Large corporates: The effects of “failure to prevent tax evasion” tax offences on the gig economy

Written on 22 Jan 2020

In this series of videos Ian Hyde, the head of our tax disputes team, talks to Adrian Lifely about the tax compliance burdens HMRC have put on large businesses to police the gig economy. In part two they explore the "failure to prevent tax evasion" tax offences.

Read the transcript.

Watch the full series:


AL: Hello, my name is Adrian Lifely, I am a Partner in the Law firm Osborne Clarke. This video is part of our series of videos called large business as HMRC's policeman. In this video, we are going to consider "failure to prevent" offences and we are, in particular, going to consider some of the mechanisms available to HMRC to compel large business to assist with tax collection. To do this I am with Ian Hyde who is head of Tax Disputes at Osborne Clarke. Ian, first of all, can you tell me about some of these mechanisms?

IH: Well the one we are talking about today, is the new legislation from 2017, the "failure to prevent" legislation, failure to prevent facilitation of tax avoidance. This basically makes a large corporate criminally liable if its employees or a relevant associate is knowingly concerned with tax evasion by a third party. For those who know about it, it's built around the Bribery Act, it has similar principles and the most important aspect for a large corporate is that there is a defence where you have taken into account reasonable procedures to prevent facilitation. That’s the main thing that corporates focus on. But the purpose of the legislation is to effectively stop corporates engaging with tax evaders, the theory being if a tax evader doesn’t have a bank account or a customer, it's very difficult to commit tax evasion. Now, in terms of our series Adrian on this, the gig economy is very relevant here, obviously the legislation has a wider remit but it can catch operators in the gig economy, so where large numbers of small traders are not declaring their incomes as they should do or are not registering for VAT, or as something we'll cover off later on the series are deliberately pretending that they comply with the IR35 rules on self-employed contractors, all of those can bring this legislation into play and cause issues for the large corporate.

AL: Let me ask something I'm sure you're asked the whole time, are we talking here about tax avoidance or are we talking about tax evasion and what's the difference?

IH: We're talking here about evasion which is tax fraud. The difference between avoidance and evasion is sometimes quite difficult, but at its simplest, avoidance is where you have tried to reduce your tax bill by using a structure or some argument that you believe works, or you have a good argument works, so you honestly believe it should work, even if it's not guaranteed. Evasion is where you know you should pay your tax, there's no argument about paying the tax, but you simply don't pay it. You just don't declare it in your tax returns, or you don’t volunteer to register for VAT. You know you're doing something wrong, that is tax evasion, it's a criminal offence, and has always been a criminal offence for centuries.

AL: Ok, coming back these "failure to prevent" offences. Do you have any top tips for large corporates in terms of making sure they comply and don’t run in to difficulty in this area?

IH: I think one of the big areas is whether your staff are concerned in this area, whether they are knowingly concerned and that can be quite broad because it includes what lawyers call Nelsonian dishonesty, so turning a blind eye to malpractice, turning a blind eye to your customers asking for their pay to be paid into an offshore bank account when there's no reason whatsoever, that is turning a blind eye to that fraud. It's not complicated though, this area, Fraud doesn’t require a large flipchart. It's about, as I said, paying income into an offshore bank account, it's having artificially split your business in two when there's no reason. Generally, tax fraud is obvious when you see it because it just doesn’t look right, there's a smell test here and I think a lot of people are put off thinking it’s a very complicated piece of tax legislation, they couldn’t possibly spot it, their staff couldn’t spot it, well generally they can in my experience. It's not artificial complicated structures they're looking for. Another area that I think is worth highlighting is that it's not just employees can put a corporate at risk here, there's a concept called relevant associate, which is anyone that is not an employee of yours but is doing something for and on behalf of you and the best example that’s very topical at the moment is where you have staff agencies who are vetting temporary staff coming to work for you, that staff agency in vetting the temporary workers is vetting them on your behalf. So if they turn a blind eye to malpractice tax fraud and allow people through the system, you are going to have the criminal offence because they are a relevant associate of yours, so they're going to cause you difficulties. So that creates a very big issue in terms of how you vet and supervise agencies acting on your behalf, it's very difficult. The procedures that you have to put in place need only be reasonable, you are not expected to prevent all tax fraud but what is reasonable in one context can be not reasonable in another, so high risk industries, say financial services is one, construction is another, the processes they expect to put in place, the controls and checks and balances, will be more extensive than in a low risk industry. Finally I'd say and probably this is one thing I think anyone watching this video should do is just check the procedures you’ve put in place in 2017, the Revenue expect corporates to review their processes, so we are now two years on from when the legislation came in and in that time, the business should have learned what processes work and what don’t, so they should of carried out, there will have been alarm bells ringing from something happening, or what did they do when the alarm bell rang, did they change their procedures, did they do anything about it, are there procedures that work or are there procedures that don’t work, can you improve them? As I said that will be one thing that I recommend that people go and do is go back and look at those procedures you put in place and check they're working and check they're still fit for purpose.

AL: Thank you Ian, so corporates need to have their eyes wide open, they need to think critically and intelligently about their commercial arrangements with consultants, staffing agencies, employees and more than that they need to have appropriate procedures in place that reflect those risks otherwise large corporates can get into serious difficulty.

IH: Yes absolutely. The Revenue are looking for prosecutions here and you really don't want to be the one that’s caught.

AL: Great, thank you Ian.