Speed read: The passage of the Criminal Finances Bill 2016 will see the introduction of a new corporate offence of failure to prevent the facilitation of tax evasion. Similar to the corporate offence model in the Bribery Act 2010, a company could commit an offence if an “associated person” commits a particular offence – namely, an offence connected to the facilitation of tax evasion. Against this background, this piece explores the issues that could arise if the “associated person” is a company.
The proposed new corporate offence would see a company liable for failing to prevent a person “associated” with it from facilitating tax evasion. Associated person is defined as “a person” who “performs services for or on behalf” of a “relevant body”, either an employee, an agent of the relevant body, or a person acting in any of these identified capacities. The offences (comprising an offence based on UK tax evasion and an offence based on foreign tax evasion) are modelled on the strict liability offence of ‘failure to prevent bribery’ in section 7 of the Bribery Act 2010 which renders corporates liable, in certain specified circumstances, for the acts of associated persons, subject only to raising a defence relating to having reasonable prevention procedures in place designed to prevent the commission of the offence.
When the term “associated person” first appeared in section 7 of the Bribery Act 2010, concern was expressed about its open texture. The argument made at the time was that the undefined nature of the term has the potential to bring within scope individuals over whom a corporation has no reasonable means or opportunity to exercise control or oversight, particularly when the associated person is based abroad. The use of the term in the Criminal Finances Bill 2016 and the corporate offence of failure to prevent the facilitation of tax evasion has done little to alleviate those previously held concerns. Ambiguity still surrounds the ‘failure to prevent’ offence as contained in the Bribery Act 2010, and, by extension, this can be expected to affect the clarity of the proposed new offence which similarly hinges on the actions of an associated person.
When one considers who might be encompassed by the term “associated person”, the mind typically conjures up employees, subsidiaries, agents and contractors – and indeed, some of these persons are specifically contemplated by the Bill’s proposed provisions.  However, the categories of persons falling within each of these titles may often be hard to discern in practice. There is, for example, a distinction between individuals who for whatever reason wish at all times to be treated as independent of the company with which they have a relationship, and companies who for own reasons of self-interest seek to artificially distance themselves from individuals with whom they in fact have a close relationship. However, specific issues and peculiarities arise when the associated person is a company and not an individual. This piece explores these issues, drawing out the idiosyncrasies of such a scenario and the inherent uncertainties surrounding the term and definitional limits of “associated persons” as contained in the Bill.
A discussion on the implications of an “associated person” being a corporation is perhaps best illustrated and discussed through a hypothetical case studies.
Presently, there is much debate as to whether a ‘gig’ work arrangement amounts to a conventional employment arrangement. Recent legal challenges, however, suggest that it can amount to an employer-employee relationship. In these circumstances, assume, for example, a gig economy employee (e.g. a driver) – a “gigger” – evades UK tax. If a separate corporate entity, such as a law firm, chooses to use the gigger’s employer for the transportation of staff, is the law firm a “relevant body” liable for failing to prevent the facilitation of tax evasion if the gig employer deliberately structured its affairs in a way that made it easier for their gigger to cheat the Revenue? Theoretically, the law firm engages with a person, the gigger’s employer, for the performance of services. If its anti-tax evasion stance is deficient, is the law firm exposed to liability?
The above might seem wholly far-fetched but the provisions are drafted widely. Let’s take a simpler example which gives rise to the same questions. What about where a company engages a cleaning agency which contracts with individual cleaners to provide cleaning services? The agency partially pays the cleaners cash in hand. This precise arrangement is not known to the company but overall it means that the company is receiving the services at less than market rate. Is the company a “relevant body” that is potentially exposed to criminal liability for failure to prevent the facilitation of tax evasion? Theoretically, the agency is the “associated person” that has facilitated the tax evasion committed by the individual cleaner.
Let’s take another example.
A sole trader – say a suburban accountant who operates his own business – provides accounting services to a separate corporate entity, a small IT outfit. The suburban accountant has knowingly assisted in moving another client’s funds offshore in an attempt to evade UK taxes. In this example, the offshore tax evasion has no relation or bearing on the services the accountant provides to the IT outfit. Is the IT outfit “a relevant body” exposed to criminal liability for failing to prevent the facilitation of tax evasion by the suburban accountant, an “associated person”? The absurdity of this example is self-evident, but prosecution is theoretically possible on a strict reading of the proposed new offence.
Imposing criminal liability on a company that has such a tenuous connection to the tax evasion and its facilitation may seem illogical but prosecution in these circumstances is theoretically possible. The provisions are drafted widely and there would appear to be few defined bounds. Clarifying whether liability could arise in the above case scenarios matters as, if the scenarios fit within the provisions as presently drafted and theoretically able to be prosecuted, this will inevitably make companies more cautious about their service providers and alert to who may even constitute a service provider, and therefore an associated person.
At its simplest, the catch-all phrase “acting in the capacity of a person performing such services” leads to the ambiguity. In effect, the crucial question that corporations need urgent guidance on is – must the services performed by the associated person for or on behalf of the relevant body facilitate the underlying tax evasion? Is a nexus required or are services performed generally sufficient to potentially trigger corporate criminal liability under the proposed new offence? Certainly, the ambiguity is something that respondents to the consultation on the offence had in mind when calling for a requirement that the relevant body benefit from the failure to prevent the facilitation of tax evasion in the legislation by the associated person.  If such a requirement was introduced, the ability to prosecute companies would be narrowed but there would at least be some certainty of the circumstances that could give rise to prosecution.
Overall, the proposed new offence has the consequence of requiring relevant bodies to not only be more cautious about who they do business with but, in being so cautious, requiring them to ask of associated persons the details of their anti-tax facilitation policies to ensure that they themselves do not fall foul of the offence provision. In this regard, the legislation could place heavier burdens on corporates that perhaps initially appreciated.
HMRC’s issued guidance on this proposed offence notes that a person will not be considered an “associated person” if the person is off on a frolic of his own. However, just when a company can contend that an associated person is ‘on a frolic’ is unclear, as is how a company would go about demonstrating such a frolic in the context of these offences. Moreover, although the guidance helpfully provides some detail as to who will not fall within the category of “associated person”, glaring gaps in understanding what performing services for or on behalf of the relevant body means remain. The Explanatory Notes state that an associated person will not include someone who provides tax advice in a personal capacity to their relatives, but there are many other scenarios, such as those identified above, which remain wholly unclear. This makes the offence uncertain though is not to say that there are no limits to it. One way in which the offence is limited is that the offence must be criminally facilitated by an associated person. This necessarily means that the associated person must deliberately and dishonestly facilitate the evasion. HMRC issued guidance on this point notes that if the facilitation can only be proved to an accidental, ignorant or negligent standard then the corporate offence of failure to prevent the facilitation of tax evasion has not been made out.  This should provide some relief to corporations who will no doubt appreciate the higher bar required.
One further unexplored area concerns the interaction between the identification doctrine, as a means of establishing corporate criminal liability in the UK, and the associated person being a corporation. The identification doctrine requires that a company can only be criminally liable where an individual who is the directing will and mind of the company is attributed to the criminal conduct. The practical effect of this is that if an associated person is a company it will be necessary to establish that an individual who is the directing mind and will of that company, i.e. a director, has facilitated the tax evasion. This poses a difficulty where the associated person is a large corporate entity, such as in Case 1 and, possibly, Case 2 (depending on its size). Although there is a call for evidence on the deficiencies of the identification doctrine in the UK, it presently remains the primary mode of establishing corporate criminal liability.
Where the relevant body has put in place reasonable prevention procedures to prevent the criminal facilitation of tax evasion by an associated person, the relevant body has a defence. Again, this will be familiar as the same structure appears in section 7 of the Bribery Act 2010. And again, corporations can expect some HMRC issued guidance on the types of procedures expected. In contrast to the section 7 offence, the proposed new offence adds an additional limb to the reasonable prevention procedures defence in extending the defence to circumstances where it “not reasonable” to expect the relevant body to have in place such procedures. Arguably the defence that it was “not reasonable in all the circumstances” to have prevention procedures directed at preventing a supplier’s facilitation of a wholly separate person’s tax evasion could be deployed in the three case scenarios. This should provide companies with some further comfort against absurd prosecutions or, on a cynic’s view, the extension might be viewed as a license for corporate complacency. In practice, how and when a corporation can rely on this extension is unknown. However, in principle, this extension should be warmly received so as to guard against the overcriminalisation of corporate behaviour. Moreover, it will be worth watching the development and usage of this extension and whether its practical application is something for consideration as an amendment to the bribery provisions.
The above discussion has illustrated the need for clarity over what kind of actions of an associated person will be sufficient to ground a prosecution against a relevant body for failure to prevent the facilitation of tax evasion. Specifically, is there a need for a benefit to be derived by the relevant body from the associated person’s services or actions? In the event there is not, this may have the inevitable effect of making corporates wary of who, and how, they engage the services of other corporate entities. The long-term effect of this may be to fundamentally change the way corporates interact.