Failure to prevent facilitation of tax evasion - Compliance levels low but businesses should act now given new corporate criminal investigations

• United Kingdom

• Financial services disputes and investigations
• Litigation and dispute management
• Tax planning and consultancy
• Financial services

29-03-2019

What you need to know

• From September 2017, every business located anywhere in the world, regardless of size or activities, has been subject to potential corporate criminal prosecution in the UK if its “associated persons” facilitate tax evasion (both UK tax evasion and, potentially, non-UK tax evasion)

• Businesses can protect themselves from prosecution by putting in place reasonable prevention procedures

• According to a recent HMRC survey, despite the corporate criminal offence being in force for over a year, only 24% of all businesses surveyed have begun implementing prevention procedures

• It was announced in the press in March 2019 that HMRC has recently commenced its first criminal investigations under these new rules

• HMRC is targeting over 100 prosecutions per year for serious and complex tax crime by 2022

• In light of the HMRC survey and these investigations targets, there is an environment of increasing HMRC and political pressure to take enforcement action and give teeth to this new corporate criminal offence

• Businesses that have not yet fully implemented reasonable prevention procedures are exposing themselves to potential criminal prosecution and serious economic and reputational damage

• Furthermore, business counterparties (customers, suppliers, partners, investors, lenders) are increasingly requiring confirmation of reasonable prevention procedures in relation to this offence for their own compliance purposes

• Eversheds Sutherland has been advising businesses on this offence and reasonable prevention procedures since inception of the offence. Reasonable prevention procedures do not have to be onerous and we provide pragmatic solutions for our clients targeting compliance with minimal business disruption and cost

The Criminal Finances Act 2017 corporate offences

In 2017 two corporate criminal offences were introduced in the UK by the Criminal Finances Act 2017. The effect of the legislation is to make a business criminally liable if any person performing services for or on behalf of the business (including employees, agents, some contracted third parties, etc - known as “associated persons”) is found to have facilitated a third party to evade UK tax or foreign tax. This is important because a business (and not the individual) can be criminally liable for such offence committed by any of its associated persons even if there is no knowledge or approval of this by senior management or supervisors.

For the purposes of this legislation the place of incorporation or formation of a company or partnership is irrelevant. The offences may be committed by companies or partnerships even if they have been incorporated or formed outside the UK. If an associated person facilitates the evasion of a foreign tax then as long as there is a small UK nexus, the company can also be held liable for the facilitation of the foreign tax evasion.

The offences under this legislation are strict liability offences. The consequences could be significant since it constitutes a criminal offence. Businesses found liable could incur unlimited fines and could be barred from bidding for public sector contracts. Further this could result in reputational issues.

Click here to read our FAQ on the facilitation offence.

Reasonable prevention procedures

The only defence to being found liable under this legislation is for a business to show that reasonable prevention procedures are in place (or that it was not reasonable in the circumstances to expect the business to have any procedures in place). Other than this the offence is a strict liability offence and there are no other defences available.

The first step to determine whether reasonable prevention procedures are required and if so, what kind of prevention procedures are required, is for a business to conduct a risk assessment to identify key risk areas for the facilitation of tax evasion, any control measures that are already in place and what further measures are required.

Common control measures and other prevention procedures that may be recommended where specific risk areas are identified include targeted training, top-down management messaging, enhanced monitoring, systems modification and contractual changes. The specific measure relevant to any particular business will depend upon the activities and risks areas of that business. There is not a “one-size fits all” approach, hence the need for a targeted risk assessment with targeted prevention procedures.

Current compliance levels

In March 2019, HMRC published the findings of an Ipsos MORI survey commissioned to examine the awareness within business of the new corporate criminal offences and the extent to which the offences have resulted in behavioural changes.

The survey can be found at the following link here, but some highlight findings are as follows:

• only 24% of the businesses surveyed have undertaken a risk assessment

• only 34% were aware of the new corporate criminal offences

• only 20% had made changes to their operations directly in response to the new offences

• only 8% had undertaken training or communications on the offences in the last 12 months

Obviously certain types of businesses (those in higher risk areas such as financial services or larger businesses with more resources) have a greater awareness and compliance level than average, but in general awareness and compliance levels are still low. It is consequently likely that HMRC will take steps to raise awareness and compliance, the most obvious being to commence investigations and seek prosecutions to act as a warning to others.

Investigations and prosecutions

It has been reported in the press that, following a freedom of information request, HMRC has stated that:

“HMRC currently has less than five criminal investigation into behaviours occurring since 30 September 2017 for an offence under Article 45. These investigations have been commenced since November 2018 and are the first in a pipeline of cases HMRC has under development that may have Article 45 implications”

For the reasons given above, it is anticipated that more investigations will be commenced with the objective of securing a prosecution. This will give greater weight to the corporate criminal offences, and will also be consistent with HMRC’s single department plan which has an objective to:

“Increase the number of criminal investigations that we undertake into serious and complex tax crime, focusing particularly on wealthy individuals and corporates, with the aim of increasing prosecutions in this area to 100 a year by the end of the Parliament.”

What should businesses be doing?

As referenced above, to mitigate the risk of prosecution, a business needs to show that reasonable prevention procedures are in place (or that it was not reasonable in the circumstances to expect the business to have any procedures in place). The first step is therefore to undertake a bespoke risk assessment on the business. Any further next steps will be determined by this risk assessment.

The guidance associated with the corporate criminal offence makes it clear that reasonable prevention measures should be proportionate. This will result in a different approach to risk assessment and prevention procedures for different businesses.

Eversheds Sutherland has been advising businesses on this offence and reasonable prevention procedures since inception of the offence. We aim to provide pragmatic solutions for our clients that target proportionate compliance measures that can be implemented and integrated with current systems with minimal business disruption and cost.

If you would like to discuss this further, please either speak to your usual Eversheds Sutherland contact or get in touch with the following members of our corporate crime and tax teams.