New UK criminal offence for companies failing to prevent tax evasion

Companies and partnerships face the prospect of being criminally liable if their employees or agents facilitate tax evasion by third parties.

The UK government has taken the next step towards the introduction of a new criminal offence for companies and partnerships who fail to prevent their staff from facilitating tax evasion by a third party. The key point here is that this is not about corporations evading tax themselves, but evasion by third parties with whom any associated person interacts.

These proposals were first raised in the Budget in 2015. The Criminal Finances Bill was published on 13 October along with updated draft guidance, and will be subject to parliamentary debate soon. However, having already faced public consultations, the proposals may not change significantly. They look likely to come into force during 2017.

The offence

The new offences arise where a relevant body fails to prevent an associated person criminally facilitating the evasion of a tax. There will be two separate offences, distinguishing UK tax evasion from tax evasion committed in foreign tax jurisdictions.

The legislation applies to businesses of all sizes and sectors, and across all taxes.

There are three stages in identifying a corporation criminal liability. Firstly there must have been two criminal offences:

• Criminal tax evasion by a taxpayer under existing law; and
• A person acting on behalf of a corporation (an associated person) knowingly facilitates this offence. The issue here is that the corporation does not need to be knowingly facilitating the evasion. Ignorance on the part of the corporation is no defence.

The third element is that the corporation must have failed to take reasonable steps to prevent the associated person from committing the criminal act.

A person is “acting on behalf of a corporation” if they are an employee, contractor or agent of the corporation and perform services for the corporation in that capacity. Therefore, it does not apply to something done by an employee outside the work environment and in a private capacity.

The foreign tax evasion facilitation offence arises where there is a ‘dual criminality’. The acts of the associated person must be criminal if committed in the UK, not just under the foreign criminal law.

The defence

Taking the three stages above, it is going to be virtually impossible for corporations to ensure that no third party ever evades tax. Similarly, any large business is going to have difficulty being certain that no associated person will ever facilitate tax evasion.

Therefore, the most likely approach for businesses is to ensure that they have taken “reasonable steps” to prevent the criminal act by the associated person.

HMRC's draft guidance includes six guiding principles as to what would constitute “reasonable steps” to prevent the facilitation of tax evasion:

• Risk assessment;
• Proportionality;
• Top level commitment;
• Due diligence;
• Communication and training;
• Monitoring and review.

The next steps

There remain a number of areas where clarity is yet to be provided, but in many ways the challenges for business are similar to those relating to the UK Bribery Act, albeit even more wide reaching.

This issue requires businesses to shift their thinking away from their own tax affairs. This is not about their tax, but that of third parties.

There are two key steps businesses can take now:

• The government is encouraging taxpayers to engage with HMRC on the draft guidance and has suggested the possibility of “tailored guidance” for particular sectors.

• Businesses should start to consider how these rules might apply to them. The identification, scoping, design and implementation of “reasonable steps” is going to be a complex and challenging task for businesses with even a moderate interaction with third parties. Businesses need to start looking at the types of transactions that might be relevant, such as buying, selling, M&A and financing. VAT and employment taxes are likely to be of particular concern for many.

Engaged Consulting is able to help. If you would like to learn more about what these new rules might mean for you, and how to you can start preparing for their introduction, please contact us. 

We are able to discuss a suitable tailored project to help you develop the "reasonable steps" that may be your most practicable way of complying with these new rules. 

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