Regulation 3 of the Criminal Finances Act 2017 (Commencement No. 1) Regulations 2017 provides that the corporate offences of failure to prevent the facilitation of tax evasion (within Part 3 of the Criminal Finances Act 2017) will come into force on 30 September 2017. This is nearly a month later than had been expected and will provide a further welcome opportunity for corporates to put in place reasonable procedures to prevent the facilitation of tax evasion.
Overview of the new offences
The new corporate offences apply to 'relevant bodies' – meaning bodies corporate and partnerships, wherever in the world they are incorporated or formed.
A relevant body may be found liable for one of the offences in the event that:
- Stage one: a natural or legal person commits tax evasion. Evasion in this context means dishonest evasion of tax. Tax avoidance, even if aggressive, is not caught
- Stage two: a person associated with the relevant body facilitates the tax evasion at stage one. A person can be 'associated with' a relevant body for the purposes of the offences by being an employee, an agent, or anybody else performing services 'for or on behalf' of the relevant body and in all cases whilst acting in that capacity. This is a deliberately wide definition that has the potential, in certain circumstances, to catch sub-contractors, subsidiaries and intermediaries
- Stage three: a failure by the relevant body to have in place reasonable procedures to prevent the facilitation at stage two.
The offences effectively make a corporate automatically liable where the facilitation at stage two is carried out by someone acting on its behalf, with the burden then shifting onto the corporate to show that it has a defence. This model of corporate liability has a precedent in the failure to prevent bribery offence contained within section 7 of the Bribery Act 2010.
Whilst the offences were originally designed in the context of HMRC's strategy for dealing with offshore tax evasion and primarily aimed at professional and financial service providers considered to be enabling or facilitating tax evasion offshore, it is important to note that the offences apply to all corporates regardless of sector.
The UK and foreign offences
There are two new offences which follow the same three-stage structure – a UK and foreign offence.
The UK offence applies to all relevant bodies, regardless of where they are established or where the conduct giving rise to the elements of the offence takes place but that conduct must involve the evasion of UK tax. The UK offence therefore has significant extra-territorial reach.
The foreign offence applies in a more restricted way in that it requires a 'UK nexus', which includes:
- the relevant body being incorporated under UK law, or
- the relevant body carrying on a business or part of a business in the UK, or
- any conduct constituting part of the foreign tax evasion facilitation offence taking place in the UK.
In addition to this 'UK nexus', the conduct at stages one and two of the foreign offence must be capable of being criminal tax evasion and facilitation offences in both the UK and the foreign jurisdiction (known as 'dual criminality')
The result of a successful prosecution under either of the offences is a criminal conviction for the corporate (which may have regulatory and other wide ranging implications) and an unlimited fine.
The statutory defence
It is a defence for the relevant body to prove that, at the time of the offence, it had in place such prevention procedures as it was reasonable in all the circumstances to expect it to have in place (or it was reasonable in all the circumstances to expect it to have none)
HMRC has issued general guidance in draft form on the prevention procedures required (updated in October 2016), which is formulated around six guiding principles:
- Risk assessment
- Proportionality of risk-based prevention procedures
- Top level commitment
- Due diligence
- Communication (including training)
- Monitoring and review.
Sector specific guidance is also being prepared by certain regulatory bodies and may be endorsed under the legislation.
'Day one' compliance
HMRC have stated that the prevention procedures that will be considered reasonable will change as time passes. What is considered reasonable on 'day one' of the offences will not be the same as that which is considered reasonable when the offences have been in effect for a number of years. The prevention procedures in place and planned will be taken into account. However, there is an expectation of rapid implementation, which must focus on the major risks and priorities and include a clear timeframe and plan for implementation.
In our view, this means that a standalone work programme will be required for the purpose of 'day one' compliance, with the outcome from that project later incorporated into an organisation’s wider financial crime controls. In order to demonstrate a clear commitment to compliance, it seems likely that the following minimum steps will be required:
- Ensure that Board-level commitment for the project is obtained and the Board's position in relation to the facilitation of tax evasion is communicated
- Undertake an initial risk assessment
- Take steps to put in place a programme to deliver proportionate risk-based procedures in a timely manner
Please see the attached flyer which sets out the offence in more detail and gives our view on what corporates should do as a minimum to protect themselves before 30 September 2017.
For more information please contact Andy Brown or Julian Balson.
View flyer >