Criminal Finances Act 2017: The Corporate Offence of Failing to Prevent Tax Evasion
Shortly before Government was dissolved for the General Election, the Criminal Finances Act was passed. As part of the Government's Action plan to tackle money laundering, terrorist financing and corruption, the Act introduced new investigation and information sharing powers for law enforcement and the regulated sector. Most notably, and of widest application, is the introduction of the new corporate offence of failing to prevent the criminal facilitation of tax evasion, which came in effect on the 30th September. If found guilty, firms can face unlimited fines in respect of acts done by their employees and associated persons. Firms which can demonstrate they have reasonable prevention procedures in place will have a defence.
To understand the requirements of the new regime, read our Guidance on the Criminal Finance Act - and watch our webinar, presented by Amy Bell, which is now available to view at any time.
Under the previous legislation, government felt that holding corporate bodies criminally liable was difficult because often the board would have no knowledge of the facilitation. The decision making or advice which can constitute facilitation of tax evasion is often at a lower level, particularly in large organisations. There was little incentive for the management to implement systems to look for the facilitation of tax evasion or to encourage whistleblowing of such activity. This legislation will hold firms accountable if they are “turning a blind eye”
HMRC have acknowledged that it will take time for firms to fully implement reasonable procedures but at the very least they expect firms to have
- Demonstrated a clear commitment to compliance which might include the design of a plan to achieve compliance
- Top level commitment to preventing the facilitation of tax evasion by the firm or its associated persons
- An initial communication plan – this could be an email to all explaining the offence, and the steps the firm is going to take to prevent the facilitation of tax evasion.
That said, they have said they will still expect rapid implementation, so firms will need to keep up the momentum to ensure implementation as soon as possible.
What is the new offence
There are three stages to the offence
- There must be tax evasion by a taxpayer. The offence applies to the evasion of UK and overseas tax provided there is a UK connection, and a corresponding UK offence. Note: there does not have to be a conviction for this to apply.
- There must be the criminal facilitation of the tax evasion by a person associated with the firm. A person is associated if it is an employee, agent or another person who performs services for or on behalf of the firm. This will be judged on the circumstances, rather than the contractual arrangements which are in place.
- The firm failed to prevent the associated person from committing the facilitation.
What is the defence?
There is a statutory defence, that the firm had in place reasonable prevention procedures. HMRC has issued draft guidance which explain the 6 guiding principles for a firm to have regard to when designing the prevention procedures. They are
• Risk Assessment – assess the nature and extent of the risk that those acting on the firm's behalf will engage in the facilitation of tax evasion.
• Proportionate Prevention procedures – depending on the size and nature of the firm, implement policies and steps to ensure they are complied with. Consider the opportunity, motive and means for a person to facilitate tax evasion, and if identified how this risk can be eliminated.
• Top level commitment – demonstrate top level management commitment to preventing tax evasion, both in the involvement with the risk management process, but also their management and communication of those who could facilitate tax evasion.
• Due diligence – carrying out appropriate due diligence on persons acting for or on behalf of the firm, who may not be subject to the same sort of monitoring as employees.
• Communication – ensuring that your policies and procedures are communicated and embedded through training. It is also important that the firm's zero tolerance approach is communicated, both internally and externally to deterrent those seeking to use the firm to evade tax.
• Monitoring and review – this could be seeking internal feedback to ensure employees and agents are aware of the policies and procedures, or formal review with documented findings. Firms need to establish whether the measures they have in place are being complied with and that they meet the risks the firm face, which may evolve over time.
What should firms do today?
Firms should consider the extent of their risk of exposure to this offence as soon as possible. They should conduct a risk assessment, identifying which departments, services, and relationships provide the opportunity, motive and means to facilitate tax evasion.
Policies and procedures will need to be reviewed to mitigate any risks identified. This offence may appear to be similar, in terms of the process to the adequate procedures required under the Bribery Act, but firms should not assume it is as simple as inserting the works “and tax evasion” into those policies.
It is important that the policy is communicated to associated people; that the firm has a zero tolerance approach to the facilitation of tax evasion, and that examples are provided through training as to how tax evasion could present itself to staff. Reinforcement of the commitment to the whistleblowing process, and protection for reporters is also crucial.
HMRC has published draft guidance, and for law firms, the Law Society has published a practice note which provides more in-depth guidance.