New criminal offence for corporates

Andrew Tuson and Kate Ison,  of Berwin Leighton Paisner, explain what the implications of the new criminal finance bill are for corporates

The Criminal Finances Act has introduced a new corporate criminal offence of failure to prevent the facilitation of tax evasion.

The offence itself is expected come into effect in September 2017. By then, corporates will be expected to have assessed risks and developed reasonable procedures to prevent any persons associated with them from criminally facilitating the evasion of UK and overseas taxes.

The new corporate criminal offence does not change the existing criminal law in relation to tax evasion or the facilitation of tax evasion.  It does, however, make it easier to prosecute corporates or partnerships. Individuals cannot be prosecuted under the new offence.

Through the new offence, if a corporate has any employees, agents or other third parties who provide services on its behalf, who criminally facilitate others from evading tax, then the corporate can be criminally liable for the acts of its representative.

To protect itself from criminal liability, a corporate should have in place policies to mitigate against the risk of its associated persons criminally facilitating tax evasion.

The policies should be designed by reference to the corporate’s assessments of the key risks which it faces in relation to tax evasion, and the facilitation of tax evasion by its associated persons.

It will be a complete defence to criminal liability for a corporate to show that it had reasonable prevention procedures in place.

The offence applies to the facilitation of tax evasion which takes place in the UK, and also foreign tax evasion.

For foreign tax evasion, a UK connection needs to be established. The connection may be established where a company has been incorporated in the UK, or where it has a place of business or associated persons in the UK.

Because of this, the jurisdictional reach of the new offence is significant and prosecutions could be brought, even where the criminal acts of facilitation and evasion did not take place in the UK.

The prosecution of foreign tax evasion could, however, only be brought in the UK where the underlying acts of evasion and facilitation would constitute criminal acts in the country in which they are committed, and where the UK Director of Public Prosecutions determines that it is in the public interest for a prosecution to be brought.

Given the wide jurisdictional scope, multi-nationals which have places of business in the UK need to consider the risks of facilitation of tax evasion created by the corporate’s associated persons, across each of the countries through which the corporate operates.

It is important to bear in mind that the new offence does not apply to a corporate’s associated persons who accidentally or negligently facilitate others to evade tax.

The offence only arises where a corporate’s associated persons deliberately and dishonestly facilitate others to evade tax.

HMRC have made clear that corporates will need to conduct a risk assessment to identify the risk of persons associated with them criminally facilitating the evasion of tax evasion.

If the corporate identifies such risks, it will need to put in place reasonable procedures to try to prevent the facilitation from happening.  If the corporate takes this step, it should be able to defend itself from criminal liability if one of its associated persons criminally facilitates tax evasion.

HMRC has also said that the risk assessment is the most critical document that it will consider, in the context of assessing whether a corporate has reasonable prevention procedures in place.

HMRC will not assess a corporate’s prevention procedures in isolation from the risk assessment, as HMRC will be looking to understand whether a corporate’s prevention procedures have properly calibrated the risks identified.

It is therefore important that the risk assessment process is carefully documented, so that the corporate can rely on it and provide it to HMRC in the event of an investigation.

HMRC also expects that the risk assessment process will be on-going, so that policies and procedures develop, as the corporate’s business and risks of facilitation change.

For corporates operating in the UK, it is critical that the risk assessment covers the risk of facilitation for all overseas branches of the legal entity operating in the UK.

HMRC have made clear that it is not sufficient for such corporates only to look at the risk of facilitation of tax evasion in the UK, as the offence of the facilitation of the evasion of overseas taxes can be prosecuted in the UK.

HMRC will issue final guidance on the new offence over the summer, once Parliament resumes after the general election.

HMRC have confirmed that the UK Government guidance will largely be the same as the draft guidance produced in October 2016. However, there will be more examples of the types of behaviour in the financial services sector which HMRC consider would breach the offence.

Andrew Tuson is a partner and Kate Ison is a senior associate at leading law firm Berwin Leighton Paisner.