HMRC has published guidance on self reporting for companies that have failed to prevent associated persons from facilitating the evasion of taxes.
On 30 September 2017, two new UK offences came into effect which make a company criminally liable where it fails to prevent those providing services for or on its behalf, such as: employees, agents, intermediaries and vendors (referred to as associated persons) from facilitating the evasion of taxes while providing services for the company.
A company will have a full defence where it can prove that it put in place such procedures as were reasonable in all the circumstances to prevent its associated people facilitating tax evasion.
To accompany the offences coming into force, HMRC has published guidance on “self reporting” to assist a company which finds itself in the difficult position where it suspects that it has failed to prevent the facilitation of UK tax evasion (the UK offence) and would like to cooperate and obtain credit by bringing the wrongdoing to HMRC’s attention. The HMRC Guidance refers to significant upsides for companies that self report wrongdoing.
The HMRC Guidance however is not the first guidance to companies on self reporting financial criminal conduct. Most notably, the Serious Fraud Office (SFO) and the Crown Prosecution Service (CPS) have issued a joint Code of Practice, which covers in some detail how the Deferred Prosecution Agreement (DPA) regime will be applied and the importance of self reporting in obtaining a DPA. There are distinctions between the HMRC Guidance and the DPA Code as to the benefits available to companies who self report. Time will tell if this distinction proves to have a practical difference.
Before the offences came into force, HMRC published substantive guidance to assist companies to put in place reasonable procedures to mitigate the risk of the facilitation of tax evasion. The guidance expressly stated, amongst other things, that “in order to encourage relevant bodies to disclose wrongdoing, timely self reporting will be viewed as an indicator that a relevant body has reasonable procedures in place.”
The HMRC Guidance provides much greater detail on the self reporting process, stating:
“Rapid self reporting doesn’t guarantee that a relevant body won’t be prosecuted, but it could be:
- part of a relevant body’s defence, if liable under the offences
- taken into account by prosecutors when making decisions about prosecution, and
- reflected in any associated penalties, if convicted.”
Meanwhile, the DPA Code does not offer companies the same level of benefit. It does not, for instance, indicate that a self report would provide any basis for a defence to a criminal offence. Rather, timely self reporting would be a factor, albeit a significant one, when deciding whether it was in the public interest to offer a company a DPA as opposed to prosecuting it. The DPA Code indicates, that a self report (and ongoing cooperation with an investigation) is a hallmark of companies who wish to be offered DPAs. The four cases to date in which DPAs have been approved have emphasised the importance of self reporting, though in the case of Rolls Royce that was of other related matters after an external investigation had been launched.
Points to note
- The HMRC Guidance relates to the UK offence only. Companies wishing to self report a foreign tax evasion facilitation offence should contact the Serious Fraud Office (which alongside the National Crime Agency has responsibility for the prosecution of the foreign offence). On its face, there is the unhelpful prospect that HMRC and the SFO could treat a self report differently for the UK and foreign offence.
- In providing more nuanced guidance, HMRC has somewhat rowed back from the comfort it provided earlier in its substantive guidance to companies considering self reporting.
- However, the HMRC Guidance should still provide assurance that there are major benefits to self reporting a UK offence. This could include (depending on the facts of the alleged offending and the effectiveness of the company’s relevant procedures), a defence to criminal liability. This could mean, taken at its highest, that the company could avoid both a prosecution and a DPA. Avoiding a DPA would have major financial and reputational benefits and represent a very significant incentive to report wrongdoing.
- While the HMRC Guidance is more business friendly in tone than the DPA Code, for a self report to provide a full defence, no doubt HMRC would be looking to see that a "rapid" self report was allied to other strong and enhanced controls to mitigate facilitation risk including due diligence, training and monitoring of controls. Practically, this may prove difficult where it has been conceded to HMRC by self reporting to have failed to prevent an associated person from facilitating tax evasion. Ultimately how the reasonable procedures defence will be interpreted by HMRC and the court in the context of tax evasion facilitation will evolve with caselaw.
- Finally, while HMRC investigates the UK offence, it is the CPS that will prosecute (and make a decision on prosecuting) a company alleged to have committed the UK offence. As the joint issuer of the DPA Code, the CPS will apply the DPA Code (and DPA jurisprudence) when considering the alleged wrongdoing. Distinctions therefore between the HMRC Guidance and the DPA Code may ultimately prove of limited practical and legal assistance to a company seeking to resolve a sensitive situation with the UK authorities.
For more detail on the offences of failure to prevent tax evasion themselves, see our article.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.