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June 21, 2017

Summary

The U.K. Criminal Finances Act (“CFA”) received Royal Assent on 27 April 2017. The CFA contains two new criminal offences aimed at corporates – the failure to prevent the facilitation of U.K. tax evasion, and the failure to prevent the facilitation of foreign tax evasion – it is expected that these provisions will become effective later this year.

These rules now mean that the conduct of persons associated with a company i.e. its employees, customers, suppliers, contractors, agents and advisors could bring a strict liability for the company. This increases the importance of having a thorough knowledge of your business partners and having a well-developed system of risk management policies and procedures.  The CFA covers all forms of incorporated entities and those entities that are found guilty will face unlimited financial penalties. An entity would need to have reasonable prevention procedures in place to act as a defence against prosecution in the event a tax evasion facilitation charge is brought against them.

Article

The CFA received royal assent on 27 April 2017. It introduces two new corporate criminal offences to tackle the failure to prevent the facilitation of tax evasion. The expectation is that these offences will become effective via treasury regulations later this year.

There are no specific thresholds or de-minimis requirements and these provisions apply to every company and partnership in the U.K. and overseas (foreign entities in scope only if they have a U.K. nexus).

These rules make it much easier for businesses to be prosecuted if they are engaged in the facilitation of tax evasion, as it will no longer be necessary to prove that the board (or top level management) was aware of the tax evasion. The only defence for a business against prosecution is that it had reasonable prevention procedures in place when the facilitation of the tax offence is committed or it was unreasonable (due to size and complexity) to expect the business to have any prevention procedures in place.

The new offences

The CFA introduces a new strict liability corporate offence of failing to prevent the facilitation of tax evasion. This could occur either in the UK or overseas and therefore has extraterritorial application.

For a UK evasion event to be committed there must be (a) a criminal offence at the taxpayer’s level (b) a criminal facilitation of this offence by an associated person (an associated person can be an employee or agent or any other person who performs services for or on behalf of the company) and (c) there has been a failure by the relevant body (company or partnership) to prevent its associated person from committing the criminal facilitation.

Facilitation is widely defined to include aiding, abetting, counselling or procuring tax evasion, as well as being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of a tax by another person.

The foreign offence, on the other hand, requires a “U.K. nexus” and “dual criminality” to be present.

U.K. nexus exists where the relevant body is either incorporated or formed in the U.K. or operates in the U.K. through a branch or where an associated person is in the U.K. at the time the criminal act facilitating the evasion of foreign tax takes place.

The dual criminality condition will be met where both the actions of the taxpayer itself and of the associated person would be an offence under U.K. law and where the overseas jurisdiction also has equivalent offences at both the taxpayer and facilitator level.

Reasonable prevention procedures

Businesses are reviewing their existing policies and procedures, both in the U.K. and overseas, to ensure that they have reasonable prevention procedures to defend themselves from any potential prosecution.

Per HMRC guidance, what constitutes reasonable prevention procedures is mainly informed by six guiding principles.

  1. Risk Assessment

This is the most important guiding principle. The business will need to assess (now) the nature and extent of its exposure to the risk of criminal facilitation of tax evasion in relation to its stakeholders.

  1. Proportionality of Risk-based Prevention Procedures

Actions, if any, required from the risk assessment exercise will need to be balanced depending on the size and complexity of the business. HMRC is clear in its guidance that burdensome procedures with a view to eliminating all risks are not required.  

  1. Top Level Commitment

Messaging from the top should be timely and clear which should be woven into the risk management fabric of the business. Top management should lead from the front in making sure that everyone that works in and with the business is made aware of the risks and the consequences of non-compliance.

  1. Due Diligence

Business leads should ensure that there are procedures in place to conduct appropriate diligence on persons who perform services for and on behalf of the organisation to mitigate potential risks.  

  1. Communication (including training)

Businesses should communicate the policies in relation to the facilitation of tax evasion and ensure that these are understood throughout the organisation. This should be done through regular training of the staff and the key stakeholders of the business.

  1. Monitoring and Review

Regular monitoring and review by top management and business leads should be built into the risk management framework. The results of the review should be documented and variations to and from the policies and procedures should be addressed.  

Implementation

Implementation may not necessarily be a time-consuming exercise for smaller organisations (or they may not need it at all) but for larger, more global organisations with complex operations, implementation will be key and probably quite time consuming.

The very first step will be for businesses to understand the law and how this impacts their business. If action is required, it needs to be immediate (given the rules are likely to be in force later in the year) and policies and procedures de-risking the business from a potential prosecution will need to be developed and implemented at the earliest opportunity.

Senior members of the business would need to take ownership of the project and assess the risks and identify the existing gaps in policies and procedures currently in place. Policies around regular engagement with staff and stakeholders will need to be put in place. It is critical that all actions taken and the results are properly documented such that if ever the business is to be challenged on grounds of facilitating tax evasion under these rules they are in a position to demonstrate the work done in this area to mitigate their risks by having the documents to hand.  However, if the business is unsuccessful in demonstrating to the satisfaction of HMRC (or ultimately the courts) that they have taken all steps to limit the facilitation of a tax evasion offence and an investigation were to start that will be a different ball game all-together.