On 30 September 2017 the UK introduced new offences targeting legal and partnership entities that fail to prevent facilitation of criminal tax evasion by persons working for that company or acting on its behalf. The law regarding tax evasion remains unchanged; however, the scope of persons who can fall foul of currently existing rules has been considerably broadened. The burden has been firmly placed on companies and partnerships operating in the UK, even if headquartered overseas, to provide evidence that they have enacted satisfactorily robust procedures to prevent facilitation.
The reasoning behind the new laws is that under the prior regime, prosecutors were required to prove that senior management in an entity were aware of and facilitated criminal tax evasion. This had the effect of encouraging management to turn a blind eye to suspected criminal activity. Now, the offence is strict liability, and intent on part of senior management where they are shown to have failed to prevent facilitation is irrelevant.
Definitions and Burden of Proof
The new offences, incorporated within the Criminal Finances Act 2017, are committed where a relevant body fails to prevent an associated person from criminally facilitating the evasion of a tax, whether owed in the UK or overseas.
In September 2017, HMRC issued guidance which holds statutory equivalence. The Guidance clarifies the terminology surrounding the new rule:
- An “associated person” covers employees, agents or other people who perform services “for and on behalf of” the relevant body. The performance of services is assessed on the basis of all relevant circumstances, over and above contractual agreement. The associated person can be a natural person.
- A “tax” broadly encompasses all taxes, including national insurance contributions.
- A “relevant body” for the purposes of the new offence is either an incorporated entity or partnership. A natural person cannot commit the offence. The relevant body must have a “UK nexus”, being one that can be identified as:
- having been incorporated under UK law;
- having been incorporated overseas with an office located in the UK; and
- having appointed an associated person who is present in the UK at the time the criminal act occurs.
A careful distinction can be made between the subsidiary of a parent company and the branch of a company. In the former case, the subsidiary must be shown to be acting for or on behalf of the parent.
The new rule aims to tackle what HMRC refers to as “stage three” offences. Such offences occur where a relevant body fails to prevent persons associated with it from facilitating criminal tax evasion. For clarity, a stage one offence is considered to have occurred where a taxpayer, be it individual or legal entity, commits criminal tax evasion. A stage two offence takes place when the stage one offender is facilitated by a person associated with the relevant body. Facilitation must be done deliberately and dishonestly, not by mere accident.
Burden of proof
Under the new rule, the burden is placed on entities to show before a court that it had reasonable procedures in place, or that it was unreasonable to have certain procedures in place.
Non-UK established entities and foreign tax evasion
The rule captures tax evasion facilitation in the UK regardless of whether the offending entity is based in the UK or overseas. To prosecute an offence concerning foreign tax evasion, the offence must be recognised within the criminal law of both the UK and the foreign country in question, known as “dual criminality”. There must be equivalency between the offences, such as requiring a deliberate and dishonest act of facilitation, as opposed to mere negligence.
Penalties
Following investigation by HMRC, the Crown Prosecution Service (in England & Wales) is empowered to prosecute and impose unlimited fines as well as confiscation orders.
HMRC Guidance on Implementation of the New Offences
It is a complete defence for an entity to show it has implemented reasonable prevention procedures.
The HMRC Guidance recognises that risk-assessment procedures cannot be fail-proof, rather, “if a relevant body can demonstrate that is has put in place a system of reasonable procedures that identifies and mitigates its tax evasion facilitation risks, then prosecution is unlikely as it will be able to raise a defence.”
The Guidance advances six core principles when formulating procedures:
- risk assessment;
- proportionality;
- top-level commitment;
- due diligence;
- communication and training; and
- monitoring and review.
It does not offer an exhaustive list of procedures that would qualify as reasonable and acknowledges that procedures must invariably be tailored depending on the size of the business and the inherent risk of the sector in which it operates.
Procedures that might be considered reasonable by type include initiating risk assessment protocols. Proportionality of procedures allows variance in scrutiny depending on the level of control the relevant body has over the associated person. Due diligence requires demonstrated priority be afforded relative to risk posed in a sector. Communication of procedures will entail an external and internal dynamic. With the former category, parties operating at arm’s length with the relevant body should be made aware of whom to report activity to. Training can incorporate awareness building and training on procedures for crime reporting and whistleblowing. Monitoring and review of procedures can be achieved through internal periodic review or commissioning an independent third-party review.
Conclusion
HMRC has clearly indicated that it expects immediate compliance from entities operating in the UK. As such, there is likely to be a dramatic increase in internal review practices, whether internally controlled or through external consultants, in order to identify areas of potential risk. However, it can be expected that HMRC will allow grace periods that account for the relative time and cost that must be invested in order to implement procedures properly.
Contact our White-Collar Crime Defence Solicitors London
If you or your business is subject to investigation or enquiry by the HMRC, it is important to contact a White-Collar Crime Defence Solicitor immediately.
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