The new corporate offences of 'failure to prevent the facilitation of tax evasion' under the Criminal Finances Act 2017 came into effect on 30 September 2017.

These offences widen the existing regime by introducing strict liability offences for companies who do not have adequate prevention procedures in place.

The new offences are part of the government's wider aim to combat tax evasion and tackle the perceived corporate culture of turning a blind eye to tax related offences.

Under the previous regime, senior members of a company (such as board directors) had to be aware that illegal tax evasion activities were taking place in order for companies to be found criminally liable. However, under the new legislation, companies may be criminally liable even if they do not have actual knowledge of the illegal activity being committed. Two new offences are introduced.

Failure to prevent facilitation of UK tax evasion

The Criminal Finances Act 2017 (the "Act") introduces a strict liability offence for companies (and partnerships) if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with the company and the company fails to prevent this.

  • Associated person - is defined widely under the act. It not only covers employees of the company, but also agents or any other person or entity who performs services on behalf of the company, such as out-sourced service providers and sub-contractors.
  • UK tax evasion facilitation offence - the associated person must have committed an offence of facilitation of tax evasion. This offence is made up of:
    1. Criminal tax evasion by a third party taxpayer (either an individual or a corporate entity). Tax evasion comprises the offence of cheating the public revenue or any other UK offence of fraudulently evading tax;
    2. The associated person deliberately and dishonestly facilitating the tax payer to evade tax. For example, a lawyer or accountant acting in their capacity as a person associated with the company drafts documents to deliberately aid the third party to evade tax. The facilitation must be deliberate or dishonest - if the associated person was negligent or was not aware they were facilitating tax evasion then no offence is committed.
  • Failure to prevent the offence - As the offence is one of strict liability, if the company's employee, agent or other associated person has deliberately and dishonestly facilitated the evasion of tax by a third party, then the relevant company is guilty of the offence, unless it can prove the existence of reasonable prevention procedures

Failure to prevent facilitation of foreign tax evasion

The act also introduces the offence of failing to prevent facilitation of overseas tax fraud, which is broadly the same as the UK offence but is narrower in scope - the offence only applies if:

  • The relevant body who failed to prevent the facilitation offence has a 'UK Nexus', meaning it is (i) a UK incorporated company; (ii) an overseas company with a branch located in the UK; or (iii) an overseas company whose associated person is located within the UK at the time they criminally facilitate the evasion of foreign tax.
  • There is 'dual criminality', meaning that both the tax evasion and the facilitation must constitute criminal offences in the UK and in the foreign jurisdiction. The foreign jurisdiction must have equivalent offences at the tax-payer and facilitator level, conversely if the foreign jurisdiction takes a particularly strict approach and criminalises activity that is not illegal in the UK then no offence is committed.

Steps your business should take reasonable prevention procedures

In a similar vein to the Bribery Act 2010, the only defence to these strict liability offences is the implementation of reasonable prevention procedures to prevent the criminal facilitation of tax evasion by an associated person (except where it is unreasonable to expect such procedures to be in place). The government guidance published on 1 September 2017 suggests that companies should:

  1. Conduct a risk assessment of their domestic and international business to ascertain who its associated persons are and if any of these pose a risk of facilitating tax evasion. Companies exposed to high risk are encouraged to undertake more extensive due diligence - such companies may include those undertaking transactions in countries which lack adequate anti-corruption and money laundering legislation, or a tax advisory businesses engaging in complex tax planning structures.
  2. Implement reasonable preventative procedures. What is reasonable will depend on the level of risk the company is exposed to, as well as the size, complexity and scale of the business's activities. Examples of procedures will include the introduction of internal and external training and communication programmes so that policies and procedures are understood throughout the organisation, the introduction of self-reporting and whistleblowing procedures and an active management commitment to foster a zero tolerance culture.
  3. Monitor and review internal procedures on an on-going basis. Companies may wish to review existing contracts with third party 'associated persons'.

Penalties for non-compliance

Companies found guilty of either of the offences may be required to pay an unlimited fine.