New corporate offences for failure to prevent the facilitation of tax evasion

Modelled on the Bribery Act 2010, the Criminal Finances Act 2017 (the Act) is the latest step in the government’s attempts to clamp down on tax evasion. The Act received Royal Assent on 27 April 2017 and is expected to come into force by September this year.

Previously, a successful criminal prosecution of entities for facilitation of tax evasion required evidence of involvement of the “directing mind” of the entity, such as its directors or other senior management. This is no longer the case - the Act introduces a host of strict liability offences which will enable prosecutions against entities if an associated person (being an employee, agent or person who otherwise performs services on behalf of that entity) enables or facilitates tax evasion in the UK and abroad.

The offences

Section 45(1) of the Act provides that a body corporate or a partnership (a relevant body) is guilty of an offence if an associated person commits a UK tax evasion facilitation offence while acting in their capacity as an associated person.

Facilitation includes being knowingly concerned in, aiding and abetting, counselling, procuring or otherwise taking part in tax evasion by a taxpayer.

Under section 46(1) of the Act a relevant body shall also be guilty of an offence if an associated person commits a foreign tax evasion facilitation offence while acting in their capacity as an associated person.

The key features of the offences are:

  • Criminal tax evasion by a taxpayer;
  • Criminal facilitation of tax evasion by an associated person of a relevant body; and
  • Failure by the relevant body to prevent its associated person from committing the criminal facilitation.

In respect of foreign tax evasion, two further elements are required:

  • The relevant body must have a sufficient connection to the UK either by establishment, carrying on a part of their business in the UK or conduct constituting part of the offence taking place in the UK; and
  • The conduct of the taxpayer and the associated person must be criminal under both UK law and the law of the jurisdiction where the tax evasion occurs.

The (only) defence

The sole defence to these strict liability offences is where the relevant body can demonstrate that at the time the facilitation offence was committed:

  • It had “such prevention procedures as it was reasonable in all the circumstances to expect” to prevent associated persons from committing a facilitation offence; or
  • It was “not reasonable in all the circumstances to expect” the relevant body to have such prevention procedures in place.

The penalties

Upon conviction in England and Wales, relevant bodies will be liable to pay an uncapped fine.

Comment

To achieve a conviction, prosecutors face a high burden as they have to prove two offences beyond reasonable doubt:

  1. The underlying criminal tax evasion (which includes cheating the public revenue or being knowingly involved in, or taking steps with a view to, the fraudulent evasion of tax); and
  2. The facilitating of the underlying criminal tax evasion by an associated person of a relevant body.

That burden is even higher in respect of foreign tax evasion offences as prosecutors will have to prove that the offences are criminal under the relevant foreign law. Obtaining the necessary proof, which will likely require expert evidence, particularly in respect of foreign tax law, will be costly. As such, the appetite to pursue such prosecutions on the public purse remains to be seen.

That said, the cost to businesses (and their insurers) may be significantly higher both in terms of investigation costs and a potentially unlimited fine. A conviction may also make it difficult for businesses to continue to operate in regulated jurisdictions. In light of this, the Act envisages the use of deferred prosecution agreements which presents an inherently more appealing option.

In order to maintain a successful defence, relevant bodies must show evidence of reasonable procedures being in place. What constitutes a reasonable procedure will be different for each entity and must be considered in the context of each entity’s operations and the risks it faces.

The Ministry of Justice prepared guidance notes in respect of the Bribery Act. Similar guidance on the Act is awaited from HMRC.

All firms dealing with the provision of tax services in any capacity will need to reconsider their procedures, particularly in respect of risk assessments; proportionality of prevention procedures; due diligence; training of staff; and monitoring/review. This includes accountants, tax advisers, brokers and trustees.

What’s next?

A Ministry of Justice consultation on “corporate liability for economic crime”, such as the failure to prevent fraud, false accounting and money laundering, closed on 31 March 2017. While the outcome of this consultation will not be considered until after the General Election, it would be surprising for this proposal to be dropped given the potential political implications.

Related item: Deferred Prosecution Agreements: the claims horizon

Read other items in the London Market Brief - June 2017