The Criminal Finance Act 2017 is still a relatively new piece of legislation that introduced onto the statute books the Corporate Criminal Offence (“CCO”).
Due to lack of publicity there continues to be limited awareness of these rules, however, failing to take appropriate actions can have serious consequences for your business. This legislation formally criminalises the facilitation of domestic and foreign tax evasion and holds businesses accountable for the actions of its employees and agents.
Following requests under the freedom of information act, it has been confirmed that there are currently up to five investigations underway by HM Revenue & Customs (“HMRC”) which could lead to cases being brought before the courts through the Criminal Prosecution Service (“CPS”). Whilst it is HMRC that are responsible for investigating cases of domestic tax evasion it is the National Crime Agency (“NCA”) and Serious Fraud Office (“SFO”) who will be responsible for investigating cases of foreign tax evasion. The SFO have refused to comment on the number of cases it is currently investigating.
This legislation provides HMRC with powers to investigate and present cases for the CPS to consider to bring before the courts which will hold organisations accountable for the activities of persons acting on their behalf where they facilitate tax evasion and where they have failed to implement relevant preventative measures.
How does an offence occur?
In order for an offence to occur there are three stages:
1. Criminal tax evasion must have taken place by a taxpayer (which could be in respect of UK or foreign taxes);
2. An associated person (e.g. an employee or agent acting on behalf of the organisation), whilst acting in that capacity has criminally facilitated the tax evasion; and
3. The organisation failed to prevent the associated person from committing the facilitation.
Who is caught by this legislation?
The legislation is aimed at organisations that have been established as companies, partnerships including LLPs. This also includes charities that have been set up as companies limited by guarantee including community interest companies, charities established either by royal charter or as a charitable incorporated organisations.
This has a deliberately wide definition which captures any individual that provides services for or on behalf of the organisation. It therefore could include:
- Group companies
- JV partners
- Corporate trustees
What is the impact of this legislation?
If an organisation is found guilty, under these new powers there would be a public record of the conviction and potential reputational damage. Additionally, they could be subject to any or all of the following:
- unlimited financial penalties;
- confiscation orders or serious crime prevention orders;
- exclusion from public procurement processes; and
- disclosure to professional regulators.
For HMRC to bring criminal charges against an organisation under the CCO; the organisation must have failed to prevent the associated person from facilitating the tax evasion. Implementing suitable prevention measures will become an essential aspect of an organisation’s defence against prosecution under these rules.
HMRC in their guidance have outlined the steps organisations need to implement in order to remain compliant with this legislation. The steps include:
- Undertake a Risk Assessment of the organisation to understand where the exposures to tax evasion could occur;
- Introduce controls that are Proportional to the risks identified;
- Ensure Top Level Commitment from the management to flow throughout the organisation instilling a culture that emphasises that tax evasion is not acceptable;
- Conduct Due Diligence procedures as required on persons acting on behalf of the organisation;
- Once policies and procedures are implemented there should Communication and Training to ensure full understanding of the new rules; and
- Organisations should continue to Monitor and Review the risks they face and update their policies and procedures as required.
This area of legislation is now featuring heavily in corporate transactions where buyers are seeking confirmation that the vendor has considered and taken appropriate action under these rules. Failure to take the necessary steps may have wider implications when shareholders are looking to sell their businesses, worst case stopping the deal or potentially reducing the purchase price and / or increasing amounts held in escrow.
How we can help
Undertaking and documenting a comprehensive risk assessment will form the basis of any defence against prosecution under CCO. This should be complimented with the implementation of policies and procedures which demonstrate an organisation’s commitment to preventing the facilitation of tax evasion. At PEM we are able to undertake the risk assessment and provide clear written policy documentation to ensure compliance with this legislation.