Andrew Howard, Ropes & Gray tax partner, discusses the UK’s new corporate criminal offence of failure to prevent tax evasion, which goes into effect in September 2017.
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The UK's new corporate offence of failure to prevent facilitation of tax evasion is quite a mouthful, but the title does do a pretty accurate job of describing the offence. So starting from the back, what's required is, number one, tax evasion by a third party – and that can be evasion of UK taxes, or it can be evasion of non-UK taxes. The second element is criminal facilitation of that evasion by an associated person of the relevant business. An associated person of a business includes its employees, its agents and also its subcontractors.
So whilst the main target of the new offence is actually a fairly limited array of businesses that are aimed at providing financial services to individuals, actually, the offence is not limited to that category of businesses and actually applies to all businesses. The example given in HMRC guidance is an example of a car manufacturer whose subcontractor becomes involved in a false invoicing scheme that allows the eventual purchaser of the car to evade VAT. And so I think you can see in there, for a car manufacturer, you could substitute any other business. So I think that shows you how any business can, in theory, commit this offence.
So the offence has been given a very wide territorial scope. The UK offence is, in fact, totally unlimited in territorial scope and in many cases, the businesses that the government is primarily targeting will be offshore businesses – they won't have a UK presence. For the offshore tax evasion offence, a UK nexus is required. But actually, that UK nexus can be pretty tenuous. So for example, a non-UK business that happens to have a UK branch can commit the offence, even if none of the relevant conduct has anything to do with that branch. The main thing that businesses can do to protect themselves from the offence and make sure that they don't commit it, is to establish the defence. In most cases, that will require the business to demonstrate that it's put in place reasonable prevention procedures. The first step in doing that is to put together a risk assessment, so the business needs to sit in the seat of its associated persons and ask whether they have the motive, the opportunity or the means to facilitate tax evasion.
Our experience of working with clients, particularly asset management clients, shows that the risks faced by businesses operating in a similar sector are likely to be pretty similar, even though the risk assessment is personal to the individual business. When they hear about this offence, many clients think that it is an example of excessive and disproportionate bureaucracy. However, when you look at this new offence together with other developments in the UK and Europe, such as the introduction of the common reporting standards, you see a direction of travel towards engendering in corporate culture, increased attention on tax affairs and on tax compliance, including the tax compliance of other people. So while you can debate whether or not the offence is proportionate, given the cost of business, the main priority for businesses must be to make sure that they've taken sufficient steps in as cost efficient a manner as possible, so that they can establish the defence by the time it comes in in September 2017.