Evading the evaders

    The Criminal Finances Act 2017 received Royal Assent in April and contains new corporate offences relating to the failure to prevent tax evasion by an associated person. Unlimited fines await a conviction. However, if reasonable prevention procedures are put in place, a prosecution is unlikely.

    Accountants, lawyers and other businesses providing financial services, such as banks and brokers, are likely to be impacted the most by these new measures, as the Government and HMRC take further steps to clamp down on tax evasion. 

    The Government believes that relevant bodies – described in the legislation as ‘a body corporate or partnership (wherever incorporated or formed)’ – should be criminally liable where they fail to prevent those who act for, or on their behalf, from facilitating tax evasion.


    Background

    The Criminal Finances Act creates two separate but related offences:
     
    1. Failure to prevent facilitation of UK tax evasion offences.
    2. Failure to prevent facilitation of foreign tax evasion offences.

    Only a ‘relevant body’ can commit the new offence which, in essence, means companies and partnerships.

    A relevant body can only commit the new offences if an ‘associated person’ criminally facilitates a tax evasion offence.

    A person is associated with a relevant body if that person is an employee, agent or other person who performs services for or on behalf of the relevant body. The latter is of particular concern because of the scope of entity which could be described as an associated person, such as external contractors and subcontractors, as well as temporary workers. 

    The draft guidance states:

    "The question of whether a person is performing services for or on behalf of an organisation is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the organisation. The contractual status or label of a person performing services for or on behalf of the organisation does not matter."


    UK tax evasion

    The Act states a 'UK tax evasion facilitation offence' means an offence consisting of:

    a) being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax by another person;
    b) aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or
    c) being involved art and part in the commission of an offence consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax.

    The UK tax offence will be investigated by HMRC, with prosecutions brought by the Crown Prosecution Service (CPS).


    Foreign tax evasion

    The Act states a 'foreign tax evasion facilitation offence' means conduct which:

    a) amounts to an offence under the law of a foreign country;
    b) relates to the commission by another person of a foreign tax evasion offence under that law; and
    c) would, if the foreign tax evasion were a UK tax evasion offence, amount to a UK tax evasion facilitation offence.

    The foreign tax offence will be investigated by the Serious Fraud Office (SFO) or National Crime Agency, with prosecutions brought by either the SFO or CPS.


    Penalties and sanctions

    Aside from the negative brand and reputational damage which would inevitably follow a successful conviction, the penalties for such an offence include:

    • Unlimited financial penalties; and/or
    • Ancillary orders such as confiscation orders or serious crime prevention orders.
    Alternatively, a Deferred Prosecution Agreement (DPA) may be reached between a prosecutor and an organisation which could be prosecuted. The DPA allows a prosecution to be suspended for a defined period of time, subject to various conditions being met under the supervision of a judge, who must be convinced the terms are ‘fair, reasonable and proportionate'. A DPA would clearly be a more palatable outcome compared to an expensive public trial.


    Reasonable prevention

    The only defence to these offences is to have a reasonable prevention procedure in place to mitigate any such offences being committed. What constitutes a reasonable procedure will be different for each entity and must be considered in the context of each entity’s operations.

    The Government has produced six principles to adopt when designing a prevention procedure. These are:

    1. Risk assessment;
    2. Proportionality;
    3. Top level commitment;
    4. Due diligence;
    5. Communication, including training; and
    6. Monitoring and review.

    Before our most recent Tax Investigations Update webinar (available on the Abbey Portal for clients to view on demand), we conducted a survey with our attendees, to gain an insight into how far advanced preparations were in developing prevention policies. We found that a staggering 86% of our webinar respondents had yet to give any thought to a prevention policy.

    With the new rules set to come into force this September and the main summer holiday season almost upon us, it is important to start designing a prevention procedure now, planning training sessions for staff and implementing any changes required to paperwork, such as contracts or other letters of engagement.

    HMRC has increased investment into the Fraud Investigation Service from £186m in 2015/16 to £204m in 2016/17, which suggests it is gearing up for the work it is intending to undertake in this area, with the first automatic exchanges of information under the Common Reporting Standard due to take place in September as well.

    If you would like to contact the author of this article for further advice, please email our Head of Technical Research, Guy Smith.