Since 30 September 2017 it has been a criminal offence if a business fails to prevent its employees or any person associated with it from facilitating tax evasion.
The new law applies to both companies and partnerships, but not to sole traders. It effectively makes a business vicariously liable for the criminal acts of its employees and other persons “associated” with it, even if the senior management of the business was not involved or aware of what was going on.
There are two stages for the new corporate offence to apply:
1. Criminal tax evasion (and not tax avoidance) must have taken place; and
2. A person or entity that is associated with the business must have criminally facilitated the tax evasion whilst performing services for that business.
“Associated persons” are employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries.
For the offence to apply, the employee or associated person must have criminally facilitated the tax evasion in its capacity as an employee or associated person while providing services to the business. A business cannot be criminally liable for failing to prevent the facilitation of tax evasion if the facilitator was acting in a personal capacity.
If stages 1 and 2 above have occurred, the business will have committed the new offence.
If convicted of the new offence a business can be subject to an unlimited fine.
A defence of reasonable prevention procedures
A business will have a defence if it can prove that it had put in place reasonable prevention procedures to prevent the facilitation of tax evasion taking place (or that it was not reasonable in the circumstances to expect there to be procedures in place).
HMRC has published guidance on the offence, in which it explains that there are 6 guiding principles that underpin the defence of having reasonable prevention procedures:
. Risk Assessment;
. Proportionality of risk-based prevention procedures;
. Top level commitment;
. Due diligence;
. Communication (including training); and
. Monitoring and review.
A business will have to undertake a risk assessment to identify the risks of facilitation of tax evasion within the organisation and the potential gaps in the existing control environment. The risk assessment should be documented so that it can provide an audit trail to support any policy decisions regarding the implementation of new procedures to reduce the risk of exposure to the new offences.
It is expected that following a risk assessment most businesses will have to introduce changes, including internally published policies, to ensure that they have robust procedures in place to prevent their employees, service providers, agents, suppliers and customers from engaging in or facilitating tax evasion.
Businesses will also need to ensure that sufficient training on the new rules is provided to all staff.
Distinguishing avoidance and evasion
The offence only applies when there has been fraudulent tax evasion. Essentially, fraudulent evasion occurs where a person knows he has a tax liability and forms a dishonest intention not to declare it. It does not arise where a person makes a mistake or is careless. It also does not apply where a person actively seeks to avoid tax, even if the planning in question does not work, provided that the person has an honest belief when filing his tax return.
Equally the facilitator must have a criminal intent. Unwitting facilitation of tax evasion is not enough and neither would the knowing facilitation of tax avoidance.
Action to be taken
The new offence is expected to increase compliance requirements across all business sectors. Businesses are likely to have to conduct more due diligence in relation to their suppliers, contractors and employees and will probably have to look much more closely at where and the manner in which payments are made for goods and services, especially if offshore accounts are involved or payments are made in cash.
All businesses should be taking action now to ensure that they are aware of and have control over how their employees, agents or service providers are operating to reduce the risk of exposure to the new offence.
Aside from the possibility of incurring a heavy fine, a successful prosecution under the new offence could give rise to serious reputational damage.
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