The fear factor – business tax evasion under the Criminal Finances Act 2017

From 30 September 2017 it is a criminal offence in the UK if a business fails to prevent its employees or any person associated with it from facilitating tax evasion under the Criminal Finances Act 2017. The new offence will be committed where a relevant body fails to prevent an associated person criminally facilitating the evasion of a tax, and this will be the case whether the tax evaded is owed in the UK or in a foreign country.

 

HMRC’s motives

The legislation is part of HMRC’s ongoing campaign to ‘modify taxpayer behaviour’ and its underlying purpose is to introduce the fear factor at the most senior levels of the company.

Here is HMRC’s description of the purpose of the new legislation:

‘Previously, attributing criminal liability to a relevant body required prosecutors to show that the senior members of the relevant body were involved in and aware of the illegal activity, typically those at the Board of Directors level. This had a number of consequences:

  • It can be more difficult to hold a large multinational organisation to account. In large multinational organisations decision making is often decentralised and decisions are often taken at a level lower than that of the Board of Directors, with the effect that the relevant body can be shielded from criminal liability. This also created an un-level playing field in comparison to smaller businesses where the Board of Directors will be more actively involved in the day-to-day activities of a business
  • The common law method of criminal attribution may have acted as an incentive for the most senior members of an organisation to turn a blind eye to the criminal acts of its representatives in order to shield the relevant body from criminal liability
  • The common law may also have acted as a disincentive to internal reporting of suspected illegal tax activity to the most senior members, who would be required to act upon such reporting since otherwise the corporate entity might be criminally liable. 

The cumulative effect was an environment that could do more to foster corporate monitoring and self-reporting of criminal activity related to facilitating tax evasion. The new corporate offence therefore aims to overcome the difficulties in attributing criminal liability to relevant bodies for the criminal acts of employees, agents or those that provide services for or on their behalf.  The new offence, however, does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law. It does this by focussing on the failure to prevent the crimes of those who act for or on behalf of a corporation, rather than trying to attribute criminal acts to that corporation. 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.’

 

The offences

There are two new offences. The first offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second offence applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion.

The offences apply to both companies and partnerships. They effectively make a business vicariously liable for the criminal acts of its employees and other persons ‘associated’ with it, even if the senior management of the business was not involved or aware of what was going on.

There are two stages for the new corporate offences to apply:

  • criminal tax evasion (and not tax avoidance) must have taken place; and
  • a person/entity who is associated with the business must have criminally facilitated the tax evasion whilst performing services for that business.
  • ‘Associated persons’ are employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries.

In relation to UK tax, the offence will apply to any company or partnership, wherever it is formed or operates.  Where non-UK tax is evaded a business will commit an offence if the facilitation involves a UK company or partnership, any company or partnership with a place of business in the UK, including a branch, or if any part of the facilitation takes place in the UK. In addition, the foreign tax evasion and facilitation must amount to an offence in the local jurisdiction and involve conduct which a UK court would consider to be dishonest.

A business will have a defence if it can prove that it had put in place reasonable prevention procedures to prevent the facilitation of tax evasion taking place, or that it was not reasonable in the circumstances to expect there to be procedures in place see – HMRC have set out some guidelines here see – https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/672231/Tackling-tax-evasion-corporate-offences.pdf

In their guidelines HMRC stress:

  • risk assessment;
  • proportionality of risk-based prevention procedures;
  • top level commitment;
  • due diligence;
  • communication, including training; and
  • monitoring and review.

 

Levy and Levy comment

The new offences will mean significant compliance costs, because businesses will be obliged to undertake detailed risk assessments in order to protect senior members from the risk of a criminal investigation and possible prosecution.  Psychologically, it will keep tax very much ‘top of the Board’s agenda’ and this is exactly HMRC’s aim.  Whether the new offences will actually reduce tax crime is, however, another matter.

 

Levy and Levy – the tax resolution specialists