The UK Criminal Finances Act (the Act) was passed in April 2017, with parts of it due to come into effect on 30 September 2017. The Act touches on a number of areas concerning the financial consequences of crime including introducing new powers in relation to tracing and recovering the proceeds of crime and information sharing concerning suspicions of money laundering. The Act also introduces new criminal offences of failure to prevent the facilitation of tax evasion, whether that be evasion of UK or foreign tax. 

Although these new offences have been introduced in the wake of the Panama Papers scandal, they are not solely aimed at financial institutions advising high net worth individuals. All corporate entities with customers and suppliers could, in theory, be at risk of facilitating the evasion of, for example, sales taxes and corporation taxes. The new offences can be committed by organisations, wherever registered or domiciled, if the organisation carries out business in the United Kingdom, if it failed to prevent the facilitation of evasion of UK taxes, or if the facilitation of the tax evasion occurred in the United Kingdom. International businesses should therefore be considering what steps they ought to be taking to avoid committing these offences. 

The Offences

The Act has created two new offences, one in respect of facilitation of evasion of UK taxes and one in respect of facilitation of non-UK taxes. The new offences are similar in some respects to the failure to prevent bribery offence under section 7 of the UK Bribery Act, in that if facilitation of tax evasion has been carried out by a person associated with a corporate entity, the corporate entity will be strictly liable for the new criminal offence, subject to a defence that the corporate entity had reasonable prevention procedures in place. 

There are two necessary predicate offences that the prosecution must prove before a corporate entity can be guilty of one of the new offences: 

1. Criminal tax evasion by the relevant taxpayer; and

2. Criminal facilitation of that tax evasion by an associated person of the corporate entity, who carries out that facilitation whilst performing services on behalf of the corporate entity. 

The prosecution needs to prove the facts that would constitute the offences, but it is not necessary for either the taxpayer or the associated person to be convicted of a criminal offence.

UK Tax Evasion

A corporate entity will commit an offence if there is criminal evasion of UK taxes by a UK taxpayer, and a person associated with the entity facilitates such tax evasion whilst performing services on behalf of the business. For the purposes of this offence, it is irrelevant where the corporate entity is registered or domiciled, and it is irrelevant whether the act constituting the facilitation took place outside of the United Kingdom. Overseas entities can commit this offence.

Non-UK Tax Evasion

A corporate entity will commit an offence if: 

1. A taxpayer evades tax liabilities that it owes outside of the United Kingdom;

2. A person associated with the entity facilitates the evasion of the non-UK taxes;

3. The acts of the taxpayer and facilitator would amount to a tax evasion offence under UK law if committed within the UK’s jurisdiction; and

4. There are equivalent offences at both the taxpayer and facilitator level in the relevant foreign jurisdiction.

The facilitation of non-UK tax evasion offence will apply to companies or partnerships incorporated in the United Kingdom, to foreign entities with a place of business in the United Kingdom, or to any entity (wherever registered or domiciled) where the act of facilitation takes place in the United Kingdom. Consequently, the offence has a very broad extra-jurisdictional scope and so an overseas company that carries on any business in the United Kingdom would be advised to put procedures in place to prevent the facilitation of tax evasion in any part of its international business by its associated persons.

What Are Evasion and Facilitation? 

Criminal tax evasion occurs when a taxpayer knows it has a tax liability and forms a dishonest intention not to declare it. It does not arise where a taxpayer is negligent, careless or makes a mistake resulting in the non – or under – payment of tax.

Facilitators must also have a criminal intent. In other words, they must know they are helping another person fraudulently evade tax. Again, it is not enough to be negligently, carelessly or mistakenly involved in the facilitation of tax evasion. 

Who are "Associated Persons"?

An associated person of a business is defined as an employee, agent or other person who performs services for or on behalf of the business. This definition is deliberately wide and may include suppliers, contractors, sub-contractors and intermediaries, and is similar to the definition of associated persons under the Bribery Act. 

An associated person can only cause the business to commit a criminal offence if they facilitate a third parties’ tax evasion whilst performing services for the business. A business will not be liable where an associated person has acted in a personal capacity to facilitate tax evasion.

Reasonable Prevention Procedures Defence

A business will have a defence to the offences if it can prove that it had reasonable procedures in place to prevent the facilitation of tax evasion, or that it was not reasonable in all the circumstances to expect there to be such procedures in place. Whilst there is of course no relevant case law on this point as yet, it seems probable that the UK courts might take the view that large, multinational companies, no matter what their lines of business, should be expected to maintain some procedures designed to prevent the facilitation of tax evasion. 

Her Majesty’s Revenue & Customs (HMRC), the UK’s tax collection and enforcement body, has provided draft guidance entitled “Tackling Tax Evasion” to support businesses in the implementation of appropriate prevention procedures. This guidance sets out the six guiding principles that organisations should work to when seeking to implement procedures: 

1. Risk assessment;

2. Proportionality of risk-based procedures;

3. Top level commitment;

4. Due diligence;

5. Communication and training; and

6. Monitoring and review.

Again, there are clear similarities with the principles set out by the Ministry of Justice in relation to what constitutes “adequate procedures” under the Bribery Act. However, it will not be sufficient to rely on having undertaken a risk assessment for bribery and corruption risks, and having implemented procedures to guard against that risk.

HMRC has been clear that it expects organisations to undertake a specific, documented, assessment to identify the risk of tax evasion facilitation – whether that be a standalone exercise or in conjunction with a wider compliance risk. HMRC has advised businesses to “‘sit at the desk’ of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity and the means to criminally facilitate tax evasion offences, and if so how this risk might be managed” (HMRC, “Tackling Tax Evasion”, October 2016).

Following a risk assessment, it is likely that most businesses will need to implement changes to their compliance programme to ensure that they have robust procedures in place to prevent associated persons from facilitating tax evasion. 

Penalties

A business that fails to prevent the facilitation of tax evasion could face unlimited fines and other ancillary orders such as confiscation orders or serious crime prevention orders. A criminal conviction could also give rise to serious reputational damage. 

Is This Not Just an Issue for Banks? 

When one thinks about tax evasion, it is often high net worth individuals and tax havens to which one’s mind immediately jumps. Indeed, as mentioned above, the new offences were introduced in the wake of the Panama Papers scandal and have an obvious application to banks, funds, financial advisers, accountants and the like who assist individuals and companies with managing their finances. 

However, there are of course other types of taxes and other types of taxpayers. If you have customers, they may have VAT liabilities that they might want to minimise; if you have suppliers, they may have corporation tax liabilities they want to minimise, for example. Payments without invoices, payments to companies other than those who supplied the goods, payments in kind rather than currency – these could all be methods by which tax evasion is taking place. It is therefore important that risk assessments are carefully considered and that organisations do not fall into the trap of assuming that facilitation of tax evasion is something that is only an issue for the financial services sector. 

Conclusion

If you carry on a business in the United Kingdom, or have associated persons performing services for you in the United Kingdom, you should consider whether you need to undertake a risk assessment to determine whether your business profile warrants changes to your compliance procedures and policies in light of these new offences. As with the “failure to prevent” offence under section 7 of the Bribery Act, your compliance programme could be what stands between the company and a criminal conviction in the event it (even unknowingly) becomes involved in tax evasion.