Author: Nicola Sharp
28 September 2020
4 min read
Nicola Sharp of Rahman Ravelli outlines the offences created by Part 3 of the Criminal Finances Act, their relevance in this COVID-19 era and the appropriate corporate response.
After what appeared a far from speedy beginning, the UK tax authorities now seem to be more willing to use the failure to prevent the facilitation of tax evasion offences.
Part 3 of the Criminal Finances Act 2017 created the corporate criminal offences of failing to prevent the facilitation of UK or foreign tax evasion by a corporate’s associated persons. While there was no immediate flurry of prosecutions, it should be noted that this is not the first time that a failure to prevent offence has had a slow start: the first successful prosecution for failure to prevent bribery, an offence created by Section 7 of the Bribery Act 2010, did not come until 2018. But HM Revenue and Customs has disclosed that its corporate investigations ledger contained nine Part 3 investigations by the end of last year, with a further 21 possible ones being reviewed.
The 2020 Budget saw the Chancellor of the Exchequer announce increased recruitment of HMRC compliance officers and greater use of tax investigation technology. It is likely, as a result of the COVID-19 crisis, that HMRC will be placing great emphasis on revenue collection – and that is likely to see the investigation and prosecution of tax evasion rising to the top of the to-do list. It would not be unreasonable, therefore, to expect Part 3 prosecutions as a result of this. The HMRC has stated that it intends to bring 100 prosecutions a year by 2022 for serious and complex tax crime, some of which are more than likely to be brought under Part 3.
The offences, which came into effect on September 30 2017, apply to both UK and foreign corporates failing to prevent the facilitation of tax evasion after that date. Penalties include an unlimited fine and possible debarment from public contracts.
The offences are:
HMRC is responsible for investigating the UK tax evasion Part 3 offence while the Serious Fraud Office (SFO) and/or the National Crime Agency (NCA) will investigate the foreign tax evasion offence.
Three stages need to be met for either of the offences:
With a corporate’s only defence to a Part 3 offence being its ability to show that it had “reasonable procedures” in place to prevent the associated person criminally facilitating tax evasion, what constitutes reasonable procedures is of great significance.
HMRC guidance details six guiding principles that corporates should follow:
Risk assessment: Corporates need to assess, record and review their risk of associated persons criminally facilitating tax evasion. HMRC has made it clear that this is an essential component of any “reasonable” approach to preventing tax evasion. It has also stated that the proportionality of reasonable procedures will be determined by the scale, complexity and nature of the corporate’s activities. There is no need for excessive procedures but those that are implemented need to do more than be a box ticking exercise.
Top-level commitment: A corporate’s senior managers need to develop, promote and maintain a culture where the facilitation of tax evasion is not tolerated. They must address tax evasion risks specifically and ensure their approach is understood and implemented throughout the company.
Due diligence: Extra scrutiny may be required for some aspects of a corporate’s activities because they present a higher risk of tax evasion. This may be, for example, because a corporate conducts some business in high-risk jurisdictions.
Communication: The corporate’s procedures need to be clear and emphasised through regular training. Employees, agents and service providers who pose the highest risks of misconduct should be targeted.
Monitoring and review: A corporate’s procedures should be subject to feedback from within the organisation as well as to regular assessment by professional external advisers. The corporate should also share experiences with others working in the same sector.
As mentioned earlier, it would be hugely surprising if HMRC did not place even greater emphasis on revenue collection – which includes tackling tax evasion – due to the impact on government finances of coronavirus.
If and when this leads to more companies coming under scrutiny for tax evasion (and failure to prevent it), those who are investigated will need to able to show that they had reasonable procedures in place. Companies, therefore, must ensure their prevention measures are fit for purpose and be able to show that they are an appropriate and carefully thought-out response to the tax evasion risks they face.
If, for whatever reason, those procedures could not be considered reasonable and there is a suspicion that an associated person has facilitated tax evasion, the corporate still has an option to reduce the chances of it being prosecuted. If it reports what it knows or suspects to the authorities it may receive lenient treatment; not least because the fact that it has reported the problem is some indication that its procedures were at least partly effective.
If the corporate then cooperates fully with investigators and shows a willingness to revise and improve its preventative procedures to avoid any repeat problems, it could avoid prosecution. Such a course of action in an investigation into facilitating foreign tax evasion may convince the SFO that a deferred prosecution agreement (DPA) may be a more suitable penalty. In such circumstances, complying with an agreed set of conditions in order to avoid prosecution will be far preferable to prosecution itself. A DPA inflicts much less damage on a corporate’s reputation and standing in the market than a prosecution does and will not carry the risk of the corporate being barred from bidding for public contracts.
Such issues have to be considered by corporates if they are to minimise the damage that can be caused by a Part 3 investigation.
Nicola is known for her fraud, civil recovery and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.