What do you need to know about tax evasion legislation?

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A year on from the introduction of tax evasion laws Martin Griffiths, partner in the Tax & Structuring team at Addleshaw Goddard, warns a lack of awareness could be putting businesses at risk.

On 30 September 2017, a new corporate offence came into force to prevent the facilitation of tax evasion. It brought with it significant implications for businesses across the country.

The legislation introduced a law whereby any business can be prosecuted if its employees, agents or even contractors evade tax – and the business is deemed to have taken insufficient preventative measures.

While this new law could have profound consequences for businesses that contravene it, many have not taken action. This may be because, in a world where capacity and resource are constrained, the legislation has simply passed them by while they concentrated on other areas. It’s possible that those aware of the legislation are sitting back – awaiting the first major prosecution – before deciding to take action to protect themselves.

However, by failing to act businesses are putting themselves at risk. Falling foul of the rules is punishable by unlimited fine and potential criminal sanctions. As if this wasn’t enough, in our experience purchasers of companies are increasingly looking for comfort that target companies are compliant with their obligations in this area.

What is the offence?

The Criminal Finances Act 2017 (CFA 2017) introduced a new corporate offence, failure to prevent facilitation of tax evasion, which came into force on 30 September last year.

This is split into two potential offences – one for when the tax evaded is owed to the UK and the other applying when the tax is owed to a foreign country.

There are three parts that must exist in order for criminal liability to arise:

  1. A taxpayer must have criminally evaded tax under existing law – this can be an individual or a corporate entity.
  2. The tax evasion must have been facilitated by an “associated person” of the organisation. The term “associated person” is extremely wide and can be an employee, an agent or some other person who performs services for or on behalf of the organisation, for example contractors or sub-contractors.
  3. The organisation must have failed to prevent the associated person from committing the criminal facilitation.

The only available defence is that the organisation had preventative procedures in place that it would be reasonable in all the circumstances to expect – or that it was not reasonable, in all the circumstances, for the company to have any prevention procedures in place. Generally, it will therefore be critical for organisations to demonstrate that they have put such procedures in place.

Are you at risk?

The CFA 2017 is unusual in that it applies to all companies, LLPs or partnerships, regardless of the size of the business or the industry it operates in. Any business that falls into these categories and has not taken action to ensure compliance, is at risk – and it is likely that this will apply to many businesses across the country.

However, it is true to say that different companies have different risk profiles as certain industries grant greater levels of exposure to tax or finance than others. Companies operating in a range of industries and sectors, therefore, may need to implement specific preventative measures.

For example, businesses that handle transactions involving customs duties are more exposed to risk than, say, those which help organise support staff for universities. Businesses need to assess their exposure to risk – and then need to put measures in place to mitigate this risk.

What should businesses that haven’t acted do?

It’s important for businesses to act now to show they have procedures in place to prevent the facilitation of tax evasion.

It is not the case that one particular preventative strategy will suit all companies. However, in the government guidance published by HMRC, six guiding principles are identified. These steps include:

Completing a risk assessment relevant to your company.

Businesses should ask themselves whether their employees, agents and contractors have the opportunity, motive and means to criminally facilitate tax evasion, and how this risk might be managed.

Exercising due diligence.

Businesses should then assess employees, agents and contractors on an individual basis to determine the level of risk they pose. Any prevention procedures put in place should recognise the organisation may have different levels of control over employees, contractors and agents.

Creating proportionate risk-based prevention procedures.

The level of prevention procedures required are entirely dependent on an individual business’s circumstances. A business may not require any procedures to be in place, but it must still be able to evidence that all risks have been assessed.

Demonstrating top level commitment.

Senior management is expected to make a significant commitment to any prevention procedures implemented – and an ethos of prevention and awareness will be viewed favourably.

Ensuring clear communication and training on need for prevention.

There needs to be clear communication about the preventative steps being taken to staff, agents and contractors across the board. This should be bolstered with mandatory tailored training where appropriate. As a minimum we expect most organisations to hold a training session for all staff and to have a policy which is included within the induction process of any new joiners.

Monitoring and reviewing procedures.

Businesses can either conduct their own regular review of procedures or they can instruct external reviewers.

How long have businesses got to implement prevention strategies?

Businesses should start putting the procedures in place now if they have not already done so. HMRC is aware the implementation of new systems will take time and will consider both prevention procedures already in place – and those being considered – at the time any offence is committed.

However, HMRC will not allow companies to delay compliance and they will assess what is “reasonable” for the company to have put in place to prevent facilitation. It will also consider how much time has passed since the legislation came into force. Ignorance of the law, or indeed ignorance of the behaviour of an associated person who could undertake tax evasion, will not be considered a defence.

The law is new and untested and it is therefore too early to identify trends or HMRC’s general approach. Organisations do not want to be a test case and a prudent approach is therefore encouraged – it is imperative that businesses understand the legislation and put the necessary prevention measures in place now to avoid future prosecution or penalties.

Martin Griffiths, Partner in the Tax & Structuring team at Addleshaw Goddard

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What do you need to know about tax evasion legislation?


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