New corporate criminal offence: what will an investigation look like?

HMRC has recently publicised a series of its high profile criminal investigations into high profile companies. This represents a huge change in strategy from the one which has been in play for the last 10 years. Those groups familiar with the new corporate criminal offence in Part 3 of the Criminal Finances Act (CFA) 2017 will be busy considering or carrying out a risk assessment and thinking about ‘reasonable prevention procedures’. But are they thinking about how they would respond if HMRC were to swoop in and investigate? And how soon after the law goes live, probably in September, will those investigations begin?

Change in strategy

HMRC is very interested in how large companies, or more precisely, their employees and other representatives, might be assisting or encouraging non-compliance by the company's business partners, customers, contractors and suppliers.

The Criminal Finances Act creates a criminal regime for companies and partnerships which fail to prevent staff, agents and certain service providers from deliberately assisting or encouraging tax evasion during the course of the performance of their duties. It will be a defence for the company to show it had reasonable procedures in place which tried to prevent the criminal conduct from taking place, or that it was not reasonable to have a procedure at all.

All sectors?

It is easy to think that this offence is only directed at banks and professional services, given the high risks of facilitation which exist in those sectors. However, it applies to all sectors.

When will investigations begin?

What the recent, publicised criminal investigations have shown is that HMRC is not afraid to go after large companies, even before the new law becomes operational.

The new offence will only apply to conduct which takes places after the law becomes operational. However, tax evasion is rarely a one-off event. A device for carrying out fraudulent tax evasion may have been set up before CFA 2017 becomes operational but, if it is subsequently maintained, the fraud will carry into the new period.

HMRC only needs to hold a suspicion in order to commence an investigation. HMRC is now in receipt of vast quantities of new information under information exchange programmes about financial and other assets that are held cross-border. September is the expected start date for the new offence because this is when HMRC will receive data from the 51 'early adopters' of the common reporting standard, which will dramatically increase the amount of data available. Much of this data will relate to periods that pre-date the effective date of CFA 2017, but if the data looks as if it reveals evidence of suspected fraudulent activity that commenced before September, it may be reasonable for HMRC to assume that the fraud is ongoing.

If a person engages in criminal facilitation whilst performing services for a company, the company also commits a crime. So if HMRC suspects that a person working for a company has engaged in facilitation, the company is also automatically under suspicion. Indeed, it is possible that HMRC may not know the precise identity of the facilitator, yet still have grounds to commence an investigation into the company.

HMRC powers

When HMRC suspects a crime has been committed, it has an array of powers and options at its disposal to try to build the case for prosecution.

The primary power is that of 'search and seizure', also known as 'dawn raids'. If HMRC suspects fraud, it can apply to the court for a warrant to use force, if necessary, to enter and search premises. Whilst on the premises, it can seize material, subject to certain safeguards.

HMRC can also apply to a circuit judge for a Police and Criminal Evidence Act (PACE) 1984 Sch 1 production order or a TMA 1970 s 20BA order. These orders require the production of the material specified in the order.

HMRC officers also have the power of arrest. Once arrested, a person can be taken into custody for a 'cautioned interview'. The caution involves reading the suspect their rights and the interview is recorded.

SOCPA notices

However, the most striking power at HMRC's disposal is also the one which it least frequently uses: notices given under the Serious Organised Crime and Police Act (SOCPA) 2005 s 62. These notices require the recipient to give information and answer questions, in such manner and at such time as HMRC shall specify, including 'at once'. Failure to answer without a reasonable excuse is a criminal offence, as is knowingly or recklessly giving false information. In effect, it is a compulsory interview power.

HMRC cannot use the answers given in such a compulsory interview in any criminal proceedings against the person interviewed, except to show inconsistency or to prosecute a false statement. In practice, HMRC will therefore use the powers against non-suspects. However, if something is said during a SOCPA interview which causes HMRC to suspect that the interviewee has committed a crime, the interview must be stopped. Any further questioning can only be carried out under cautioned interview procedures, where a person has a right to remain silent.

If an employee is suspected of facilitation, so is the employer. Increasingly, HMRC's practice will be to issue SOCPA notices against senior people in the business. Such people will not be under suspicion of having directly participated, but are third parties to the company who will have access to information HMRC needs to investigate the case. Using SOCPA means HMRC does not need to take any chances that their questions will meet with a lack of cooperation or the exercise (by the company) of the right to silence.

More fundamentally, HMRC can issue SOCPA notices without recourse to the courts. Internal approval is all that is needed. We therefore expect SOCPA notices to become the weapon of choice.

Are you ready?

Unlike other investigating bodies, such as the Serious Fraud Office, HMRC also has an array of civil powers at its disposal, including a right to visit commercial premises, again unannounced. This can make it difficult to establish, in the heat of the moment, what exactly HMRC has turned up to do. However, it is only where HMRC has a warrant that it will be able to force entry.

Large companies should therefore refresh their raids and critical incident procedures, in particular to make sure the right escalation procedures are in place if HMRC officers appear at reception without warning. If the officers are there with a warrant, they won't always wait whilst the reception staff scrabble around to try to find their 'handy' guide, last seen two years ago, on what to do in the event of a raid.

Jason Collins is a tax disputes expert at Pinsent Masons, the law firm behind Out-Law.com. This is an abbreviated version of an article which was published in Tax Journal on 26 May 2017.