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James Egert BDO London
James Egert is Partner and Head of Tax Risk at BDO London
The U.K.’s new rules to criminalize corporate organizations that fail to prevent associated persons from facilitating tax evasion is expected to encourage “a more effective, risk-based and outcomes-focused approach”. Taking effect September 30, 2017, the U.K. legislation has global implications and the consequences are rather severe—potentially resulting in an unlimited fine and criminal prosecution.
This is a new and important piece of legislation (which has no de minimis) which was introduced as part of the Criminal Finances Act in April 2017, and is based on the U.K. Bribery Act 2010.
The aim of the legislation is to overcome the difficulties in attributing criminal liability to corporates when their employees, contractors and other “associated persons” are seen to be facilitating tax evasion by a taxpayer. New, updated guidance from HM Revenue & Customs (“HMRC”) was issued on September 1, 2017 (see http://src.bna.com/sF3).
Examples of where this could happen within your own organization could include someone in Human Resources or Payroll deliberately and dishonestly assisting someone else in the company evade tax by—for example—paying part of the salary “off the books”, or someone in Accounts falsifying or dishonestly updating invoices to facilitate tax evasion for a third party in the supply chain.
The offense is not just focused on facilitation of tax evasion in the U.K. As HMRC has stated in its recent guidance, “it would also be wrong for a UK-based relevant body to escape liability for acts which, if they were in relation to UK tax would be criminal, just because the country suffering the tax loss is unable to bring an action against that relevant body within that jurisdiction's legal system.” As such, the legislation also makes it an offense where certain relevant bodies (with a U.K. nexus) failure to prevent the facilitation of tax evasion in other jurisdictions.
Although the term “associated person” would essentially cover all those within your organization, it also refers to someone (an individual or an incorporated body) acting in the capacity of the organization, including agencies, provider of outsourcing and other third parties. This makes the legislation appear quite broad.
A common question is how to define an “associated person”, and then, to what extent can an organization demonstrate that they have reasonable prevention procedures in place. For the first question, this is anyone who is “performing services for or on behalf of an organisation” and in the words of HMRC, this “is to be determined by reference to all the relevant circumstances and not merely by reference to the nature of the relationship between that person and the organisation.”
A common concern raised by organizations relates to the potential extensiveness of the definition of associated persons, and we have heard that a starting point taken by some organizations is simply to include all those to whom you are paying money. Having said that, organizations should take some comfort from what HMRC has said is expected in terms of prevention procedures (see below) for associated persons that are less “proximate” to your business. Specifically, the guidance states that HMRC:
recognises that the reasonableness of prevention procedures should take account of the level of control and supervision the organisation is able to exercise over a particular person acting on its behalf, and the proximity of the person to the relevant body. The new offences do not require relevant bodies to undertake excessively burdensome procedures in order to eradicate all risk, but they do demand more than mere lip-service to preventing the criminal facilitation of tax evasion.
The final point is also important and, in practical terms, means that even if an organization already has rigorous prevention procedures in place for previous requirements such as money laundering and anti-bribery and corruption, it will need to build on these sufficiently to meet this new legislation and—in HMRC's words—it will not be sufficient to “include the word ‘tax’ into existing procedures.”
The HMRC guidance includes some practical examples (see http://src.bna.com/sF3). For those of us who are familiar with the original draft guidance (published in October 2016), there is nothing significantly different to previous commentary in terms of the actual legislation. However, there are some good case studies. This includes the example from Payroll above, as well as more complex examples involving where corporate structures have been set up with the intention of enabling the taxpayer to hide money.
As part of the guidance, another important area raised by HMRC is in relation to how they would view the situation where an organization has “turned a blind eye” to facilitation of tax evasion. In one of HMRC's case studies, they include the example where trustees have turned a blind eye to the true beneficial ownership of a structure. In HMRC's view, if the trustees in truth had knowledge of, but decided to ignore, the tax evasion, their conduct would amount to the criminal facilitation of tax evasion and any trust company or partnership for which they worked would be guilty of the new offense if it had not taken reasonable steps to prevent the facilitation of the tax evasion.
Other case studies include examples relating to contractual arrangements with joint ventures, the movement of funds offshore for tax evasion purposes and where an associated person (in this case a U.K. distributor) had created a false invoicing scheme. All of these provide some real life examples and are worth a read.
The second question is to what extent an organization can demonstrate that they have reasonable prevention procedures in place. Put simply, the U.K. Government considers that prevention procedures should be informed by the following six principles, namely, to undertake a risk assessment, ensure proportionality of risk-based prevention procedures, a top level commitment, due diligence procedures, communication (including training) and ongoing monitoring and review to ensure effective implementation of the policies. For those of you who know the Bribery Act, this will look familiar.
In responding to the legislation, organizations should consider some of the illustrative examples within the guidance of what HMRC consider what to be “reasonable” prevention procedures for companies of different sizes, complexity and industry. In all of these, the common link is the need to develop a clear policy against tax evasion, developing terms and conditions with all third parties, due diligence assessments of associated persons, and most important, an up-front risk assessment.
The scale of this legislation should not be understated. Commentary from HMRC indicates that they take this very seriously, and is a response to the ongoing momentum that is the focus on tax transparency, with the publication of the Panama Papers being a key contributor.
Organizations are acting now as they should be able to be in a position to demonstrate “reasonable procedures” to prevent the facilitation of tax evasion from September 30, 2017. Given the speed at which this legislation has come in, and the importance of getting this “right”, we are hearing that there is some flexibility to this to reflect what is reasonable for the organization to do in relation to some of the defences; however, steps should be taken as soon as possible especially in relation to the risk assessment.
James Egert is Partner and Head of Tax Risk at BDO London.
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