Policing the evaders and facilitators: new corporate offences relating to tax evasion
December 2017 | SPECIAL REPORT: GLOBAL TAX
Financier Worldwide Magazine
December 2017 Issue
On 30 September 2017, the new corporate criminal offences of failure to prevent the facilitation of both UK and foreign tax evasion under Part 3 of the Criminal Finances Act 2017 came into force.
The Act establishes two new offences, dealing respectively with facilitating the evasion of UK tax or the evasion of foreign tax. Although primarily aimed at businesses providing tax advice and which operate in the financial sector, these offences apply to all businesses irrespective of sector.
It should be noted that the new offences are based on tax evasion by another person, not tax avoidance. Tax evasion takes place when individuals or businesses dishonestly omit, conceal or misrepresent information in order to reduce tax liability. Tax avoidance, on the other hand, is not a criminal offence, but involves the exploitation of tax rules by the use of transactions that are designed to gain a tax advantage. It involves operating within the letter, but not necessarily within the spirit of the law.
Under the Act, a corporate will be liable where an “associated person” acting in his or her capacity as such, criminally facilitates others to evade taxes. The new offences will not be made out, however, if an associated person was acting in a personal capacity.
The Act defines an associated person as: (i) an employee acting in that capacity; (ii) an agent of the corporate who is acting in that capacity; or (iii) any other person who performs services for or on behalf of the corporate while acting in that capacity. Although the definition could potentially apply to contractors, sub-contractors and temporary workers, along with joint ventures, whether it does so in any given case will be determined by reference to all the relevant circumstances and not merely by reference to the contractual nature of the relationship.
Elements of the UK offence
A corporate or partnership, wherever incorporated or formed (X), will be guilty of the UK offence if: (i) a person (Y) evades UK tax of any kind; (ii) another person (Z) deliberately and dishonestly facilitates Y’s evasion while Z is acting as an associated person of X; and (iii) X fails to prevent Z from doing so. X or Z does not need to have any connection or nexus to the UK.
For the purposes of the Act, UK tax evasion means an offence of cheating the public revenue or an offence under the law of any part of the UK consisting of being knowingly involved in, or taking steps with a view to, the fraudulent evasion of a tax (e.g., conspiracy).
A UK facilitation of tax evasion offence includes, for example, being knowingly concerned in or taking steps with a view to, another person’s fraudulent tax evasion, or aiding, abetting, counselling or procuring the commission of a UK tax evasion offence.
As such, the UK offence relies on the existing framework of UK criminal offences of tax evasion and facilitating tax evasion. It operates to make a corporate strictly liable where the facilitation is done by someone acting on its behalf.
Elements of the foreign offence
X will be guilty of the foreign offence if: (i) Y evades foreign tax (and this would be a tax evasion offence if committed in the UK); (ii) Z deliberately and dishonestly facilitates Y’s evasion while Z is acting as an associated person of X (and such facilitation would be an offence if committed in the UK); and (iii) X fails to prevent Y’s facilitation.
For this offence it is necessary that X is incorporated or formed under UK law, carries on business or part of a business in the UK or any conduct constituting part of the foreign tax evasion facilitation offence takes place in the UK.
For the purposes of the Act, foreign tax evasion means conduct which amounts to an offence under the law of a foreign country, relates to a breach of a duty relating to foreign tax, or would be regarded by a UK court as amounting to being knowingly concerned in, or in taking steps with a view to, fraudulent tax evasion.
Foreign tax evasion facilitation means conduct that amounts to an offence under the law of a foreign country, relates to the commission by another person of a foreign tax evasion offence, and would, if the foreign tax evasion offence were a UK tax evasion offence, amount to a UK tax evasion facilitation offence.
In short, for the foreign offence to apply, the act of tax evasion and its facilitation must both be criminal evasion and facilitation offences in the relevant foreign country, and they must constitute evasion and facilitation offences had they occurred in the UK. This is known as the principle of ‘dual criminality’.
As a safeguard, the foreign offence will require the consent of the director of public prosecutions or the director of the Serious Fraud Office (SFO) to prosecute.
Defence of ‘reasonable procedures’
Mirroring the corporate offence enacted through the Bribery Act 2010, it is a defence to each of the new offences if a business charged with either proves that: (i) it had such prevention procedures as it was reasonable in all the circumstances to expect it to have in place; or (ii) it was not reasonable in all the circumstances to expect it to have any prevention procedures in place (known as the ‘reasonable procedures’ defence).
HMRC published its final guidance on developing reasonable procedures on 1 September 2017, which mirrors that which accompanied the Bribery Act 2010, and is intended to help firms to understand what types of prevention measures are likely to be considered ‘reasonable’. The focus of HMRC’s draft guidance is listed below.
Risk assessment. Prevention procedures should be developed following a risk assessment, regularly reviewed, and documented. HMRC’s guidance makes clear that for a corporate to be able to avail itself of the reasonable procedures defence, it will at the very least need to show that it conducted an effective risk assessment that identified the risks (if any) to be mitigated by additional controls. That assessment should be documented and kept under review. When determining whether prevention procedures are ‘reasonable’ and ‘proportionate’, the guidance notes that the size of the organisation will be an important, but not the only, determining factor. The nature and complexity of the business should also be considered. The guidance emphasises that those in the business of giving financial or investment advice are likely to be in a high risk category for the purpose of the new offences.
Proportionality. Prevention procedures should be proportionate to the risks faced of an associated person committing a tax facilitation offence.
Top level commitment. Prevention procedures should be developed with appropriate commitment from senior management, which will be expected to take responsibility for the development, implementation and endorsement of such prevention procedures.
Due diligence. Prevention procedures should make provision for appropriate due diligence, capable of identifying the risk of criminal facilitation of tax evasion by associated persons. The due diligence procedures put in place should be proportionate to the identified risk.
Communication (including training). Prevention procedures should be communicated, embedded and understood throughout the organisation, through internal and external communication, including training. The nature of internal and external communication should be proportionate to the risk to which the organisation assesses that it is exposed.
Monitoring and review. Prevention procedures should be monitored and reviewed periodically and improvements made, where necessary.
The guidance makes clear that simply including the word ‘tax’ in existing anti-bribery or anti-money laundering procedures and processes, but not effectively implementing or enforcing them or risk assessing them, is unlikely to be sufficient for the purposes of the Act.
It is worth noting that pursuant to Schedule 17 of the Crime and Courts Act 2013, which introduced Deferred Prosecution Agreements (DPAs) on 24 February 2014, DPAs are an available alternative to prosecution for tax evasion offences and so may be applied to the new offences.
Omar Qureshi and Sam Dames are partners and Andre Anthony is an associate at CMS. Mr Qureshi can be contacted on +44 (0)20 7367 2573 or by email: firstname.lastname@example.org. Ms Dames can be contacted on +44 (0)20 7367 2470 or by email: email@example.com. Mr Anthony can be contacted on +44 (0)20 7367 2644 or by email: firstname.lastname@example.org.
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Omar Qureshi, Sam Dames and Andre Anthony