The new corporate offence of failure to prevent tax evasion

The Government has published draft legislation in the Criminal Finances Bill and updated draft guidance on the scope of the new offence of failure to prevent the criminal facilitation of tax evasion.

Update

The Criminal Finances Bill received Royal Assent on 27 April 2017. See “Criminal Finances Bill receives Royal Assent”.

The Government has released amended legislation for the new criminal offences which will apply to companies that fail to prevent the facilitation of tax evasion in the Criminal Finances Bill, which was introduced on 13 October 2016. At the same time, the Government has published a Summary of Responses document, responding to feedback to its April 2016 consultation, and expanded draft guidance on the offence.

The broad message is that the offences will be enacted as previously proposed, with minor amendments to the legislation and expanded guidance. As such, concerns will remain over the potential for companies to incur criminal liability in relation to the activities over persons over whom they have relatively little control and who may be in foreign jurisdictions. It will be vitally important, therefore, for companies to have in place policies and procedures to protect themselves as much as possible from these risks.

The draft guidance makes clear that the new offence will require all businesses to put in place “such prevention procedures as it was reasonable in all the circumstances to expect” to ensure that their associates do not facilitate tax evasion. Businesses will also need to review legacy business practices to assess their risk of prosecution. Accordingly, it will be important for businesses to carry out a review and risk assessment of their business well in advance of the new offence coming into force.

Background

Following consultation during 2015, the Government confirmed in November 2015 its intention to introduce a new corporate criminal offence of "failing to take reasonable steps to prevent the facilitation of tax evasion". A further consultation document, released in April 2016 contained draft legislation and guidance to implement the new offence.

The stated purpose of the proposed new offence is to make it easier for the Government to hold companies to account for the actions of their agents, where those agents facilitate tax evasion, but without the direct involvement or knowledge of senior management. In the same way that a professional who dishonestly assists a customer to evade tax is guilty of the tax offence in which he or she becomes complicit, the Government argues that the corporation which employs this professional and fails to take reasonable steps to prevent their offending should also face prosecution.

The proposals have been controversial from the outset. In particular, questions whether the offence should apply to both UK and non-UK corporations and both the evasion of UK taxes and non-UK taxes and whether a corporation should have to benefit from the facilitation behaviour have been the topic of much feedback. Nevertheless, the Government has decided to push through the offence as originally designed with a very broad international scope.

The new offence

For both the UK and foreign offence there are three elements which need to be met in order to result in criminal offence by the relevant corporation:

  • there must be criminal tax evasion by a taxpayer (such as cheating the public revenue)
  • there must be criminal facilitation of the offence by a person acting on behalf of the corporation (an associated person), and
  • there must be a failure by the corporation to take reasonable steps to prevent that facilitation.

If those three elements are met, then the corporation will be guilty of the strict liability offence. Penalties for the offence will include unlimited financial penalties and ancillary orders such as confiscation orders or serious crime prevention orders. Deferred Prosecution Agreements are available.

Whilst the new offence will primarily apply to corporations, the definition included in the legislation is a “relevant body”. This is defined as a body corporate or a partnership, wherever incorporated or formed. As such the legislation will apply to partnerships (such as limited or general partnerships) but also any firm or entity of a similar character formed under the law of a foreign jurisdiction.

Associated persons

A person will be “acting on behalf of a corporation” if that person is an employee, agent or contractor of the corporation and performs services for the company in that capacity. It will not catch something done by an employee outside the work environment and in a private capacity or on a “frolic of his own”.

The associated person must criminally facilitate the tax evasion offence. This means that the associated person must deliberately and dishonestly take action to facilitate the evasion. It is not enough if the associated person negligently facilitates the evasion offence.

As confirmed in the response document, there will be no requirement that the corporation should benefit in any way from the facilitation. Therefore, if an employee facilitates tax evasion whilst providing services for his employer, the fact that the corporation does not benefit in any way from the facilitation, does not prevent the company from being guilty of the new offence, albeit that the payment of a benefit is likely to be evidentially significant in proving the offence. In essence, the Government takes the view that if a corporation has done as much as it reasonably can to address the risk then it will have a defence in any event.

The Government’s response document rejects concerns that the definition of “associated person” brings within the scope of the offence the activities of persons over whom the corporation may have no realistic control. However, the response does recognise that the level of control a corporation has over an associated person who has committed the illegal act will be a factor taken into account when considering what procedures are reasonable and the guidance introduces the concept of “proximity”. As such, a corporation “can reasonably be expected to do less to control those less closely proximate, such as the staff of a sub-contractor. Here a term in the contract requiring the sub-contractor to control their staff might suffice”.

Where a corporation simply makes a referral in good faith and “steps away” from the transaction entirely, the guidance recognises that it is unlikely that the corporation would fall within the scope of the offence in circumstances where the company to which the referral is made facilitates a tax evasion offence. It is likely to be different if the corporation sub-contracted the work.

UK tax evasion facilitation offence

It is a prerequisite of the offence that “tax evasion” has been facilitated. Tax evasion in the UK is defined as encompassing anything that might be indicted as an offence of cheating the public revenue, no matter the tax evaded and no matter the actual form of any indictment (such as fraudulent evasion of VAT under VATA 1994 section 72). Facilitation of UK tax evasion will involve carrying out any of the following, with the necessary knowledge or intent:

  • aiding, abetting, counselling or procuring the commission of the offence, and
  • doing anything that constitutes the commission of a tax evasion offence by virtue of being knowingly concerned in the fraudulent evasion of tax by another person.

The dishonest conduct must be able to be proven to the criminal standard of proof. One of the interesting practical issues of prosecuting the offence is that HMRC is likely to be required to disclose to the corporation evidence that tax has been evaded.

The offence will apply both to UK and non UK based corporations.

Overseas tax evasion facilitation offence

During the consultation on the overseas tax evasion facilitation offence, it was apparent that corporations would be in scope where they (i) were incorporated or formed in the UK or (ii) carried on business in the UK (including through a branch) or (iii) any act or omission constituting part of the offence takes place in the UK. Many expressed concerns that this meant that companies with limited nexus to the UK, through the acts or omissions of its associated person, would be caught by the offence. HMRC have confirmed that this is indeed the case. The guidance makes it clear that the existence of a UK branch of an overseas company is enough, in principle, to bring all the overseas activities of that entity within the scope of the overseas facilitation offence. And an entity with no connection to the UK at all could be guilty of the overseas facilitation offence if one of its associated persons does anything to facilitate overseas tax evasion whilst temporarily in the UK.

Whilst a UK branch will bring the wider international corporation within the rules, it is unlikely that a parent company would be liable for the failings of a UK subsidiary. The response document acknowledges this difference in treatment and the fact that since subsidiaries are different legal persons with their own distinct legal identity, it would normally be the subsidiaries own responsibility to prevent facilitation.

Whilst the Government agreed with the sentiment that “it will always be preferable for the country suffering the tax loss to take civil, criminal or regulatory actions”, the Government ultimately takes the view that “it should not be the case that justice fails to be done because of an unwillingness or inability to act on the part of those countries involved”.

In addition, it will be a requirement pursuant to the dual criminality doctrine that:

  • the conduct must be an offence under the law of a foreign jurisdiction which relates to the evasion of tax in that country
  • would amount to an offence of being knowingly concerned in the fraudulent evasion of that tax in the UK, assuming there was an offence of that kind in the UK in relation to that tax, and
  • the foreign jurisdiction has an equivalent offence of facilitating the commission of tax evasion by another person.

The Guidance provides straightforward examples to illustrate the dual criminality doctrine. As such, it is clear that, notwithstanding any provisions of local law, the behaviour must involve dishonesty on the part of the associated person and cannot be committed without knowledge (even if the local offence is one of strict liability).

The previous consultation indicated that the Government was considering ways in which the legislation can exclude the commission of offences in relation to taxes that would not be lawful in the UK. On this point, the response document states that it will be “highly unlikely that a prosecution would be taken forward when a foreign tax was in some way incompatible with the UK’s legal values such as respect for human rights. It would also be very unlikely to be in the public interest to bring a prosecution where a foreign tax was discriminatory and applied on the basis of race, religion or gender”.

The Government’s response document rejects concerns over the foreign tax evasion offence requiring “a detailed knowledge of every tax regime in the world”, emphasising that the offence will be committed in relation to foreign tax only where the requirement of dual-criminality is met. Nonetheless, the offence of facilitating overseas tax evasion remains the most troubling aspect of the rules. In particular, the offence of facilitating overseas tax evasion may apply even in circumstances where there would be no tax evasion in the UK, because tax would not be chargeable in the same circumstances in the UK. As such, given the very divergent approaches taken in many jurisdictions, corporations could be held criminally liable in the UK for conduct which has led to loss outside the UK but which would not give rise to any taxation in the UK. Given the lack of any consistent international approach to tax evasion, the extension of the offence to non-UK tax evasion will undoubtedly add a significant level of complexity and cost both to companies seeking to comply with the legislation and to HMRC trying to prosecute it.

The Serious Fraud Office or the National Crime Agency is the designated prosecutor of the foreign offence. HMRC will be the investigator and the CPS the prosecutor of the UK offence.

Defence of reasonable prevention measures

It will be a defence to the new offences that the relevant body had in place “such prevention measures as it was reasonable in all the circumstances to expect [that person] to have in place” or that “it was not reasonable in all the circumstances to expect [that person] to have any prevention procedures in place”. Once the predicate offence is proven, the burden shifts to the company to prove, on the balance of probabilities, that it has put in place reasonable prevention procedures.

What is reasonable will change during an initial implementation period. The Government accepts that some procedures (such as training and new IT systems) take time to implement, such that what is reasonable on day one when the offence comes into force will not be the same as what is reasonable when the offence has been in force for several years. However, the Government does expect there to be “rapid implementation”, focusing on major risks and priorities. In addition, reasonable procedures will need to be kept regularly under review to deal with new risks that emerge and any lessons learnt.

The procedure need only be reasonable, however, not one hundred percent effective -“reasonable procedures need not be fool proof and need not to have actually stopped the financial crime from occurring.”

This is clearly an area where the guidance from HMRC will be extremely important. On this point, the revised and expanded draft guidance sets out six core principles to be followed:

Risk assessment. The corporation should assess the nature and extent of its exposure to the risk of its agents engaging in activity during the course of business to criminally facilitate tax evasion. The risk assessment should be documented and kept under review.

Proportionality. What constitutes reasonable procedures for a corporation to adopt to prevent persons associated with it from criminally facilitating tax evasion should be proportionate to the risk of criminal facilitation faced by the corporation. This will depend on the nature, scale and complexity of the corporation’s activities. In addition, the reasonableness of prevention procedures should take account of the level of control and supervision that the organisation is able to exercise over a particular person acting on its behalf. The new offences do not require corporations to undertake excessive due diligence but does demand more than mere lip-service to preventing the facilitation of tax evasion.

The “procedures” referred to would encompass both:

  • formal policies adopted by a corporation to prevent criminal facilitation of tax evasion by those acting on its behalf, and
  • practical steps taken to implement these policies, the enforcing of compliance with the policies and the monitoring of the policies’ effectiveness.

Top level commitment. The top-level management of a corporation should be committed to preventing persons associated with the corporation from engaging in criminal facilitation of tax evasion. They should foster a culture within the corporation in which activity to facilitate tax evasion is never acceptable.

Due diligence. The organisation should apply due diligence procedures, taking an appropriate and risk based approach, in respect of persons who perform or will perform services on behalf of the organisation, or if appropriate to their clients, in order to mitigate identified risks.

Communication (including training). The organisation should seek to ensure that its prevention policies and procedures are embedded and understood throughout the organisation, through internal and external communication, including training. This should be proportionate to the risk the organisation assesses that it is exposed to.

Monitoring and review. The organisation should monitor and review its preventative procedures and makes improvements where necessary.

The revised guidance includes further details on these core principles as well as case studies designed to aid interpretation of the new offence.

Comment

The draft legislation has now been included in the Criminal Finance Bill, which was introduced into Parliament on 13 October 2016, and, whilst it could still change in its passage through Parliament, there is no suggestion at the moment that the Government is willing to revisit the provisions. The guidance remains in draft and final guidance will be formally published (as required by the legislation) once the legislation has received Royal Assent.

In the meantime, the Government encourages taxpayers to engage with HMRC on the draft guidance and holds out the possibility of “tailored guidance” for particular sectors. Businesses or organisations wishing further dialogue with HMRC on the guidance should contact: consult.nosafehavens@hmrc.gsi.gov.uk.

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.