02 Jun 2017
One of the most notable provisions of the Criminal Finances Act, which came into law at the end of April 2017, is the introduction of corporate liability for failure to prevent the facilitation of tax evasion. It is now a criminal offence in the UK for businesses to fail to prevent anyone who is working on their behalf from helping a third party evade tax.
For the new offence to apply, two other criminal acts have to occur:
- Criminal tax evasion
- -> Facilitation of criminal tax evasion by a person associated with the business
- -> Insufficient effort by the business to prevent that person facilitating tax evasion
The failure to prevent facilitation offence doesn’t require a conviction for either of the other offences. Enforcement agencies can prosecute a business for failing to prevent facilitation on the presumption that the other two offences have taken place.
Businesses found guilty will be subject to an unlimited fine and will have a criminal conviction recorded against them. The conviction could clear the way for proceedings against specific directors and employees, could result in a business losing its license or regulatory status, and is likely to have reputational implications.
The new offence has extraterritorial jurisdiction. It can be committed be a non-UK company (or partnership) acting wholly oversees if UK tax has been evaded.
The Criminal Finances Act also introduces the parallel offence of failure to prevent the facilitation of foreign tax evasion offences, which can be committed by a UK incorporated body, a body conducting at least part of its business in the UK, or by an overseas body where part of the offence takes place in the UK.
If someone working for a business is found to be facilitating tax evasion, the business will have two main lines of defence:
- that it had “reasonable prevention procedures” in place
- that it would not be “reasonable in all circumstances to expect it to have any prevention procedures.”
The latter is clearly unlikely to be applicable to financial institutions, legal or accountancy firms, or any businesses offering financial advice.
Goals of the legislation
Tax evasion and facilitating tax evasion are already both criminal acts. But enforcement agencies have so far struggled to pin blame on corporations when offences occur. Evading tax on a large scale generally requires external support in the form of advice, legal services, company or trust creation and so on. This legislation (which is designed primarily with banks, advisory firms and company formation services in mind) aims to reduce evasion by encouraging businesses to self-police more stringently.
As the “reasonable prevention procedures” defence underlines, the intention of the legislation is not to make businesses responsible for the elimination of tax evasion—which would clearly be unworkable. Rather, it is to encourage businesses to boost their internal safeguards, taking a risk-based approach to the prevention of facilitation by their people.
The upcoming general election does of course cast some doubt on the implementation of new legislation. However, the Criminal Finances Act passed with broad cross-bench support and it is expected that regardless the result of the election, the new offence will be effective within a few months.
The line between creative tax avoidance and criminal tax evasion is of course not always clear: for more on the topic, listen to our recent interview with leading tax barrister Philip Baker.
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