The UK’s Government has again been busy creating new corporate crimes to help enforce its policy objectives. This time it relates to tax evasion, or more accurately “failure to prevent the facilitation of tax evasion”. Two new offences came into force on 30 September 2017 in the Criminal Finances Act 2017 – one for UK tax evasion and one for foreign tax evasion. As the HM Revenue & Customs (HMRC) press release says: “It is already a crime to evade tax, or deliberately help another person to do so, but on behalf of the majority of taxpayers who pay what is due, the UK government is taking an even firmer stance on corporate fraud in a move designed to drive a change in corporate culture.” Much like anti-bribery and corruption rules your company’s defence is to prove you have reasonable prevention procedures in place. HMRC has provided guidance on this, which this blog summarises for you.
Who is this relevant for?
All companies and partnerships in all industries will need to put some prevention procedures in place. Higher risk sectors e.g. accountancy, tax advice, wealth management and legal services will need to do more.
What are the offences?
There’s three parts: (1) a taxpayer commits criminal tax evasion, (2) a person who is acting on behalf of your company or partnership commits an offence by “deliberately and dishonestly” helping the taxpayer evade tax (“facilitation”), and (3) the company failed to take reasonable steps to prevent this criminal facilitation. Part (3) is the corporate offence and the only part that’s new. For the UK tax evasion offence the company or its business could be based abroad. For the foreign tax evasion offence only the company, its business or some of its staff needs to be based in the UK. It doesn’t matter whether the senior management / board were aware of the facilitation or not.
What’s tax evasion (illegal) and what’s tax avoidance (legal)?
This is not an easy question as the line is increasingly blurred but the HMRC guidance provides some examples of criminal facilitation of tax evasion:
· A mid-size car parts maker operating in the UK and Europe, entered into a sub-contracting arrangement with an UK distributor. The senior managers of the UK distributor created a false invoicing scheme with the assistance of a purchaser, allowing the purchaser to evade UK taxes due on its purchase of the car parts in the UK.
· As part of a large transaction an employee of a UK-based multinational bank knowingly referred a corporate client to an offshore accounting firm with the express intention of assisting the corporate client to set up a structure allowing the client to evade foreign income tax.
Existing procedures won’t cut it
Companies and partnerships who operate in the UK or deal with UK tax will need to put in place yet more compliance procedures – HMRC is very clear that your existing anti-bribery and corruption, fraud prevention or financial crime prevention procedures (if applicable) will help but aren’t enough on their own.
So what do you need to do? According to HMRC guidance every company and partnership needs to firstly undertake a risk assessment of the products and services it offers, as well as internal systems and client data that might be used to facilitate tax evasion. This includes “sitting at the desk” of employees and other associated persons, considering the motive, means and opportunity for facilitating tax evasion. When doing this you should consider typical fraud “red flags”, for example:
- Are there staff who refuse to take leave and do not allow anyone else to review their files, or are overtly defensive over client relationships?
- Do existing processes ensure that for higher risk activity at least a sample of files are routinely reviewed by a second pair of eyes?
Then consider tailoring existing processes and procedures accordingly to prevent and detect potential tax evasion facilitation – this could include:
Having a commitment to preventing the involvement of those acting on your behalf in the criminal facilitation of tax evasion, demonstrated by issuing a prominent message from the board of directors, partners or leadership team against all forms of tax evasion;
- Having terms in contracts with employees and contractors requiring them not to engage in facilitating tax evasion and to report and concerns immediately;
- Providing regular training for staff on preventing the facilitation of tax evasion;
- Having clear whistle-blowing procedures;
- Ensure your pay and bonus policy/structure encourages reporting and discourages pursuing profit to the point of condoning tax evasion;
- Having regular reviews of the effectiveness of prevention procedures and refining them where necessary; and
- Monitoring and enforcing compliance with prevention procedures.
These are merely the basics for SMEs and need to be tailored to the organisation’s specific risks. Larger or higher risk companies and partnerships will need to do more on top of this to comply but may have guidance from their sector regulator to help them.
When do we need to do this?
HMRC is expecting you to be doing your risk assessments and initial staff communications now and to have a clear timeframe for putting the other procedures in place.
For more information or help with complying contact the Corporate Team at Blackadders. Thanks to Sara Scott, our Regulation & Compliance Manager for input to this article.
Campbell Clark, Partner – Corporate and Commercial @CampbellJSClark