with it from engaging in criminal facilitation of tax evasion. They should foster a culture within the relevant body in which activity intended to facilitate tax evasion is never acceptable.’

 

5. Begin to plan if you consider that specific staff training will be required

Consider:

• Is this necessary in so far as it is a proportionate response to the size and type of your business and the results of your risk assessment?
• Which level(s) of employee will this be needed for? Will it also be needed for associated third parties?
• What format should the training material take? Can you provide this or should you consider an external training product?
• How often will the training need to be repeated or updates sent out and how will you monitor its success?
• Other:

6. Due diligence

HMRC do not offer much specific guidance on this point although a clear process of identification of risk and implementation of prevention policies is indicated.

Consider:

• Do you know enough about the people who represent you in business? Might you need to find out further information about them or undertake any checks on them? Do recruitment policies need to be adapted?
• Should you require annual certifications regarding compliance with your anti-facilitation of tax evasion policies from associated third parties? Might it be necessary to audit their practices to ensure compliance with your policies and procedures?
• If you go to do business in a new country, will you need to undertake due diligence in order to identify risks specific to that country?
• If you plan to merge with, or acquire, another business have you considered the implications of the Criminal Finances Act?

HMRC guidance ‘The organisation applies due diligence procedures, taking an appropriate and risk based approach, in respect of persons who perform or will perform services on behalf of the organisation, in order to mitigate identified risks.’

7. Communication (including training)

HMRC accept that many people involved in relevant bodies will not require a detailed understanding of the new rules. However, they will require an overview of the issues, procedures and policies of the business. Suggested content for tax evasion and general fraud training could include:

• the business’s policies and procedures, which include provisions of the Act and any other sector regulatory rules and principles;
• explanation of when and how to seek advice and report any concerns or suspicions of tax evasion or wider financial crime;
• an explanation of the term ‘tax evasion’ and associated fraud; and
• an explanation of an employee’s duty under the law.

 

HMRC guidance ‘The organisation seeks to ensure that its prevention policies and procedures are communicated, embedded and understood throughout the organisation, through internal and external communication, including training.’

8. Monitoring and review

It is not enough just to implement new procedures, they must be monitored and maintained. Businesses can review their procedures in a number of ways:

• by seeking internal feedback from staff and looking to other financial crime prevention procedures;
• through formalised periodic review with documented findings; and
• through working with other organisations, such as representative bodies or other organisations facing similar risks.

Are there processes in place to monitor compliance with the above?

 

HMRC guidance ‘The organisation monitors and reviews its preventative procedures and makes improvements where necessary.’

9. Keep your policies and procedures up to date and monitor compliance

A low risk assessment for your business today may change in the future as your business changes. Bear in mind the requirements of the Criminal Finances Act as your business grows and if you enter new markets and business relationships, especially if outside of the UK. You may need to adapt your procedures in the future.

• Keep risk under review and repeat the above actions as necessary.
• Review actual compliance with your anti-facilitation of tax evasion policies and procedures. If considered appropriate to your business, appoint a formal compliance manager.
• Other: