We have previously commented about the UK Government’s proposals in relation to a new criminal offence for corporates who fail to prevent the facilitation of tax evasion and the initial consultation "Tackling Offshore Tax Evasion: a new corporate criminal offence of failure to prevent the facilitation of tax evasion" which was first published in July 2015.
Following the release of the “Panama Papers” and the pressure on the UK government to take robust steps to tackle tax evasion, David Cameron has today announced plans to push through the introduction of this new offence this year. Although it is not yet clear when the new offence will come into effect, corporates and financial institutions should now take steps to ensure that they have robust policies and procedures in place to prevent the facilitation of tax evasion.
The new offence
Corporations will be criminally liable where a person representing the corporation during the course of business criminally facilitates the evasion of tax by others. The offence will apply to the evasion of all UK taxes and all equivalent overseas rules about the offence of taxes, and those corporations found guilty of this offence will be subject to a fine.
The draft legislation published last year is based on the corporate offence contained in section 7 of the Bribery Act 2010. This provides that a commercial organisation is guilty of an offence if it fails to prevent a person associated with it from engaging in bribery intending to benefit the commercial organisation (subject to an "adequate procedures" defence). In order to be found guilty under section 7 of the Bribery Act, it is not necessary to prove that the organisation itself had any criminal knowledge or intent.
There is no requirement under the proposed tax offence that the representative must have been acting for the benefit of the organisation. The effect of this is to potentially lower the threshold for liability and broaden the scope of the new offence: corporations and other organisations will be liable where the representative is providing services for or on their behalf (even if not directly for their benefit).
A "representative" includes natural and legal persons acting on behalf of a corporation - for example an employee of a bank dealing directly with a customer, a subsidiary of a corporation or a third party organisation providing services to a customer as part of a package provided by a bank.
The offence is subject to the defence that the corporation had put in place reasonable procedures to prevent its representatives from criminally facilitating tax evasion. As with the Bribery Act defence of "adequate procedures", the key issue is what will constitute "reasonable procedures" for these purposes. The draft legislation requires guidance on the meaning of “reasonable procedures” to be published, and this was to be released in early 2016. As yet, no such draft guidance has been released, however it is expected that this should follow shortly given the acceleration of the introduction of the new offence.
Although the Government stated in its response to the original consultation that it was "mindful of the need not to overburden corporations", the confirmation that the legislation will be introduced this year means that there will be a very limited period for companies to ensure that they have these “reasonable procedures” in place. Whilst it has been indicated that whether the procedures are reasonable will depend on the specific context, without further guidance it will be difficult for companies to fully satisfy themselves that they are not at risk.
The Government appears to envisage that the new legislation will not require corporations to carry out additional checks on their clients. However, it is clear from the responses to the consultation last year that many organisations do not already have sufficient controls in place to monitor whether staff have deliberately facilitated tax fraud, and to prevent staff from doing so. Concerns were raised in relation to the burden that this new offence would place on corporates, particularly financial institutions, and the work that will be required in order to ensure that procedures and policies are up to scratch. The Government’s December 2015 response indicated that a formal policy will be necessary. Accordingly, organisations will need to ensure that they have appropriate policies, procedures and guidance in place before the enactment of the legislation this year. This could impose a significant and time-sensitive burden on corporations.
Status of the proposed legislation
In December 2015, the Government confirmed that it intended to proceed with this measure by publishing draft legislation which sets out the detail of the new offence, together with the summary of responses to its initial consultation. It was intended that the Government would consult on the draft legislation, and although the consultation was expected to open in early 2016 there have, until this week, been no further announcements in relation to the proposals.
It was announced today that the legislation will now be introduced this year. It is unclear though when exactly the new offence will come into force and how much time there will be for corporates and financial institutions to prepare for it. It is possible that even though the relevant legislation will be introduced this year, the new offence may not itself come into force until 2017: the Government has adopted this approach in relation to the introduction of three new criminal offences seeking to tackle tax evasion and avoidance which are provided for in Finance Bill 2016. However, we await further details on the timing of the proposed new offence for corporates. Whether there will be an opportunity for taxpayers to be consulted on any draft guidance now appears unlikely given the expedited timeframe.
New cross government taskforce
The government has also launched a new “taskforce” to investigate and respond to the practices identified in the “Panama Papers”. The combined involvement and expertise of HMRC, the National Crime Agency, the Serious Fraud Office and the Financial Conduct Authority indicates that there will be a strong emphasis on investigating corporates and the internal policies, practices and controls that they have in place in relation to all aspects of financial compliance, not solely taxation.