HMRC is clamping down on corporate tax evasion, adding extra resources to its Fraud Investigations team to tackle the new ‘Corporate Criminal Offence’ (CCO) of failing to prevent the facilitation of tax evasion. HMRC’s investigation pipeline covers businesses across all sectors and sizes. Organisations should take note and review their risk infrastructure urgently.
Previously, prosecutors needed to show that senior members of an organisation were involved with or aware of illegal activity. This was often difficult to prove: larger organisations often had decentralised decision- making that made it difficult to identify ultimate responsibility. Today, prosecutors just need to show that the organisation did not have reasonable procedures in place to prevent facilitation of tax evasion. These rules have been in force since the Criminal Finances Act came into force in 2017, meaning that organisations who have not already taken action may be at risk of criminal prosecution.
In September 2017, in an effort to tackle tax evasion the UK Government introduced the CCO through the Criminal Finances Act 2017. This offence holds organisations that fail to prevent the facilitation of tax evasion criminally liable and subject to unlimited fines. As with any criminal conviction, this offence also carries with it potential issues on the ability to trade (particularly for regulated entities or those who work on public sector contracts) and reputational damage. Directors may also face potential disqualification.
The scope of the legislation is broad, applying to UK tax evasion regardless of where the organisation is based or where the offence takes place. The rules also apply to overseas tax evasion where there is dual criminality and where the organisation has a UK nexus i.e. is a UK tax resident, has a UK permanent establishment or has associated persons located in the UK when the offence occurs.
Background and rationale
For this reason, legislation was introduced with the aim of targeting organisations who fail to prevent facilitation of tax evasion, prosecuting organisations where ‘associated persons’ knowingly aided, abetted, counselled or procured tax evasion, or where the organisation had not implemented reasonable procedures.
Penalties are severe and HMRC is taking investigation seriously. Since the introduction of the Criminal Finances Act 2017, we have seen:
- HMRC allocating an additional 500 roles within their Fraud Investigation Service.
- HMRC case managers being trained to discuss CCO with large businesses.
- HMRC opening investigations in 27 large UK businesses and 200 mid-sized businesses in relation to tax evasion across a variety of sectors.
- While HMRC will investigate cases of facilitation of UK tax evasion, the Serious Fraud Office will investigate cases of facilitation of foreign non-UK taxes.
The offence can only be committed by a corporate body, including companies and partnerships, rather than an individual.
There are three stages of the offence:
- Stage 1 – criminal tax evasion by a tax payer (individual or corporate)
- Stage 2 – deliberate and dishonest facilitation of the tax evasion at stage 1 by an ‘associated person’ of the corporate body
- Stage 3 – corporate body fails to prevent the criminal facilitation
‘Associated person’ includes any person, individual or corporate, who provides services for or on behalf of the corporate body. Most commonly this refers to employees, contractors, sub-contractors, consultants, agents and suppliers but is drawn widely.
The only defence against a prosecution is that the organisation had ‘reasonable procedures’ in place to prevent tax evasion. The definition of ‘reasonable procedures’ is likely to evolve over time. It will depend on the risks faced by the organisation as well as the sector and country of operation.
Businesses in the financial services or property and construction sectors are likely to be higher risk, as are any cash-based businesses.
HMRC recommends that procedures implemented by organisations are created on six guiding principles:
- Risk assessment –identification and documentation of risks related to an organisation’s associated persons; the risk assessment will form the basis for determining whether procedures are ‘reasonable’.
- Proportionate policies and procedures –implementation and documentation of procedures tailored to mitigate the risks; in practice, organisations will often be able to build upon existing procedures which may be in place for other financial crime or commercial risk management.
- Top level commitment –demonstration of senior management’s commitment to a zero tolerance approach in respect of the facilitation of tax evasion
- Due diligence – demonstration that the procedures work in practice
- Communication – appropriate communication and training on the risks and the organisation’s CCO policies and procedures
- Monitoring and review – ongoing review of risks and procedures as the business activities and external environment changes over time, including self-reporting of breaches
Ultimately, CCO brings about potential criminal liability to corporates (including partnerships) who fail to prevent their associated persons from facilitating tax evasion. Those in senior positions within relevant organisations will need to act immediately if they have not already. It is important to ensure that appropriate risk assessments have been documented and any additional procedures have been implemented to ensure that procedures are considered ‘reasonable’.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.