New corporate offence: failure to prevent the criminal facilitation of tax evasion

Written on 7 Jun 2016

As part of its commitment to tackle tax evasion, the government has brought forward plans to introduce a new corporate offence of failure to prevent the criminal facilitation of tax evasion.

This forms part of a package of civil and criminal options which the government has announced in the last couple of years, which were due to be implemented in 2017.

However, in light of the publication of the Mossack Fonseca “Panama papers”, David Cameron announced in April that “we will legislate this year to hold companies who fail to stop their employees facilitating tax evasion criminally liable”. On 18 May 2016 the Queen’s Speech announced that this measure is to be included in the Criminal Finances Bill.

Consultation

HMRC has published a consultation on the proposed new corporate offence, which runs to 10 July 2016. This follows on from a consultation during summer 2015 on the policy of introducing the new offence. Updated draft legislation and draft guidance has also been published for comment.

The new corporate offence aims to overcome the difficulties in attributing criminal liability to corporations for the criminal acts of those who act on their behalf.

The new strict-liability offence will apply to a wide range of legal persons, from body corporates to partnerships, and the consultation document outlines that it will have three stages:

  1. Stage 1 – criminal tax evasion by a taxpayer under the existing criminal law (for example, cheating the public revenue or fraudulently evading the liability to pay VAT or income tax);
  2. Stage 2 – criminal facilitation of this offence by a person acting on behalf of the relevant body (whether by taking steps with a view to; being knowingly concerned in; or aiding, abetting, or procuring the tax evasion by the taxpayer); and
  3. Stage 3 – the relevant body’s failure to take reasonable steps to prevent those who acted on its behalf from committing the Stage 2 criminal act. This includes a defence of implementing reasonable prevention procedures. A further defence has been introduced, namely where in all the circumstances it was not reasonable for the company to have any prevention procedures in place, but it is anticipated that this will only apply in very limited circumstances.

The offence has been split out into UK tax fraud and overseas tax fraud. The government believes that companies with a presence in the UK should be obliged to take reasonable steps to prevent their agents being complicit in criminal tax evasion, wherever that tax is owed.

As drafted, the category of person for whom a company can be liable is widely drawn, and would normally catch employees, agents and subsidiaries.

Draft guidance

The draft guidance which has been published for the new corporate offence follows the principle-based approach of the guidance produced for the Bribery Act 2010.

This sets out overarching guidance which companies can use to create reasonable prevention procedures (recognising that the new corporate offence will apply to a wide range of companies – in size, activity and geographical location).

The consultation document seeks case studies and examples which will be incorporated into the final guidance.

As drafted, the key principles are summarised below:

Principle 1 Proportionality of reasonable procedures What constitutes reasonable procedures will be proportionate to the risk of criminal facilitation faced by the entity
Principle 2 Top level commitment Top-level management to be committed to preventing its associated persons from engaging in criminal facilitation of tax evasion
Principle 3 Risk assessment Risk assessment to be documented and kept under review
Principle 4 Due diligence Due diligence procedures to be applied in respect of persons performing services on behalf of the organisation in order to mitigate identified risks
Principle 5 Communication (including training) Prevention policies and procedures to be embedded and understood throughout the organisation
Principle 6 Monitoring and review Monitor and review preventative procedures and make improvements where necessary

It is expected that trade bodies will develop sector-specific guidance, which can be put forward for endorsement by the government. Clearly any such specific guidance will be key to determining what is reasonable for a company operating in that sector.

Next steps

The consultation closes on 10 July 2016, so we would expect responses to the consultation to be published (together with near-final draft legislation to be included in the Criminal Finances Bill and updated guidance) in autumn 2016.

The government’s stated intention is to legislate this year – this may be challenging given the current parliamentary timetable, but companies should start to consider the “reasonable steps” which they could implement, taking into account the draft guidance.