Posted on 21 October 2020
The Criminal Finances Act 2017, which came into force on 30 September 2017, introduces criminal liability where companies fail to adopt appropriate systems and procedures designed to prevent an individual (defined in the legislation as an “associated person”) who acts for or on behalf of the business from criminally facilitating tax evasion. This applies to all taxes.
It is important to note that the above Act does not change what tax fraud is, just who may be liable.
Most importantly, however, there is a statutory defence for companies where Directors can show that they have taken appropriate steps to put in place a system of reasonable prevention measures.
There are three elements to UK tax evasion facilitation offences:
- the criminal evasion of any UK tax under existing laws;
- the criminal facilitation of tax evasion by an “associated person” where an “associated person” includes any employee of the Company as well as an agent or any third party who performs services for the Company (such as a consultant or subcontractor);
- a failure by the Company to put in place appropriate procedures designed to prevent an “associated person” from committing these criminal offences.
Elements 1 and 2 do not create any new offences. Importantly, only a company can commit the new offences created by element 3. This is a “strict liability offence”, which means that if elements of 1 and 2 are committed, depending upon the circumstances, the Company has prima facie committed the new offence. The ultimate outcome of any prosecution by HM Revenue and Customs is subject to the Company being able to legitimately claim the statutory defence.
The nature of the offence
A tax evasion facilitation offence means an offence under UK law consisting of:
- being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of tax by another person;
- Aiding, abetting, counselling or procuring the commission of the UK tax evasion offence; or
- Being involved “art and part” in the commission of an offence consisting of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax.
The illegal act created by the Criminal Finances Act is the failure to prevent the facilitation of UK tax evasion offences. In simple terms, a company is guilty of an offence (subject to its statutory defence) if a person commits a UK tax evasion facilitation offence when acting as a person “associated” with that company.
A company found guilty of an offence under these rules is liable to a financial penalty, stated as being potentially unlimited. But, at least as important as the reputational damage from the publicity of being adjudged guilty of such an offence.
The Company’s defence?
It is a defence if the company can demonstrate with evidence that when the UK tax evasion facilitation offence occurred it had already put such prevention measures in place as were reasonable in all the circumstances or, alternatively, it was unreasonable in all the circumstances to expect it to have certain prevention procedures in place.
HMRC has published illustrative guidance, designed to be of general application, on the procedures that company should put in place. This guidance cannot, of course, cover every form of risk so it does not pretend to be “one size fits all”. So, companies must establish their own bespoke prevention procedures designed to address their particular business circumstances and commercial pressures, having given due consideration to the risks that are involved.
HMRC’s six guiding principles (headlines only) are:
- risk assessment
- proportionality of risk-based prevention procedures
- “top level” commitment
- due diligence
- communication and training
- monitoring and review
HMRC’s detailed guidance provides some helpful pointers towards what is expected.
Friend Partnership has produced a detailed step-by-step set of work programmes which assesses a company’s existing systems and procedures against each of HMRC’s six guiding principles. These programmes, which in some ways bear a resemblance to an audit internal control questionnaire, will always need to be tailored to the requirements of the particular business being reviewed.