To prevent the criminal facilitation of tax evasion, two new corporate criminal offences were introduced on 30 September this year (following Royal Assent of the Criminal Finances Act on 27 April 2017). Corporates and partnerships that fail to meet their responsibilities face potential prosecution and unlimited fines.
The two offences are in relation to UK tax evasion and foreign tax evasion. The foreign tax offence is slightly narrower in scope, but the principles of the offence are consistent with the UK offence, with additional detail to govern differences in overseas tax regimes, location where the offence is carried out and other factors.
Has the definition of tax evasion been changed?
The rules do not change what constitutes evasion – they simply extend the scope of who can be prosecuted should tax evasion take place or be attempted.
It was always an offence for an individual to knowingly facilitate tax evasion, but there was no extension to prosecute the organisation within which the employee or associate was operating, unless it could be proved that the directors or members were aware of what the employee or associate was doing. This is no longer the case. This new legislation places an onus on key management to put appropriate and proportionate procedures in place to deter employees and associates from facilitating tax evasion.
If tax evasion has been attempted, and HMRC feels it has been facilitated, the business employing or associated with the facilitator can be prosecuted alongside the perpetrator and facilitator. The business may avoid prosecution if it can demonstrate it had put in place all reasonable prevention procedures, proportionate to the risk as perceived by management.
Risk and recommendation
HMRC’s guidance document (available here) provides a number of examples. The key issue in these examples is whether appropriate risk assessments were carried out by key management to identify risk areas, and if so, whether key management responded appropriately and proportionately to key risk areas. If so, the guidance document suggests that this could be a complete defence for the corporate or partnership against the offence. That would still apply even if, in certain circumstances, the risk review showed that no further controls were deemed appropriate or proportionate to the risk.
The procedures recommended in the document include:
- Committing to clear policies and communicating them from the top down
- Providing training courses
- Reviewing contracts for terms that could unwittingly reward the wrong behaviour
- Committing to whistleblowing processes vs profit
- Disciplinary procedures for breach of policies
- Ongoing monitoring and review of adequacy of policies
Six guiding principles
HMRC has provided six principles that are particularly helpful.
- Risk assessment. The relevant body should assess the nature and extent of its exposure to the risk of those who act in the name of the business (e.g. employee, undisclosed agents, consultants) to criminally facilitate tax evasion. This assessment underpins the organisation’s entire approach.
- Proportionality. Any procedural response needs to be reasonable in relation to the perceived risk. This could even result in no procedures being considered necessary, if the perceived risk is extremely low, and the costs of implementing any controls are disproportionate or prohibitive. Taking an ‘active’ decision rather than a passive approach is what matters, and the reasoning should be well documented.
- Top level commitment. The top level management of an organisation should be committed to preventing persons associated with it from engaging in the criminal facilitation of tax evasion. They should foster an internal culture where actions intended to facilitate tax evasion are never acceptable.
- Due diligence. An organisation should apply due diligence procedures, taking an appropriate and risk based approach, in respect of anyone who represents or performs services on behalf of the organisation. This should mitigate identified risks.
- Communication (including training). The organisation should ensure that its prevention policies and procedures are communicated, embedded and understood throughout the organisation, through internal and external communication. This should be proportionate to the risk as assessed by the organisation.
- Monitoring and review. The organisation should monitor and review its prevention procedures and make improvements where necessary.
As a matter of priority, you should be considering the implications of this new legal requirement on your business, as well as your response to it. Should you need a higher level review, or assistance in formulating your response to these changes, please get in touch with your usual BKL contact or use our enquiry form.