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By Ben Stupples
Big companies face constant pressure to cough up more corporation tax, but they will help reinforce the U.K.’s fight against abusive tax planning from the end of this month.
Enacted six months ago and taking effect Sept. 30, the new law targets corporations that fail to prevent the facilitation of tax evasion, forcing them to review their compliance systems.
The legislation will make large corporations do tax compliance “policing,” Ian Hyde, a London-based tax partner at global law firm Pinsent Masons, told Bloomberg BNA. To comply, companies will have to assess risk across their business, including with suppliers and customers, he added.
The measure, which threatens companies with unlimited fines and a criminal record if they facilitate tax evasion, comes as the U.K. targets large businesses as leaders in tax compliance standards.
“Large businesses sit, or usually sit, at the head of extensive supply chains, and that means their position is hugely important for tax compliance,” Jo Wakeman, large business director at Her Majesty’s Revenue and Customs, said in a Sept. 12 talk at the U.K. tax authority’s annual stakeholder conference in London. As a result, these companies “can put pressure to comply on anyone looking to join their supply chain, requiring compliance up front before they can enter,” she added.
While the U.K.’s new offense law against tax evasion affects both large and small businesses, it aims to make it easier for HMRC to hold the decision-makers of multinational companies accountable.
In past attempts to criminalize businesses for facilitating tax evasion, prosecutors faced the tough task of proving that decision-makers were both aware of and involved in efforts to evade tax. The new law overcomes this challenge by criminalizing businesses that have simply failed to introduce procedures to prevent their staff, or even an associated third party, facilitating tax evasion.
Relating to both onshore and offshore activity, the offense law will consequently challenge the “un-level” balance that previously existed in the U.K., HMRC said in guidance published Sept. 1.
“This is something that will obviously make its way onto a company’s board agenda,” Stephen Brown, a London-based financial services tax partner at accountancy firm Mazars, told Bloomberg BNA. The U.K. is looking to “change” corporates’ behavior with the new offense, he added.
U.K. is the only country to have this form of legislation against tax evasion. However, at this month’s Tax Congress for Financial Institutions in London, an HMRC official said that other countries are interested in introducing their own version of the new law.
“We’ve presented this legislation far and wide, from the OECD to other international governments,” Richard Vause, a senior policy adviser at HMRC, said in his Sept. 19 conference presentation. “Obviously, due to the complexities of other jurisdictions in tax laws and criminal law, it’s going to be interesting how it all pans out-but, yes, there has been a lot of interest.”
Part of other jurisdictions’ interest relates to how the new offense law is based on the U.K.’s Bribery Act 2010, Vause added. The legislation formed part of the legal case behind British engine-maker Rolls Royce Plc.’s 671 million pounds ($901 million) payment this year to settle bribery probes.
Like the new corporate offense, businesses face unlimited fines if they have failed to implement systems to prevent the exchange of bribes. Yet companies can avoid criminal prosecution under both sets of legislation if they can prove to have reasonable prevention procedures in place.
“The question is: What is reasonable?” James Egert, a London-based tax partner at accountancy firm BDO, told Bloomberg BNA about internal prevention procedures for the new offense. “This is a question for a U.K. court of law, rather than a black-and-white statement from HMRC.”
On top of an unlimited fine and criminal prosecution, the U.K.’s new corporate offense poses an extra threat to companies that rely on outsourced government contracts for businesses.
According to HMRC’s guidance, any company that discloses a criminal conviction to professional regulators will be unable to bid for government contracts both in the U.K. and overseas.
Capita Plc, the U.K.’s largest outsourcer by market value, relied on public contracts for almost half of its 4.9 billion pounds ($6.6 billion) in revenue for 2016, according to its annual report.
Yet a spokeswoman told Bloomberg BNA that the offense won’t adversely affect the London-based company. Capita has “rigorous” compliance procedures already in place, she added.
While the fallout from the new offense poses a risk to outsourcing companies, it poses a more immediate threat to banks in their routine business of handling their customers’ finances.
A spokeswoman for U.K. Finance, which represents the banking industry, told Bloomberg BNA the group is working with HMRC and other financial sector groups on guidance for the new law.
“U.K. Finance will publish it without delay,” according to a Sept. 18 post on the group’s website.
“Banks are at a particular risk from the offense due to the nature of what they do,” Mazars’s Brown told Bloomberg BNA. “But when you start thinking about how wide-reaching the scope is,” relating to both onshore and offshore activity, “there’s something in it for everyone,” he added.
In a statement, an HMRC spokesman told Bloomberg BNA the new corporate offense is an important law, and the tax authority will work to ensure it works as intended.
Along with preparing for the new offense law’s Sept. 30 implementation date, companies should have a roadmap to show to HMRC how they will continue to tighten compliance procedures over the next two years that will further prevent the facilitation of tax evasion, according to BDO’s Egert.
“Companies need to show that they are responding the right way,” he told Bloomberg BNA. “What may be reasonable now” for a preventative procedure “may well be different in two years.”
As Sept. 30 nears, companies also need to ensure they are educating staff on how to flag suspicious behavior and implementing monitoring processes, according to Pinsent Masons’ Hyde.
HMRC is asking large companies to be “demonstrably good,” he told Bloomberg BNA. At the same time, these companies are becoming the government’s “eyes and ears” for tax compliance.
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