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      Tuesday 19 November 2019

      HMRC increase activity on businesses who fail to prevent facilitation of tax evasion

      HMRC are allocating additional resource to their Fraud Investigations team to tackle facilitation of tax evasion offences – their pipeline covers businesses across all sectors and sizes. Organisations should consider their risk profile in respect of the offence urgently as these rules are already in force, meaning that organisations who have not already taken action may be at risk of criminal prosecution. Note that the offence applies to all corporate organisations globally, not just those incorporated in the UK.

      Long path against fraud

      Overview

      In September 2017, in an effort to tackle tax evasion the UK Government introduced the new ‘Corporate Criminal Offence’ (CCO) through the Criminal Finances Act 2017. This offence holds organisations which 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.

      Significantly, the scope of the legislation is very broad and does not just apply to UK incorporated entities:

      • It applies to UK tax evasion regardless of where the organisation is based or where the offence takes place,
      • The rules also apply to overseas (non-UK) 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

      Prior to the Criminal Finances Act 2017, the law required proof that senior members of an organisation were involved with or aware of illegal activity in order for a prosecution to be successful. This was often difficult to prove, as with larger organisations decision making could often be decentralised.

      For this reason, the legislation was introduced with the aim of targeting organisations who fail to prevent facilitation of tax evasion, prosecuting organisations whose ‘associated persons’ knowingly aided, abetted, counselled or procured tax evasion, where the organisation had not implemented reasonable procedures.

      Impact

      Penalties are severe and include unlimited financial penalties, as well as reputational damage and potential disqualification of directors of the company. HMRC are taking this seriously, and since the introduction of the Criminal Finances Act 2017, notable events include:

      • 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.

      Whilst 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

      The offence can only be committed by a corporate body, including companies and partnerships, and cannot be committed by natural (rather than legal) persons.

      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 very widely.

      The only defence an organisation has against the prosecution is that the organisation had ‘reasonable procedures’ in place to prevent the facilitation of tax evasion. What is considered to be ‘reasonable procedures’ will likely evolve over time, and 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 considered higher risk, as are any cash-based businesses.

      Ensuring compliance

      HMRC recommends that proportional procedures be implemented to manage the risks faced by organisations using six guiding principles:

      1. 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’.
      2. 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.
      3. Top level commitment: demonstration of senior management’s commitment to a zero-tolerance approach in respect of the facilitation of tax evasion
      4. Due diligence:  demonstration that the procedures work in practice
      5. Communication: appropriate communication and training on the risks and the organisation’s CCO policies and procedures
      6. Monitoring and review: ongoing review of risks and procedures as the business activities and external environment changes over time, including self-reporting of breaches

      Summary

      Ultimately, CCO brings about potential criminal liability to corporates (including partnerships) who fail to prevent their associated persons from facilitating tax evasion.

      Thus 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 (including policy documentation, staff training, ongoing monitoring etc) to ensure that the entity’s procedures are considered ‘reasonable’.

      For more information, contact:
      Tom Shave - Partner, Business Tax
      E: Tom.shave@smithandwilliamson.com

      Emily Spooner – Associate Director, Business Tax
      E: Emily.spooner@smithandwilliamson.com

      Date: February 2019
      Date: February 2019

      HMRC are allocating additional resource to their Fraud Investigations team to tackle facilitation of tax evasion offences – their pipeline covers businesses across all sectors and sizes.

      Date: February 2019
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