• New criminal offence intended to stop businesses ignoring activities of their staff and other representatives
• Businesses will be liable even if the senior management of the business was not involved in, or aware of, what was going on
• Businesses can have a defence if they put in place reasonable prevention procedures
• Businesses guilty of the offence face unlimited financial penalties, criminal record and exclusion from public sector contracts
Make sure it’s not you!
Recruiters, umbrella companies, accountants and others will be liable for the actions of their employees and other 'associated persons' who intentionally facilitate tax evasion. When legislation, set to be introduced on 30th September 2017, makes businesses liable for criminal acts committed by employees who encourage or assist tax evasion by other individuals, e.g. contractors, consultants or suppliers.
The Criminal Finances Act 2017 will make businesses liable for criminal acts committed by employees who encourage or assist tax evasion by other individuals, e.g. contractors, suppliers or customers.
Businesses will be liable even in cases where senior management were either uninvolved or unaware of the acts.
So think twice when you hear your staff may be receiving incentives (have they declared the tax?) or that your contractors are using dodgy loan scheme providers.
The offence is strict liability, subject to the defence of having in place reasonable prevention procedures.
Two New Offences
The legislation creates two new offences:
• The first will apply to all businesses, wherever located, in respect of the facilitation of UK tax evasion.
• The second will apply to businesses with a UK connection in respect of the facilitation of non-UK tax evasion
The offences 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.
The definition of associated person is extremely wide, and entities howsoever structured will be regarded as a single entity for the purposes of prosecuting the offence.
In relation to UK tax, the offence will apply to any company or partnership, wherever it is formed or operates.
Six Guiding Principles to an Effective Defence
In the event of a facilitation offence taking place, it is a defence for a business to show that either reasonable prevention procedures were in place to prevent the facilitation by the associated person or that it was reasonable not to establish additional procedures at the time the offence was committed.
A conviction could lead to an unlimited fine and orders for confiscation of assets.
Guidance is formulated around six guiding principles for the prevention procedures:
• Risk assessment: a business assesses the nature and extent of its exposure to the risk of those who act for or on its behalf.
• Proportionality: risk-based prevention procedures will depend on the levels of control and supervision that a business is able to exercise over a person acting on its behalf and the proximity of that person.
• Top level commitment: senior management should be committed to prevention and should foster a culture in facilitation of tax evasion is never acceptable.
• Due diligence: procedures should take an appropriate and risk-based approach.
• Communication (including training): prevention policies and procedures are communicated throughout the business.
• Monitoring and review: the business monitors and reviews prevention procedures and makes improvements where necessary.
The new rules are designed to prevent businesses ‘turning a blind eye’ to the activities of their staff and other representatives.
Recruiters will need to undertake a risk assessment, designing appropriate policies and procedures and implementing a communications programme and training, to minimise the risk of the offence being committed in the first place, and to maximise the chances of mounting a 'reasonable prevention procedures' defence successfully.
These steps will be significantly more complicated for firms which operate internationally, either as UK headquartered businesses or as UK 'permanent establishments' of non-UK headquartered businesses.
A non-UK parent carrying on business through a UK branch or permanent establishment would be in scope for both the corporate offence related to UK tax and for the foreign tax offence. This extremely broad jurisdictional scope means that any overseas-headquartered firm which carries on part of the business in the UK should consider putting in place procedures to prevent the facilitation of tax evasion across all its international business operations.
The offence has been included in the Criminal Finances Act, which received royal assent before parliament was dissolved for the general election. It will come into force in September 2017 to tie in with the first disclosures of information that HMRC is due to receive under the common reporting standard.
Businesses should not wait until 30th September to take action though, as they will not then have time to take the steps to prevent the business being exposed.
What is Criminal Tax Evasion?
Criminal tax evasion is conduct that constitutes the common law offence of cheating the public revenue or statutory offences of fraudulently evading taxes, such as income tax and VAT.
Criminal evasion occurs when a person knows they have a tax liability and forms a dishonest intention not to declare it. It does not arise when a person makes a mistake or is careless. At its simplest, the facilitator knows they are helping another person to carry out a fraud. The unwitting facilitation of tax evasion is not enough.
The offence applies if an associated person facilitates evasion. ‘Associated persons’ are employees, agents and other persons who perform services for or on behalf of the business and can include subsidiaries and joint ventures.
For either of the offences to apply, the employee or associated person must have criminally facilitated the tax evasion, in their capacity as an employee or associated person, providing services for and on behalf of the business rather than acting in a personal capacity.
All businesses will have to undertake a risk assessment to identify the risks of facilitation of tax evasion within the organisation and the potential gaps in the existing control environment.
The risk assessment should be documented so that it can provide an audit trail to support any policy decisions regarding the implementation of new regime.
It will be important to secure top level commitment from a company’s board and senior executives about the risks of exposure to the new offences and the need for the business to respond with new procedures.
Many businesses will need to ensure that training is provided to staff. Businesses will be expected to monitor and enforce compliance with the procedures. They will also be expected to review regularly the effectiveness of the procedures, and refine them when necessary. This will be particularly relevant as the business or its customers change over time.
A business that commits one of these offences could face an unlimited financial penalty, as well as ancillary orders such as confiscation orders or serious crime prevention orders. However, criminal conviction may have more wide-ranging implications because it may require disclosure to professional regulators and could prevent the business being awarded public contracts. It could also be a public relations disaster for the business.
Action to be taken
The new law could have serious implications for all entities and is expected to increase compliance requirements across all sectors.
All businesses should be taking action now to ensure that they are aware of and have control over how their employees, agents or service providers are operating to reduce the risk of exposure to the new offences