Since the start of October, companies can be held liable and fined if any one of their suppliers, anywhere in the globe, evades taxes even if the business was not involved in the offence, or was aware of it.
A successful prosecution could lead to both a conviction and unlimited penalties.
Under the Act which became law in April 2017 but only came into effect from 1st October, two new offences have been introduced. Whilst offshore tax evasion is the ‘driving force’ behind the creation of these offences, the regulations apply to the facilitation of tax evasion committed onshore, as well as offshore, and apply to all taxes.
The domestic fraud offence makes companies, partnerships and relevant bodies criminally liable for failing to implement reasonable prevention processes to stop their employees or agents from criminally facilitating tax evasion.
The overseas offence criminalises corporations trading in the UK who fail to put into place reasonable processes to prevent their employees from facilitating tax evasion in another jurisdiction.
Whilst, of course, tax evasion is already a criminal offence up until now it has not been possible for a criminal liability to be attached to the firm where it occurred.
For a firm to be liable under the Act, there must have been:
- Stage one: criminal tax evasion by a taxpayer (either an individual or a firm) under existing law.
- Stage two: criminal facilitation of the offence by a representative of the firm, as defined by the Accessories and Abettors Act 1861.
- Stage three: the firm failed to prevent its representative from committing the criminal act outlined at stage two.
The onus is on the company to demonstrate that it has implemented reasonable prevention procedures within the business to protect against the facilitation of tax evasion. If the company can prove it implemented stringent procedures, prosecution will be unlikely.
HMRC has issued guidance and factsheets on how the new rules will work in practice:
- HMRC detailed guidance (download PDF)
- Criminal Finances Act factsheets
- Criminal Finances Act 2017
- Explanatory notes to the Bill (download PDF)
The guidance encourages relevant bodies to focus on six guiding principles:
- Carrying out a risk assessment to identify the specific risks of facilitation.
- Implementing procedures which are proportionate to the specific risks identified in the risk assessment.
- Performing due diligence of staff, third parties and clients in proportion to the risks that they pose to the business.
- Ensuring that there is a top level commitment within the organisation to preventing the facilitation of tax evasion.
- Communication (including training) to employees and third parties to ensure procedures are embedded and understood.
- Carrying out ongoing monitoring and review of procedures and risk assessment.
This, in turn, leads to a number of strategic and contractual management actions, namely:
- Making clear to employees that the firm is committed to preventing the facilitation of tax evasion.
- Including clauses in contracts with employees and external contractors requiring them not to engage in facilitating tax evasion, and to report their concerns straightaway.
- Providing staff training on recognising and preventing financial crime.
- Providing a safe whistle-blowing procedure.
- Monitoring and enforcing prevention procedures.
- Regular reviews of prevention procedures and changing them where required.