Will we see the first prosecutions for failure to prevent the facilitation of tax evasion in 2020?

By Nicola O'Connor

12-2019

On 18 November 2019 The Times published an article entitled 'if your suppliers cheat us we'll fine you says taxman'.  They reported that HMRC were particularly concerned with companies who provide labour and are looking closely for instances of VAT fraud within supply chains. HMRC want to see enhanced due diligence in these areas and their officers intend to step up the use of their powers to raid premises and demand inspections of business records. 

The corporate criminal offences of failing to prevent the facilitation of tax evasion, contrary to the Criminal Finances Act 2017 came into force on 30 September 2017.  However, to date no prosecutions have been brought by HMRC. Investigations are ongoing at the moment but we do not know how advanced they might be.  

Under the Act, a corporate body or partnership (“relevant body”), may be criminally liable where it fails to prevent its employees or associated persons from criminally facilitating tax evasion. The Act created two offences, namely the failure to prevent facilitation of UK tax evasion and the failure to prevent facilitation of evasion of foreign tax. The former offence, will be investigated by HMRC and the latter by the Serious Fraud Office.  Both offences are strict liability. This means that a relevant body will be guilty if any of their associated persons criminally facilitate the evasion of tax unless they demonstrate that "reasonable preventative procedures" were in place or they were not expected to require any.

Relevant bodies will face unlimited fines upon conviction if they fail to prevent the facilitation of tax evasion by an 'associated person'. That associated person might be anyone acting in the capacity of an employee, an agents or someone else who is performing services on behalf of the business. A conviction is also likely to cause significant reputational and regulatory damage.   

It's not me, it's you, right?

In March of this year HMRC published the results of some research into whether corporate behaviour had changed in response to the introduction of the Act.  The key objective of the research was to examine whether organisations were aware of the new offences and to what extent the introduction of those offences has resulted in changes in behaviour.

The research found that only ¼ of the businesses surveyed were actually aware of the Act and had made changes because of it.  Only 1/3 of the businesses believed that the Act was relevant to their business.  HMRC was no doubt disappointed to note that the research showed a "relatively low" level of awareness and understanding of the relevance of the offences and it is perhaps unsurprising that it has decided to target this area.  We are now nearing the end of the year and recent press on this point has questioned whether the low level of awareness has improved or remained as it was at the time the report was compiled.  

Reasonable Preventative Procedures

HMRC expects businesses to have developed and have in place "reasonable preventative procedures", which if designed properly should provide a business with a defence to the offences. In its guidance, HMRC explained that when designing its "reasonable preventative procedures" a business should have regard to the following six principles: 

  1. Risk assessment: Businesses should identify the nature and extent of the risk that their associated persons are criminally facilitating tax evasion. The risk assessment should be documented and kept under review.

  2. Proportionality: The preventative procedures will need to be proportionate to the risk the business faces. This will depend on the nature, scale and complexity of its activities. Businesses are not required to have to undertake excessive due diligence but they will have to show that they have paid more than just “mere lip service” to preventing the facilitation of tax evasion.

  3. Top-level commitment: Businesses must be able to demonstrate that top-level management is committed to preventing persons associated with the business from engaging in criminal facilitation of tax evasion.

  4. Due diligence: Businesses should apply a risk-based approach to due diligence on their associated persons in order to mitigate the identified risks.

  5. Communication: Businesses should seek to ensure that their preventative policies and procedures are embedded and understood throughout the organisation, through internal and external communication, including training.

  6. Monitor and review: Businesses should monitor and review their preventative procedures and make improvements where necessary.

In the research that HMRC conducted they found that 55% of companies had at least one of the above procedures in place. Therefore at that stage a number of firms had a long way to go in order to get their house in order. 

Businesses will be subject to a risk assessment by HMRC

HMRC will be scrutinising what active steps have been taken by relevant bodies to prevent the facilitation of tax evasion. Businesses will become subject to a risk assessment by HMRC as part of a Business Risk Review announced earlier in the year. As part of the review HMRC has outlined 4 areas of risk. They are low risk, moderate risk, moderate – high risk and high risk. 

The ratings are based upon the businesses approach to compliance, internal governance and systems delivery. HMRC have made clear that any business that they review that fail to demonstrate that they have effective measures in place will be considered high risk.  

How can you catch up or make sure you are still prepared?

If you are a business that is yet to address its obligations then time is clearly of the essence, particularly if you are working in the areas that HMRC are targeting. 

Any businesses should remember that it is their responsibility to take active steps to prevent the facilitation of tax evasion and it is the only defence available.

If HMRC were to visit you today would you be ready?  If you are not wholly confident about the procedures you have in place or have nothing in place at all then you need to act quickly.  We can help organisations that find themselves without all or some of the necessary procedures in place at this late stage. We can help to swiftly put in place compliance measures. 

It is important to monitor and review procedures

If you have procedures in place, when was the last time they were reviewed and updated? In its guidance HMRC are clear that what may be considered reasonable preventative procedures will change over time.   

Have you tested the procedures that you have in place for compliance to ensure that they remain relevant? HMRC are clear that all risk assessments in particular should be reviewed on a regular basis.  Have you considered adding any new provisions as the business has changed and evolved?

What if you get the knock on the door or a letter requiring sight of your reasonable procedures? We can help by testing your readiness in a mock 'dawn raid' scenario and give an assessment of your defence from a criminal law perspective. 

Our tax disputes and investigations team are well equipped to help companies prepare for the possibility of a visit by HMRC. We regularly defend companies and individuals who are the subject of investigations by HMRC. We offer tax specialist knowledge in addition to having experience of fraud investigations, dawn raids and prosecutions by HMRC.  

If you would like to discuss any of the above issues please do not hesitate to contact us.