Many Businesses Still at Risk from U.K. Tax Corporate Criminal Offense

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Ian Hyde Catherine Robins

Ian Hyde and Catherine Robins Pinsent Masons LLP, U.K.

Ian Hyde, Partner and Catherine Robins, Partner, Pinsent Masons LLP. U.K.

It is now a criminal offense in the U.K. for a business if an employee or “associated person” facilitates tax evasion: what should businesses be doing now to protect themselves from penalties?

Five months after it became a criminal offense in the U.K. for a business if an employee or other “associated person” facilitates tax evasion, many businesses still do not have the policies and procedures in place that could protect them. Further, as well as U.K. companies and partnerships, businesses formed or operating outside the U.K. can also commit an offense if their employees facilitate the evasion of U.K. tax.

It seems that many businesses are not taking the issue seriously enough. This is a risky strategy, as one rogue individual could expose the business to serious adverse publicity and a criminal conviction could prevent a business from bidding for government contracts.

The Offenses

Two new U.K. offenses were introduced by the Criminal Finances Act 2017 and began to apply from September 30, 2017. The first offense applies to all businesses, wherever located, in respect of the facilitation of U.K. tax evasion. The second offense applies to businesses with a U.K. connection in respect of the facilitation of non-U.K. tax evasion.

The offenses apply to both companies and partnerships. They effectively make a business vicariously liable for the criminal acts of its employees and other persons “associated” with it, even if the senior management of the business was not involved or aware of what was going on.

There are two stages for the new corporate offenses to apply: there must have been criminal tax evasion by someone other than the business concerned; and a person/entity who is associated with the business must have criminally facilitated the tax evasion while performing services for that business.

The associated person must deliberately and dishonestly take action to facilitate the evasion. If the associated person accidentally, ignorantly or negligently facilitates tax evasion by another person, that will not be sufficient. Neither will it be enough to facilitate tax avoidance. An associated person who facilitates their own or another person's tax evasion in the course of their private life, and not in their business capacity, will not trigger the corporate offense.

“Associated persons” is widely defined and includes employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries.

Businesses will have a defense if they can prove that they had reasonable prevention procedures in place to prevent the facilitation of tax evasion, or that it was not reasonable in the circumstances to expect there to be procedures in place.

The penalties for the offense include unlimited financial penalties. However, the consequences for a business of having a criminal conviction are likely to be more serious: potentially requiring disclosure to professional regulators in the U.K. and overseas, and preventing the business being awarded public contracts. Adverse publicity and serious reputational damage are also very likely.

Territorial Issues

In relation to U.K. tax, the offense will apply to any company or partnership, wherever it is formed or operates.

While the offense was introduced as a reaction to disclosures about the activities of non-U.K. branches of U.K. banks, it is not just limited to banks and applies to all businesses. Those operating in other high risk areas prone to tax fraud, for example construction, must also be at risk. All U.K. based businesses should take steps to protect themselves.

For businesses operating offshore, although it technically applies to all businesses, it is banks, accountancy firms, law firms, trustees, financial advisers, and support services, such as company formation providers, which are most likely to fall foul of the new law.

Where non-U.K. tax is evaded a business will commit an offense if the facilitation involves a U.K. company or partnership, any company or partnership with a place of business in the U.K., including a branch, or if any part of the facilitation takes place in the U.K. In addition, the non-U.K. tax evasion and facilitation must amount to an offense in the local jurisdiction and involve conduct which a U.K. court would consider to be dishonest.

Steps Businesses Should be Taking

A business will have a defense if it can prove that it has put in place reasonable prevention procedures to prevent the facilitation of tax evasion taking place, or that it was not reasonable in the circumstances to expect there to be procedures in place. HM Revenue & Customs' (“HMRC”) guidance on the offenses explains that there are six guiding principles that underpin the defense of having reasonable prevention procedures. These are:

  •  risk assessment;
  •  proportionality of risk-based prevention procedures;
  •  top level commitment;
  •  due diligence;
  •  communication (including training); and
  •  monitoring and review.

It is important to secure top level commitment from a company's board and/or senior executives about the risks of exposure to the offenses and the need for the business to respond to the new offenses.

Risk Assessment

Business should have already undertaken a risk assessment to identify the risks of facilitation of tax evasion within the organization and the potential gaps in existing controls. Any business that has not already carried out a risk assessment needs to do so now as a matter of urgency.

Following a risk assessment, most businesses will need to introduce changes to ensure that they have robust procedures in place to prevent their employees, service providers, agents, suppliers and customers from engaging in or facilitating tax evasion. A key element of those procedures is to ensure that sufficient training on tax evasion and the offenses is provided to all staff.

HMRC Guidance

HMRC guidance states that tax evasion and general fraud training for employees could include:

  •  the organization's policies and procedures, including provisions of the Criminal Finances Act and any other sector regulatory rules and principles;
  •  an explanation of when and how to seek advice and report any concerns or suspicions of tax evasion or wider financial crime, including whistleblowing procedures;
  •  a definition and explanation of the term “tax evasion” and associated fraud; and
  •  an explanation of an employee's duty under the law.

The level and nature of the training given to employees may vary depending on their role and the perceived level of risk.

International Businesses

For international businesses, because the U.K. tax evasion offense can be committed by a non-U.K. resident entity, it will not necessarily be sufficient just to train the U.K. staff. HMRC makes it clear that in relation to a bank operating through branches in different countries it would expect the bank to put in place reasonable prevention procedures for all branches and not just for the U.K. branch.

Policies and Procedures

The appropriate policies and procedures will depend upon the high risk areas identified in the risk assessment. These could include due diligence procedures for customers and suppliers, a whistleblowing procedure and accounts policies and procedures regarding payments to employees and suppliers.

Training programs and company policies and procedures can and should be put in place to manage the risk of employees facilitating tax evasion. However, businesses are also at risk from the actions of associated persons who are not employees, where it may be more difficult to manage the risk.

Businesses will need to place obligations on third parties not to commit or facilitate a tax evasion offense. Wording should be considered for inclusion in contracts with agents, intermediaries, subcontractors and suppliers. Where there are chains of suppliers, a business will want to require those they are contracting with to carry out anti-tax evasion facilitation due diligence and procedures in relation to the next party in the chain.

Protecting against exposure to the new offense is not a one-off activity. The guidance makes it clear that HMRC expects reasonable procedures “to be kept under regular review and to evolve as [the business] discovers more about the risks that it faces and lessons are learnt.”

In the same way it will not necessarily be enough to simply put a clause in an agreement and point to that alone as amounting to reasonable prevention procedures in relation to an associated person. The engager should consider exercising rights under the clause to review the procedures of the associated person.

Timing

Some risk teams will have conducted an initial assessment, but may since have “lost steam” and not followed through by actually putting policies and procedures in place.

The HMRC guidance accepts that some procedures, such as training programs and new IT systems, will take time to roll out, especially for large organizations, and will not necessarily have been in place from September 30. However, the guidance makes it clear that the government expects there to be “rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan.”

We are now around five months on since the introduction of the new rules. Although HMRC did not expect businesses to have everything in place from day one, the longer the offense has been in force, the more difficult it will be for a business to rely on the reasonable prevention procedures defense if it has not actually made any practical changes to its procedures or rolled out its training and policy changes.

Although within the European Union many risk teams will be focusing their resources on implementing the General Data Protection Regulation (“GDPR”), this tax evasion facilitation offense could have such potentially adverse consequences for a U.K. or non-U.K. business that it simply cannot be ignored.

Ian Hyde and Catherine Robins are Partners with Pinsent Masons LLP, U.K.They may be contacted at: ian.hyde@pinsentmasons.com; catherine.robins@pinsentmasons.com

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