On 30 September 2017, the Criminal Finances Act 2017 introduced two new corporate offences imposing criminal liability on corporate bodies which fail to prevent the facilitation of tax evasion.

The offences are:

  • Failure to prevent the facilitation of UK tax evasion
  • Failure to prevent the facilitation of foreign tax evasion

These new offences follow in the wake of the much heralded section 7 of the Bribery Act and brings the criminal law directly in to the corporate boardroom. The Act makes it clear that corporates will be vicariously liable for the actions of persons associated with it without the need of proving that the ‘directing minds’ under the identification principle had knowledge.

Readers will note that this is precisely the basis of the corporate offence under the Bribery Act 2010 and reinforces the intention of Parliament to hold corporates liable.

Relevant body

The offences apply to corporate organisations which fall into the category of ‘relevant bodies’, which are defined under the Act as either:

  • a body corporate or a partnership (whether incorporated or formed), or
  • a firm or entity of a similar character formed under the law of a foreign country

Associated person

A relevant body may be convicted of an offence where an associated person facilitates UK or non-UK tax evasion. A person will be considered as ‘associated’ with a relevant body if they are:

  • an employee, acting in the course of their employment
  • an agent of the relevant body, acting in their capacity as an agent
  • any other person who performs services for or on behalf of the relevant body, who is acting in the capacity of a person performing such services

Subsidiaries, joint venture companies and referrers are not automatically deemed to be associated persons. However, the Act leaves the door open to who can constitute an associated person under point 3, above, as the status of a party may be determined by reference to all the relevant circumstances, including any contractual terms determining association.

In order for either offence to be committed, there must be a criminal tax evasion offence by a third party (tax payer) and the deliberate and dishonest facilitation of that offence by an associated party. A relevant body may not be liable where the tax evasion was facilitated by the associated person negligently or inadvertently.

The offences

Section 45: Failure to prevent facilitation of UK tax evasion

Section 45 of the Act introduces the offence of failure to prevent facilitation of UK tax evasion. This offence can be committed by UK and non-UK corporate bodies where an associated person commits a UK tax evasion facilitation offence. Offences under Section 45 will be investigated by HMRC.

Section 46: Failure to prevent facilitation of foreign tax evasion offence

Section 46 of the Act introduces the offence of failure to prevent facilitation of foreign tax evasion. Like the offence under Section 45, there must be criminal evasion of taxes by a third party and criminal facilitation of tax evasion by an associated person.

Offences under Section 46 will be investigated by the Serious Fraud Office. This offence is has a broader extra-territorial reach, in that:

  • The relevant body must have a UK nexus – this means that the company is either incorporated in the UK, carries out an element of its business in the UK or the associated person was located in the UK at the time of the facilitation
  • Dual criminality – the actions of the third party (tax payer) and associated party must be capable of being subject to prosecution under foreign law and UK law

Prevention procedures

Both are strict liability offences. A relevant body may, however, be afforded a statutory defence if, at the time of the offence:

  • it had in place reasonable prevention procedures, or
  • it was not reasonable in the circumstances to expect the relevant body to have any prevention procedures in place

Prevention procedures amount to the formal policies put in place by a relevant body to prevent associated persons from committing facilitation offences.

Various factors will be considered in establishing whether prevention procedures are reasonable, such as the level of control the company had over the associated person and procedural compliance with the relevant guidance. In some cases, it may be that it was reasonable for there not to be any procedures in place, however this will likely only amount to a defence in a minority of cases and cannot be relied upon.

Guidance on prevention procedures

Under the Act, the Lord Chancellor is required to publish guidance on prevention procedures. The current guidance is similar to that accompanying the Bribery Act 2010, and is based on these six principles:

  1. Risk assessment
  2. Proportionality
  3. Top level commitment
  4. Due diligence
  5. Communication
  6. Monitoring and review

An initial risk assessment is a fundamental starting point for any company to ensure adequate prevention procedures are in place. Full compliance will help ensure associated parties are aware of the risks of facilitation and, if necessary, provide a defence where the offences are committed.

Failure to do so could result in unlimited fines and substantial reputational risk. As the saying goes, prevention is better than cure!