Author: Niall Hearty
15 October 2021
4 min read
Niall Hearty of Rahman Ravelli outlines the offences of failing to prevent the facilitation of tax evasion and the defence available to them.
According to the latest available figures, HM Revenue and Customs (HMRC) has 14 live corporate criminal offences investigations ongoing into the failure to prevent the facilitation of tax evasion.
HMRC has stated that no charging decisions have yet been made on these investigations and has said a further 14 possible investigations are under review; with a further 40 such possible investigations having already been dropped.
The current and potential investigations cover 10 different business sectors, including financial services, oil, construction, labour provision and software development. While no charges have yet been brought, the statistics suggest it may not be long before the first prosecutions commence.
It is a criminal offence in the UK if a business fails to prevent its employees or any person associated with it from facilitating tax evasion. Two corporate criminal offences were introduced on 30 September 2017 under Part 3 of the Criminal Finances Act 2017. The first applies to all businesses, wherever they are formed and operating, in relation to UK tax evasion. The second offence applies to businesses that have a UK connection and relates to the facilitation of non-UK tax evasion (which must amount to an offence in the local jurisdiction and involve conduct which a UK court would consider to be dishonest).
The offences, which apply to companies and partnerships, make a business liable for the criminal acts committed by its employees – or others who are associated with it - even if senior management had no involvement in the wrongdoing or awareness of it.
For the offences to have been committed, criminal tax evasion must have taken place, and someone associated with the business must have criminally facilitated the tax evasion while performing services for the business. Employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries, are all considered to be associated with a business.
While this definition of someone associated with a business is a fairly wide one, a business will not be criminally liable for failing to prevent the facilitation of tax evasion if the person who facilitated it did so while acting in a personal capacity.
The offence of facilitating non-UK tax evasion can only be committed by a company that is incorporated under UK law or has conducted business in the UK or whose relevant associated person was located in the UK at the time of the criminal act that facilitated the evasion of the overseas tax. While a UK subsidiary of an overseas company would not be liable for any facilitation of tax evasion by its parent company - unless the parent company acted for or on its behalf - an overseas company with a UK branch could be liable for facilitation of tax evasion, even if the facilitation of tax evasion occurred in a branch other than the UK branch.
The scope of this offence makes it imperative that every overseas company that does any business in the UK devises and introduces procedures to prevent the facilitation of tax evasion in all of its operations around the world. HMRC guidance states that the UK government will prefer the jurisdiction that suffers the tax loss to take criminal or civil action. But if this is not possible – due to factors such as corruption or lack of resources – the UK government will prosecute if it believes it would be in the public interest to do so.
As mentioned earlier, a business will not be held liable for either offence if it can show the person who committed it was acting in a personal capacity. But it will also have a defence to these offences if it can show that either it had in place reasonable 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.
In guidance that it published on the offences, HM Revenue and Customs (HMRC) detailed six principles that should be part of reasonable prevention procedures:
A business should carry out a risk assessment to identify the risks of facilitation of tax evasion, recognise any weaknesses in its existing preventative measures and help determine which new ones need to be introduced. There needs to be commitment from a company’s board and/or senior executives about potential risks, which should be communicated to the workforce and, if necessary, form the basis of staff training. The risks and a company’s response to them should be subject to ongoing scrutiny and, when necessary, revised.
It is clear from the guidance that conducting a risk assessment is viewed as being key to putting in place reasonable prevention procedures for the facilitation of tax evasion. Companies should carry out a thorough risk assessment of their business and contractual relationships and determine what procedures will be appropriate to prevent the facilitation of tax evasion.
While the six principles are useful for companies that are looking to devise procedures, the risk assessment that is carried out has to be more than going through the motions in a bid to tick the boxes. Any assessment has to be comprehensive, carefully planned and conducted in a way that ensures nothing is overlooked and that all risk areas are recognised and analysed, both in terms of the processes in place and the people involved.
It is also important that companies do not view such activities as a one-off, as they will be expected to have prevention procedures in place that reflect the risk they currently face. A company that put in place what were reasonable prevention procedures when, for example, the Criminal Finances Act came into effect will find it hard to convince the authorities they have a defence if the risk it faces has changed or increased significantly in the intervening years and a Part 3 offence has been committed.
A company may, however, be able to reduce the likelihood of it being prosecuted – or at least lessen the severity of any penalty - if it reports the wrongdoing to the authorities. The authorities may view this as the company being cooperative and having procedures in place that were at least partially effective, which could result in more lenient treatment.
Niall has a wealth of corporate crime expertise and an ability to coordinate global bribery and corruption cases. His achievements in such investigations have made him a logical choice for corporate clients.