The Criminal Finances Act 2017 (“the Act”) came into force on 30 September 2017. Its target is the prevention of tax evasion, which is the deliberate and illegal circumvention of tax rules in order to escape a tax liability. This should be distinguished from tax avoidance, which is a legal method of minimising tax liability.

The legislation impacts all service providers, including those operating internationally, as many shipping companies do, provided they have a presence and/or business operations in the UK and/or there is some other link to the UK.

The offences

The Act created two new corporate offences:

1. Failure to prevent facilitation of UK tax evasion.

2. Failure to prevent facilitation of foreign tax evasion.

The offences are not applicable to individuals. They can be committed only by “relevant bodies”. A relevant body is a partnership, company or other body corporate which has either:

· been formed or incorporated in the UK; or

· been formed or incorporated anywhere else in the world, but which does business in the UK.

The offences are committed when an “associated person” acting for or on behalf of a relevant body facilitates a tax evasion offence whilst performing services for that relevant body. An associated person is any person acting for or on behalf of a relevant body, including an employee, sub-contractor, manager, or local agent.

To anyone familiar with the corporate offence introduced by the Bribery Act 2010 (which exposes commercial organisations to criminal liability for failing to prevent bribery), this may appear to be ‘more of the same’. In fact, there are important differences – likely leading to a need for more due diligence on your contracting network, updated internal training materials and preparation of updated compliance policies. Whilst existing compliance training and policies will form a good starting point for any changes, given the network of correspondents, sub-contractors, managers and local agents commonly adopted by those in the shipping industry, the impact of the new legislation should not be under-estimated.

Guidance issued by HMRC in September 2017 (“the Guidance”) sets out the three stages of the corporate offence, as follows:

· Stage 1: There is criminal tax evasion by a taxpayer.

· Stage 2: There is criminal facilitation of the tax evasion by an associated person acting on behalf of a relevant body.

· Stage 3: The relevant body fails to prevent the associated person from committing the criminal facilitation act at Stage 2.

Extra-territorial effect

It is immaterial whether the relevant conduct takes place inside or outside the UK. The first offence applies to all businesses, wherever they are located, in respect of UK tax evasion offences. The second offence applies to businesses with a connection to the UK in respect of tax evasion offences committed outside of the UK. A company headquartered outside the UK but carrying on business in the UK, either through a permanent establishment (a branch), or another corporate body, could be subject to both corporate offences.

The foreign tax evasion facilitation offence requires 'dual criminality', meaning the actions of the taxpayer (Stage 1) and the associated person (Stage 2) must be a tax evasion offence under UK law and the overseas jurisdiction must have equivalent offences to those set out in Stage 1 and Stage 2.

The defences

The Act contains a defence where the relevant body has in place reasonable procedures designed to prevent associated persons from committing tax evasion facilitation offences. This follows a similar defence in the Bribery Act 2010, where the business has in place adequate procedures designed to prevent persons associated with the business from committing a bribery offence. A relevant body can also potentially rely on a defence to prosecution where it is not reasonable in all the circumstances to expect it to have any prevention procedures in place.

In the Guidance, “reasonable prevention procedures”, means both that:

· formal policies have been adopted by a relevant body to prevent criminal facilitation of tax evasion by those acting on its behalf; and

· practical steps are taken to implement the policies, enforce their compliance and monitor their effectiveness.

According to the Guidance, to be reasonable, prevention procedures should be proportionate to the risks that the relevant body faces.

HMRC expects reasonable prevention procedures to be kept under regular review by a relevant body, which should evolve as it discovers more about the risks that it faces and lessons are learnt. HMRC will take into consideration the prevention procedures that were in place and planned at the time that the facilitation of tax evasion occurred.

The associated person must deliberately and dishonestly facilitate the taxpayer-level evasion. Where an associated person is proven to have committed an offence accidentally, ignorantly or negligently, the new offence is not committed by the relevant body.

Principles to assist with compliance

The Guidance sets out the following six principles for relevant bodies to ensure compliance with the legislation:

1. Risk assessment: The relevant body should assess the nature and extent of its exposure to the risk of those who act for it, or on its behalf, engaging in activity during the course of business to criminally facilitate tax evasion. Having operations in jurisdictions known for criminality will present a higher risk profile.

2. Proportionality of risk-based prevention procedures: Prevention procedures should be proportionate to the risk of a relevant body’s associated persons committing tax evasion facilitation offences. This will depend on the nature, scale and complexity of the relevant body’s activities as well as the level of control and supervision exercised over associated persons. Those operating in high-risk jurisdictions should bear in mind that the bar for compliance will be accordingly higher.

3. Top level commitment: Senior management of the relevant body should be committed to preventing associated persons from engaging in criminal facilitation of tax evasion. They should foster a culture within the business in which activity intended to facilitate tax evasion is never acceptable.

4. Due diligence: The relevant body should apply, follow, and be able to demonstrate, rigorous due diligence procedures in respect of persons who perform or will perform services on its behalf, in order to identify risks and mitigate them.

5. Communication (including training): Prevention policies and procedures must be communicated and understood by all working for, and associated with, the relevant body.

6. Monitoring and review: The relevant body should regularly monitor and review prevention procedures and make improvements where necessary. Procedures should be updated as the risks change.

Penalties for breach

If convicted under the new offence, a relevant body faces the possibility of unlimited financial penalties as well as ancillary orders (such as confiscation orders or serious crime prevention orders). Potentially significant reputational damage is also a risk.

HMRC has acknowledged that deferred prosecution agreements might potentially be used to allow prosecution to be suspended for a defined period, provided that the relevant body meets certain specified conditions.

Next steps

We recommend that companies caught by the legislation review all existing training programmes and compliance policies and amend/supplement them as necessary to deal with the new legislation. It may be possible to update existing anti-bribery procedures to capture these new offences.