Earlier this year, we commented on the proposed new criminal offence for corporates who fail to prevent the facilitation of tax evasion. The initial consultation was first published by the Government in July 2015, a response document released in December 2015 and the new offence has now (following further consultation between April and July 2016) been included in the Criminal Finances Bill, published on 13 October 2016.
The new offence
The new offence is set out in sections 36 to 44 of the Bill, and largely follows the draft legislation previously published and consulted on. A “relevant body” (which includes body corporates, partnerships and other legal persons) will be criminally liable where a person representing the corporation during the course of business (an “associated person”) criminally facilitates the evasion of tax by others, and the corporation in question did not have in place reasonable prevention procedures. There are two distinct offences: (i) failure to prevent the facilitation of domestic tax evasion; and (ii) failure to prevent the facilitation of overseas tax evasion.
The key elements of these offences are the same (although there are additional requirements for the overseas offence) and are neatly summarised in the October 2016 Summary of Responses:
Stage one: criminal tax evasion by a taxpayer.
Stage two: criminal facilitation of this offence by a person acting on behalf of the corporation, whether by taking steps with a view to; being knowingly concerned in; or aiding, abetting, counselling, or procuring the tax evasion by the taxpayer.
Stage three: If there has been a criminal offence at stage one and stage two, a corporation is then liable for having failed to prevent a person associated with it from committing the criminal act at stage 2.
The purpose of the legislation is to prevent the facilitation of tax evasion (Stage 2), not to prevent the criminal tax evasion itself (Stage 1). The Explanatory Notes make clear that the tax avoidance must be fraudulent, and that the offence will not be committed where the “associated person” merely inadvertently or negligently facilitates the evasion. An “associated person” is any person acting for or on behalf of a relevant body (i.e. a company or partnership). This is a wide definition and will include an employee, an agent or even a sub-contractor. It does not include acts committed by that person outside of their capacity as an associated person to that relevant body, such as by facilitating a tax evasion offence of their spouse if this take place in a private capacity.
Organisations should bear in mind that if found liable they will be subject to a fine and, given that this is a criminal offence, may also have to notify the appropriate regulator, depending on their sector.
The overseas offence
The legislation provides for a separate overseas offence. This can only be committed by a relevant body that is incorporated in the UK, that carries on business from a permanent establishment in the UK, or whose associated person commits the overseas facilitation offence in the UK; there must be some nexus to the UK. This requirement seeks to ensure that resources are not spent on pursuing cases that have little connection to the UK.
The facilitation offence and tax evasion must be criminal both in terms of UK law and in respect of the foreign law in question. No proceedings in relation to this offence may commence without the consent of the Director of Public Prosecutions or the Director of the Serious Fraud Office, who will consider whether prosecution will be in the public interest. In addition, the draft HMRC guidance confirms that the overseas offence will not be triggered by an act that would not be unlawful in relation to UK taxation.
The defence: reasonable prevention procedures
The Government has confirmed that, despite concerns raised by some stakeholders, the liability of the corporation will not depend on it having benefitted from the act of its representative. However, a corporation will not be liable if it has reasonable procedures in place to prevent the facilitation. The Government’s position set out in the Summary of Responses makes clear that “reasonable procedures need not be fool-proof and need not have actually stopped the financial crime from occurring”. Further, it is stated that “the level of control a corporation has over the associated person who has committed the illegal act of facilitating tax evasion will be a factor taken into account when considering what procedures are reasonable”. In some circumstances, it may not be reasonable to expect the company to have any such procedures.
Businesses should now carry out risk assessments of whether their services, or services connected to it, are at risk of being used by employees or other associated persons in order to facilitate tax evasion. As part of this process, all relevant associated persons should be identified and due diligence checks should be undertaken, including on the services the relevant persons are providing, the jurisdictions in which they operate and the potential scope for the facilitation of tax evasion by such associated persons. The contractual arrangement with third party service providers, contractors and agents should also be revisited. It is also important that training for senior management, compliance, customer facing staff and other employees is designed and introduced.
The guidance published alongside the Bill remains in draft form, and will be formalised once the legislation has been passed and received Royal Assent. The draft guidance emphasises the importance of a business having reasonable prevention procedures in place. It states:
“If a relevant body can demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks, then prosecution is unlikely as it will be able to raise a defence.”
The processes and procedures recommended by the draft guidance are based on six guiding principles: (i) risk assessment; (ii) proportionality of risk-based prevention procedures; (iii) top level commitment; (iv) due diligence; (v) communication (including training); and (vi) monitoring and review. The guidance states that the Government is mindful of the fact that some procedures will take time to roll out (i.e. training programmes), but that it expects there to be “rapid implementation” targeting key risks. It is envisaged that these procedures should be included in a company’s wider financial crime procedures, such as its anti-bribery and corruption policies.