Corporate criminal offences of failure to prevent the facilitation of tax evasion

Two corporate criminal offences (CCOs) were introduced on 30 September 2017 under the Criminal Finances Act 2017.

All businesses should have introduced measures to ensure that they are aware of and have control over how their employees, agents and service providers are operating to reduce their risk of exposure to the CCOs.

The CCOs have serious implications for all businesses and have increased compliance requirements across all business sectors. Businesses should conduct due diligence in relation to their suppliers, contractors and employees and should be looking closely at where and the manner in which payments are made for goods and services, especially if offshore accounts are involved or payments are made in cash.

The offences

There are two 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 CCOs 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 CCOs 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.

For either of the CCOs 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 to the business. A business cannot be criminally liable for failing to prevent the facilitation of tax evasion if the facilitator was acting in a personal capacity.

A defence of reasonable prevention procedures

A business will have a defence if it can prove that it had put in place reasonable procedures to prevent the facilitation of tax evasion taking place, or that it was not reasonable in all of the circumstances to expect there to be procedures in place. HM Revenue & Customs (HMRC) has published detailed guidance on the CCOs, in which it explains that there are six guiding principles that underpin the defence of having reasonable prevention procedures: 

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

A business should 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 procedures to reduce the risk of exposure to the CCOs.

It is expected that following a risk assessment most businesses will have to introduce changes to ensure that they have robust procedures in place to prevent their employees, service providers, agents, suppliers and customers from engaging in or facilitating tax evasion.

It is important to secure top level commitment from a company’s board and/or senior executives about the risks of exposure to the CCOs and the need for the business to respond to the offences. Businesses will also need to ensure that sufficient training on tax evasion and the CCOs is provided to all staff.

Territoriality

In relation to the UK tax offence, the offence applies to any company or partnership, wherever it is formed or operates.

Where non-UK tax is evaded a business commits an offence if there is a "connection" to the UK. Broadly, there will be a UK connection 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.

Distinguishing tax avoidance and evasion

The CCOs only apply when there has been fraudulent tax evasion. Fraudulent tax evasion is a crime and involves dishonest behaviour. A person behaves dishonestly if they know, or turn a 'blind eye' to whether, they have a liability to pay tax but decide not to pay or declare it. Dishonest behaviour may involve a person simply deciding not to declare money they make. It may involve someone deliberately trying to hide the source of money, or even intentionally misrepresenting where money came from. In most countries, such dishonest tax evasion will be considered illegal and therefore a crime.

Fraudulent tax evasion does not arise where a person makes a mistake or is careless. It also does not arise where a person actively seeks to avoid tax. A person's attempts to avoid tax may involve using complicated and artificial structures to exploit gaps in the rules of the tax system. Tax avoidance will usually involve arrangements to move assets from one place to another to secure a better tax treatment. Tax authorities may not agree that what has been done is legally effective and may challenge the taxpayer.

Even if the tax authority successfully challenges a tax avoidance arrangement and the taxpayer is required to pay additional tax, the taxpayer will not have acted dishonestly if they held a reasonable belief that the tax was not due when they entered into the arrangement, even though they may have acknowledged that they may be proved wrong. Tax avoidance would only become evasion if the taxpayer dishonestly withheld or misrepresented information to try to make the planning appear effective when it is not in fact effective.

For the CCOs to apply, there must be criminal facilitation of the tax evasion. Broadly, this means that the facilitator must also have a criminal intent and thus be an ‘accomplice’. At its simplest, this occurs where the facilitator knows that they are helping another person to carry out a fraud. Unwitting facilitation of tax evasion is not enough. Nor would knowing facilitation of tax avoidance be enough.

Consequences

The CCOs affect all companies across all sectors. By introducing the CCOs, HMRC wanted to make sure that businesses cannot simply ignore whether their customers and supply chains are tax compliant. Businesses which pay large sums to consultants; engage in cross-border business; engage casual or itinerant labour and contractors; or handle goods and services where organised fraud is a risk, are at higher risk of falling foul of the CCOs.

The CCOs do not only impact big businesses - smaller and medium sized businesses could also be at risk.

Aside from the possibility of incurring a heavy fine, a successful prosecution under either of the CCOs could give rise to serious reputational damage for an organisation. A criminal conviction could make it more difficult for a business to win government contracts in the UK or overseas, or restrict it from operating in regulated markets. The CCOs are not something that businesses can afford to overlook.