- The new corporate offence
The Criminal Finances Act 2017 brought into effect on 30 September 2017 two new corporate criminal offences of failure to prevent the facilitation of UK and foreign tax evasion by a person associated with a “relevant body”. The legislation does not amend that what is criminal, for tax evasion has, unsurprisingly, always been unlawful. The menace that the Act addresses is rendering businesses criminally liable for the acts of their associated persons who criminally facilitate the evasion of tax.
To that end, a corporate or partnership (‘X’) will be guilty of an offence if:
- A person (‘Y’) evades UK tax of any kind;
- Another person (‘Z’) deliberately and dishonestly facilitates Y’s evasion while Z is acting as an associated person of X; and
- X fails to prevent Z from doing so.
In respect to (1) for the Corporate Offence to be committed, a criminal offence of tax evasion must have occurred. Any fraudulent activity that intends to divert funds from the public revenue constitutes the common law offence of cheating the public revenue. There are also a range of statutory offences of “fraudulently evading” various taxes, for example fraudulently evading VAT, contrary to section 72 of the Value Added Tax Act 1994; or fraudulently evading income tax, contrary to section 106A of the Taxes Management Act 1970.. These provisions make it an offence to dishonestly “take steps with a view to” or “be knowingly concerned in” the evasion of the tax and as such for these offences to be committed it is not necessary that any tax actually be successfully evaded. Further, in order to bring a prosecution against a business there does not need to be a conviction of an individual (Y) but it must be proven beyond reasonable doubt that the tax payer level offence has been committed by Y.
In respect to (2) 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. Whether the definition applies shall be determined by reference to all the relevant circumstances. The concept of a person who ‘performs services for or on behalf of’ the organisation is intended to be broad in scope, to embrace the whole range of persons who might be capable of facilitating tax evasion whilst acting on behalf of the relevant body. The contractual status or label of a person performing services for or on behalf of the organisation does not matter, so, for example, employees, agents and sub-contractors can be associated persons. If the associated person is only proved to have accidentally, ignorantly or negligently facilitated tax evasion, then the new offence is not committed by the business for the Act demands the conduct of facilitation to be deliberate and dishonest.
In respect to (3), it should be noted that the offence is one of strict liability. The business however has a defence if it has put in place reasonable procedures to prevent the criminal facilitation of tax evasion by an associated person or where it is unreasonable to expect such procedures to be in place.
A business who is convicted could face an unlimited fine. While there are currently no sentencing guidelines, we can reasonably anticipate the fines imposed shall be very large, when we consider the matrix of other corporate offending guidance. However, as is common reputational and other pecuniary damage (such as loss of future contracts)may follow a conviction.
- How should businesses react to the new offence?
Business will have to commit to policies and processes designed to prevent employees and others committing tax facilitation offences. To devise such procedures, the business will need to:
- Carry out a risk assessment.
- Decide on what is a proportionate response to that risk.
- Ensure top-level commitment within the organisation to implementing any policy/procedure.
- Maintain due diligence.
- Communicate the policy/procedures and train all employees/agents who carry out work on your behalf.
- Monitor and review the policies and procedures to ensure continued effectiveness.
- Example of “reacting” to the new offence.
The following is a worked example by HMRC of the application of the defence and demonstrates the importance of due diligence.
- A mid-size car parts maker (“UKCO”) 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
- UKCO itself undertook a tax evasion focused risk assessment, identifying only low and medium level risks to the organisation, subsequently implementing a number of prevention policies and procedures to mitigate the identified risks. UKCO had a clear policy against tax evasion, including terms and conditions within contracts with all third parties
- UKCO also carried out a due diligence assessment of its sub-contracting partner, but not for the entire supply chain. Nothing abnormal was detected during the due diligence test and consequently, UKCO had no reason to believe that the staff of the distributor were involved in a fraudulent tax scheme
In these circumstances, UKCO had undertaken a tax evasion facilitation risk assessment, had procedures and processes in place, as well as conducting a due diligence assessment of its sub-contracting partner. It is therefore unlikely that this company would have committed the offence as it has a valid defence of having reasonable procedures in place and articulating and evidencing what it had done, even if it did not conduct due diligence for the entire onward supply chain. Whilst UKCO could have done more, it would not have been reasonable or proportionate to do so, the steps that it did take were proportionate to the risks it identified and faced.
- How Can Chambers help?
While HMRC does not expect business to have everything in place as of today’s date, it does have some ‘day one’ requirements, with HMRC stating in its guidance that: ‘[We expect] there to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force’.’
As such we would advise businesses to tackle the new offence (or rather the defence) and not disregard the importance of this piece of legislation.
How can Chambers help in that regard? We can advise businesses providing a specific, tailored, action plan and provide training (including seminars) to allow you to address any concerns and best insulate you against prosecution. Chambers has high-level expertise in both the prosecution and defence of corporate clients and companies in the full spectrum of criminal and quasi-criminal matters. Led by four Queen’s Counsel, our Business Crime Group enjoys an enviable back catalogue of advisory, trial and appellate work.
A series of major financial scandals taken together with an ever increasing number of Statutes and Regulations have highlighted the significance of corporate responsibility and the State’s willingness to hold those responsible to account. As such, business should not simply look for reactive advice but proactive. The Financial Crime Act 2017 is a further evidence of such a need.
Our barristers routinely act in complex business crime matters both for prosecuting agencies and on behalf of defendant companies and directors. Many of our Members have undertaken secondments to gain relevant exposure and specialisation, including with the Serious Fraud Office, Her Majesty Revenue and Customs and leading city and niche corporate crime firms. In addition to traditional advocacy services, Chambers are therefore well placed to provide advice in respect to due diligence and effective procedures arising from the new offence, in addition to providing training and interactive seminars.
Moreover, our Members are well versed in drafting policies and compliance manuals and have provided training and lectures both domestically and internationally. Our Business Crime Group can call upon expertise from our Employment Group, Financial and Banking Group together with our Commercial Group to ensure the highest level of representation to our clients.
If you would like to discuss matter further with either Jo Morris or Colin Witcher, or any other member of our business crime team, please do not hesitate to contact Rod McGurk Chambers’ Practice Director.