Overview

  • The UK Government has announced the proposed introduction of a new corporate offence of failing to prevent the facilitation of tax evasion.
  • The new offence is likely to build on draft legislation produced in response to a consultation undertaken by HM Revenue and Customs (HMRC) in 2015.
  • The new offence is likely to resemble the UK Bribery Act 2010 ("Bribery Act") by (i) holding corporations liable for acts of their "associated persons" and (ii) having extensive extra-territorial application. There will also be a defence of having "reasonable procedures" in place to prevent the facilitation of tax evasion (as opposed to "adequate" procedures under the Bribery Act).
  • The offence is to be introduced in legislation this year.
  • Companies and partnerships incorporated in or conducting business in the UK will need to implement relevant policies and procedures as appropriate.

Background

David Cameron announced on 11 April that the UK Government "will legislate this year to hold companies who fail to stop their employees facilitating tax evasion criminally liable." The announcement follows intense pressure on the Prime Minister to take steps to combat tax evasion following the leak of the "Panama Papers" from Mossack Fonseca which has also seen Mr Cameron take the unprecedented step of publishing details of his own tax returns after details emerged in the Panama Papers that he previously owned shares in an offshore investment fund set up by his father.‎

The announcement constitutes an acceleration of the proposals consulted on by HMRC over the second half of 2015 in its consultation paper "Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent the facilitation of tax evasion" and which the Government confirmed in the March 2016 Budget that it would proceed with. The response document to the consultation ("Response Paper") was published in December 2015 and included draft legislation and plans for further consultation. A copy of the Response Paper can be found here.

Whilst the full details of the new offence are yet to be finalised, it seems likely that it will be similar to section 7 of the Bribery Act 2010. This created a corporate offence of failing to prevent bribery by associated persons, subject to an absolute defence where the company could show that it had in place, at the time the offence took place, "adequate procedures" that were designed to prevent such bribery. As with the Bribery Act (which provides for the possibility of unlimited fines), it is expected that the new offence will attract substantial financial penalties upon conviction. The prospect of significant reputational harm for an institution is also obvious, as well as the prospect of separate action by the regulator of any regulated entity which is found to be in breach.

The offence

Under the proposals in the Response Paper a corporation will have committed the offence where:

  • there is criminal tax evasion by a taxpayer. This may be evasion of UK tax or evasion of tax in any other jurisdiction, and
  • there is criminal facilitation of this offence by an "associated person" of the corporate body or partnership (corporation).

It will be a defence for the corporation to show that it had reasonable procedures in place to prevent its associated persons from committing the criminal facilitation of the tax evasion.

In relation to the criminal evasion of tax, there will be no requirement for a taxpayer to have been convicted of criminal tax evasion. So, for example, this could cover a situation where the tax evader has died, or they have made a disclosure to the authorities such that a civil rather than a criminal penalty is deemed appropriate. Where no criminal conviction has been secured against a taxpayer, the consultation notes that the prosecution "would have to prove to the criminal standard during the prosecution of the corporate that the predicate offence had been committed".

It is not necessary for the corporation to know about, or participate in the facilitation by its associated persons.

The defence of 'reasonable procedures'

The Response Paper envisages a defence of "reasonable" rather than "adequate" procedures, suggesting a slightly less onerous standard than that which applies under the Bribery Act. The Response Paper noted that the guidance to the Bribery Act did not set out what constituted "adequate procedures", but instead took a principles-based approach to what is deemed adequate. It seems likely that a similar approach will be adopted in relation to the "reasonable procedures" defence. The Response Paper further noted that the government is open to an approach whereby governmental guidance could be supplemented by sector specific guidance.

The scope of the offence

Despite Mr Cameron's headline announcement on Monday, the proposed offence will not be limited to criminal facilitation carried out by a corporation's employees. It will extend to criminal facilitation of tax evasion carried out by "associated persons" which can include an employee, agent or subsidiary of the corporation (indeed, anyone who provides services "for or on behalf of" the corporation). However, it is anticipated that the assessment of whether "reasonable procedures" were in place will take into account the level of control which the corporation exercised over its associated persons.

The offence is also likely to have broad extra-territorial application, such that a corporation can be prosecuted if it is incorporated in or formed under the law of any part of the UK, or is carrying on a business, or part of a business, in the UK. This could mean that a company based outside of the UK which, for example, has a branch or subsidiary or sales operations in the UK, or is listed on the London Stock Exchange, could be prosecuted in the UK. In addition, the offence will apply where the tax evasion is evasion of overseas tax by a body incorporated in or carrying on business in the UK.

The proposed offence will be of significant interest to all corporations with a nexus to the UK, including, in particular:

  • banks
  • firms of accountants
  • financial planners
  • wealth managers
  • law firms, and
  • tax consultancies

whose employees, agents or other "associated persons" are providing tax advice or related services to clients on behalf of the corporation, or who make referrals to third parties that provide those services.

Such entities will need to design and implement policies and procedures to ensure that they can take advantage of the "reasonable procedures" defence in the event that a problem arises.

Whilst it seems likely that a brief period of time will be allowed for those affected to prepare for the new offence, companies with a nexus to the UK should be giving active consideration to their policies and procedures as soon as possible. Either way, such an exercise is unlikely to be wasted effort bearing in mind the global mood in relation to tax evasion, unprecedented levels of inter-governmental co-operation, legislation such as FATCA, the introduction of the Common Reporting Standard (which provides for automatic exchange of tax information between almost 100 countries), recent EU plans to force the world's biggest multinationals to report their earnings in each EU member state and international efforts to investigate and prosecute companies accused of wrongdoing.

An interesting question is whether the new offence will revive interest in the adoption of a more general corporate offence of "failing to prevent financial crime" (as advocated by David Green QC, the director of the Serious Fraud Office) which the government last year signalled was not being progressed, at least for the time being.

One thing that does seem certain is that the "old ways" of doing business via offshore tax havens, the use of complex "tax mitigation" and "avoidance" schemes, and use of shell companies to hide wealth will become, for all intents and purposes, things of the past. Competing in the modern age of tax transparency and openness will require companies and partnerships, and their associated persons, to demonstrate their commitment to an ethical (as opposed to simply legal) approach to both corporate and individual taxation.