Revised draft UK legislation and new draft guidance on the proposed corporate offence of failing to prevent facilitation of tax evasion have been published. We examine the proposals.

HMRC’s campaign against tax evasion will be bolstered, from autumn 2017, by a new corporate offence of failing to prevent facilitation of tax evasion. Revised draft legislation and draft guidance on the offence and related defence were published on 17 April for consultation until 10 July.

Under the new offence, an organisation will be criminally liable where (i) a tax evasion offence is committed by a taxpayer and (ii) a related facilitation offence is committed by a person associated with the organisation, subject to a statutory defence of having in place reasonable procedures to prevent facilitation.

The broad scope of the offence will force organisations to focus on the defence, and so clarity in the associated guidance will be key.

Why is a new offence needed?

The offence is part of a raft of recent measures intended to deter tax evasion, including HMRC’s plans to close its last disclosure facility in 2017 (reducing the non-prosecution options for criminal conduct) and various penal measures in the current Finance Bill focused on offshore evasion.

Tax evasion is a predicate offence for money laundering under the Fourth Anti-Money Laundering Directive, and tax reporting under CRS and FATCA are making it harder for individuals to hide their money from the taxman. However, prosecuting organisations that are knowingly involved in (or turn a blind eye to) tax evasion remains difficult due to the common law ‘directing mind’ test which (generally) requires the involvement of senior management. The new offence circumvents this requirement.

What is the proposed offence?

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The offence is loosely modelled on Bribery Act 2010, s 7. In brief, a relevant body is guilty of the offence where a person associated with it (acting in that capacity) commits a ‘UK tax evasion facilitation offence’ or a ‘foreign tax evasion facilitation offence’. Liability is strict and no criminal intent, knowledge or condonation by senior management is therefore required. Organisations found guilty will face an unlimited fine. There is a statutory defence where the relevant body has in place such prevention procedures as are reasonable in all the circumstances.

Key Concepts

  • ‘relevant body’ (‘B’ in Fig. 1) = body corporate or partnership, wherever incorporated or formed.
     
  • ‘person associated’ (‘A’ in Fig. 1) = someone performing services for or on behalf of the relevant body (e.g. employees, contractors, agents or subsidiaries). This does not include an agent acting in his own capacity advising his own clients, or an employee ‘on a frolic of his own’ (although there is a rebuttable presumption that an employee is performing services on the relevant body’s behalf). The breadth of associated persons is extremely wide. Guidance will be key, and HMRC have requested anonymised case studies on how organisations make referrals, especially where these form the basis of an ongoing relationship or the joint provision of services to a client.
     
  • ‘UK tax evasion facilitation offence’ = an offence which is committed by facilitating the commission by another person of a UK tax evasion offence.
     
  • UK tax evasion offence’ = an offence either of cheating the public revenue or of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of a tax.
     
  • ‘foreign tax evasion facilitation offence’ = an offence under the law of a foreign country which (a) is committed by facilitating the commission by another person of a foreign tax evasion offence under the law of that country and (b) would (if the foreign tax evasion offence were a UK tax evasion offence) amount to a UK tax evasion facilitation offence.
     
  • ‘foreign tax evasion’ = conduct (carried out with the necessary knowledge or intent) which (a) is an offence under the law of the foreign country concerned that relates to the evasion of a tax payable under the law of that country and (b) would amount to an offence of being knowingly concerned in, or taking steps with a view to the fraudulent evasion of that tax (assuming there was such an offence in relation to that tax in the UK).
     
  • ‘prevention procedures’ = procedures designed to prevent associated persons from committing UK or foreign tax evasion facilitation offences.

Is the offence limited to corporates incorporated or head-quartered in the UK?

No. Where there is facilitation of a UK tax evasion offence, any relevant body is in scope. Neither of the predicate offences nor the organisation’s acts or omissions need to take place in the UK.

Where there is facilitation of a foreign tax evasion offence, a relevant body is in scope if:

  • it is incorporated or formed in the UK; or
  • it carries on its business or undertaking (or part of one) from an establishment in the UK – note there need be no nexus between the UK establishment and the facilitation; or
  • any act or omission constituting part of the tax evasion facilitation offence takes place in the UK.

What taxes are covered?

UK:

  • All taxes. Although the new offence has been presented as part of the package of measures tackling offshore evasion, it is much broader than that and also covers e.g. onshore VAT evasion or evasion of employment tax evasion.
  • The offence hinges on the type of evasion, not the type of tax evaded. Both the UK tax evasion offence and the corresponding facilitation offence require criminal knowledge and intent. The new strict liability offence for individuals failing to declare taxable offshore income or gains is currently out of scope.

Overseas:

  • Again, all taxes are covered but dual criminality is required. Importantly, both the overseas tax evasion and the facilitation must be offences under the law of the foreign country (carried out with the necessary knowledge or intent), and under UK law. The requirement for criminal knowledge and intent at both stages will be key for organisations training their staff to spot tax evasion risks. This is an area where mission creep could be a real problem: extending the overseas tax evasion facilitation offence to strict liability offences worldwide would be totally unworkable.
  • The draft guidance gives examples of tax evasion in Germany and Norway which would amount to a cheat if they occurred in the UK. No examples are provided which would fall outside the scope but the consultation document acknowledges difficulties with extortive or discriminatory foreign taxes and requests case studies for inclusion within the guidance.

How will the offence be prosecuted?

HMRC do not have powers to investigate foreign tax evasion, so any such cases would be investigated by another agency (most likely the NCA or the SFO). In practice, HMRC have indicated that deferred prosecution agreements may be a more efficient and effective enforcement strategy.

Does a tax evasion offence need to be proved?

Yes, as part of the prosecution case (and therefore to the criminal standard).

However, no prosecution or conviction of the taxpayer (‘C’ in Fig. 1) is necessary. The prosecution could rely on a witness statement (and testimony) obtained as part of a Code of Practice 9 procedure or a disclosure facility. HMRC point out in their roadshows that a civil settlement for the criminal evasion of income, capital gains and inheritance taxes is far more common than prosecution. This could create evidential difficulties for a prosecutor, required to call a dishonest tax evader to give evidence of his – and others’ – activities.

Does a facilitation offence need to be proved?

Yes, to the criminal standard, although again no prosecution or conviction of the facilitator (‘A’) is necessary. The offence is framed in language familiar from both criminal and tax legislation and requires criminal knowledge or intent on the part of ‘A’, who facilitates by:

  • Aiding, abetting, counselling or procuring the commission offence (and its Scottish equivalent), or
  • Being knowingly concerned in or taking steps with a view to the fraudulent evasion of tax by ‘C’.

This encompasses a facilitator who devises a scheme for a taxpayer, becoming liable as a co-conspirator, or on a joint enterprise basis. However, an associated person acting in good faith who is deceived by a taxpayer, or who was negligent and foolish, would not be guilty of facilitation, and liability for ‘B’, would fall away. This area will be an evidential battleground.

How can an organisation protect itself?

Once the predicate offences have been proved (to the criminal standard), the onus shifts to the organisation to prove (to the civil standard) that it had in place reasonable procedures to prevent the facilitator from doing what it did (or that no procedures were required), taking account of all the circumstances.

The draft guidance adopts the principle-based approach of the Bribery Act guidance. Organisations should ensure their senior management’s ‘tone from the top’ supports a culture of compliance. Policies and procedures which are clear, proportionate and effective should be implemented. Due diligence and risk-assessment are key, as is training and communication.

In practice, an organisation will have to demonstrate that it has taken a risk-based approach, document the steps it takes to compile and implement prevention procedures, and the methods it employs to test their suitability.

HMRC have said that they will work with representative bodies to develop and endorse industry-specific guidance, and have asked for help identifying commonly encountered risks, along the lines of the risks identified in the Bribery Act guidance (e.g. country, sectoral, and transaction risks).

Does the language in the proposed offence mirror Bribery Act 2010, s 7?

To a point. Key differences are that there are two predicate offences rather than one and the scope of the underlying offences covered (including the territorial application) is much broader.

Another difference is that the prevention procedures need to be ‘reasonable in all the circumstances’ rather than ‘adequate’, as in the Bribery Act. The focus is on the type of organisation in question, and what is reasonable and proportionate for it in the circumstances particular to it: its size and the nature of its business, the complexity of its operations, and the jurisdictions in which it operates.

Since UK tax and foreign tax are the subjects of separate offences it will be possible to have one set of prevention procedures relating to UK tax evasion facilitation and another for foreign tax. This will be important for organisations that are weighted towards one or the other.
The definition of ‘person associated’ is now aligned with the Bribery Act, although it remains to be seen if the interpretations will differ. This is a change from the broader scope as first proposed in July 2015, and is to be welcomed.

What action should be taken?

  • Conduct a risk assessment: what are the risks faced by different areas of the business? What procedures are proportionate and appropriate?
  • Identify where associated persons are operating, the types of taxpayers they are dealing with and the conduct they are engaging in. Will contracts with employees, agents, contractors or referral firms need to be amended? Will more informal arrangements need to be documented?
  • Look at existing policies and procedures: where would the reasonable procedures to prevent tax evasion facilitation best fit? Is existing monitoring and decision-making adequate (e.g. due diligence and KYC checks, reporting obligations under CRS, FATCA and POCA)?
  • Examine the training needs of staff across the business (not just the tax department): where is training best targeted? What degree of tax technical knowledge will frontline staff require? How will the efficacy of training be measured?
  • Consider management information: what information will senior management need? How can the organisation assess progress?
  • Respond to the consultation on the draft legislation and guidance directly or via an industry body – HMRC have stressed that they are keen to incorporate case studies addressing ‘real life’ difficulties in the guidance.