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The Criminal Finances Act of 2017 serves to criminalise the failure of businesses to prevent the facilitation of tax evasion. The two offences created under this new legislation have a basis in the Bribery Act 2010, and mean that your company can be held responsible for illegal tax related activity undertaken by contractors or other organisations with which it has professional dealings – whether the tax in question is:

  1. Owed to the UK government or
  2.  Owed overseas

In order to ensure that your company will not be investigated by Her Majesty’s Revenue and Customs as a result of another organisation’s attempts at tax evasion, it is worth examining the new act to see what actions to take.

What Constitutes the Facilitation of Tax Evasion?

Under the new act, the offence is defined thus: “a relevant body (B) is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B”.

Will My Business Be Prosecuted?

To find out whether you are liable to fall foul of a facilitation of a tax evasion inquiry, you and your management team must first understand the stages that would constitute an assessment of your company.

  1. The uncovering of proof that criminal tax evasion has taken place. This evasion may have been undertaken by an individual or a body professionally connected to your organisation.
  2. The discovery that this offence was facilitated by an individual, group or department within your organisation, and that this facilitation took the form of aiding, abetting, counselling or procuring the aforementioned evasion of tax.
  3. The historical refusal or neglect of your organisation to put in place processes and implement procedures that may have prevented the aforementioned evasion of tax from taking place. Those investigating your company’s potential failure must consider whether it would have been reasonable to expect you to have had such measures in place at the time.

Investigators can only consider the final stage once they are satisfied that your circumstances meet the requirements in stages one and two.

If your company has been found lacking, or at fault, throughout all three stages, then it is liable to be prosecuted for failure to prevent the facilitation of tax evasion.

What Are the Six Guiding Principles of Failure to Prevent the Facilitation of Tax Evasion?

While policing the activities of all the individuals and companies connected with your organisation may seem considerably difficult, there is in fact an official set of six guiding principles of adherence to the new legislation in existence – created by HMRC and designed to help organisations improve their understanding of the activities of their partners and service providers and tighten their security against any potential fraud or tax evasion.

Principle One: Risk assessment

When developing your risk assessment, your company should first take into account how likely it is that any of the individuals or organisations acting on your behalf or alongside you would evade the correct payment of tax. This will require considering that party’s potential motives, means and opportunity – asking questions such as:

“Why would this company commit taxation fraud?”

“Can we think of ways in which they would be likely to do it if so?”

“Is it at all possible that this would happen?”

You should then work towards a strong risk management strategy, which should continue to be reviewed for as long as your company and the third party do business together.

This is the most vital step, as not only will it shield your organisation against the dangers of entering into a contract with a potentially fraudulent body, but it will also provide you with a defence in response to the aforementioned third stage of an assessment.

Principle Two: Proportionality of risk based Procedures

Preventative procedures should be proportionate to the risk you/your company faces. Your organisation should be proactive in the implementation of its chosen approaches of persons associated with you committing evasion facilitation offences. However, while it is tempting to make sure that your back is covered when it comes to new government legislation, you must ensure that the plans you intend to put in place are achievable.

Your management team must consider the the scale of the risk in order to construct procedures that are straightforward and proportionate. For example, close, extensively recorded supervision of each agent/employee is not always achievable without creating unmanageable amounts of extra work. The new offences do not require you to undertake excessive procedures, so simpler alternatives should be sought.

The scale and complexity of your companies activities are important factors. The reasonableness of prevention procedures should take account of the level of the control an supervision the organisation is able to exercise over a particular persons activity acting on your behalf. A combination of formal policy and practical steps to ensure such a policy is implemented and monitored is a good step.

Principle Three: Top Level Commitment

All changes that are to be made via the implementation of new procedures should become embedded into the working life of your business and taken as seriously as possible so as to adopt a no tolerance attitude towards facilitation of tax evasion.

A committed approach should be adopted from the “top down”, with the CEO and management leading by example, so that diligence and care can spread throughout the senior ranks of your organisation.The prevention of tax evasion facilitation should be the duty of your entire staff, and of top level management in particular.

The involvement of senior management will also enable a greater and clearer communication of the existence of your prevention processes to external bodies. Partners, contractors and any other individuals with whom your company works will be made more acutely aware of your position on the facilitation of tax evasion if it is championed by the CEO in person.

Principle Four: Due Diligence

Proper due diligence procedures should be applied and followed by persons who perform services on behalf of your company to reduce risks, and quantifiable steps taken in order to recognise and prevent criminal behaviour. This approach should not only be applied to companies newly entering into your organisation’s list of partners and contractors, but should also be applied in hindsight.

Now that the Criminal Finances Act has been initiated, all of your company’s external contacts and service providers should be made subject to due diligence checks, however long your history with them may be. You may believe that a certain industry poses a higher risk than others of being utilised for tax fraud. Consequently increased levels of checks should be applied to address such risks.

Principle Five: Communication

Every member of your company should have a practical understanding of both the significance and the implementation of your prevention policy. Not only should each individual be confident in the inner workings of your prevention policies these new processes, but your organisation should also be able to effectively communicate them to contractors, service providers and partners.

Regular training should be provided where possible in order to pass on the message that tax fraud will not be tolerated at any level, and no person or body that engages in such activities will be able to continue their dealings with your company. In addition news feeds communicating your companies anti tax evasion policy can act as a deterrent to those who seek to use your company for illegal activity

Principle Six: Monitoring and Review

Your systems and procedures should never be considered a finished product, but should be adjusted, adapted and improved in response to ongoing observation. When you first set them out, you should work into all documentation an agreement that the procedures must be revised and reconsidered once a set period of time had passed.

If your company is a large multinational, personal implementation of preventative measures by seniors may not be practical and instead a sub department being delegated may be seen as reasonable.

What are the Penalties for Failure to Prevent the Facilitation of Tax Evasion?

Your business could receive an unlimited fine for failing to prevent the facilitation of tax evasion. The minimum amount to be recovered will be 100% of the amount of tax the third party neglected to pay. Criminal convictions can also be imposed and recovery actions such as confiscation orders may be taken.

Of course, when it comes to the expected timescale for implementing new processes and procedures, the government and HMRC will take into account the nature and size of your company and the resources it is able to draw upon. However, it is expected that you will do all in your power to ensure that a well considered plan of action is put in place at your company’s earliest possible convenience.

What Types of Activities Could Put My Business at Risk?

Sector: If your organisation is part of a particular sector, such as financial services or law, it is immediately more likely to be investigated for facilitating tax evasion.

Value of projects, products or services: Should you be dealing with high net worth companies and service providers, they and you are perhaps more likely to be the subject of taxation investigations than other organisations.

Transparency: If a partner or contractor connected to your company gives the impression of being unreasonably covert with regards to financial activity, there is a possibility that suspicions will be raised.

System complexity: If a supply chain or transaction process seems from the outside to be purposefully opaque or complex, investigators may believe that the companies involved are masking fraudulent financial activity. Therefore, it is highly advisable to keep fiscal processes as straightforward and above board as possible.

History: If there is a history of the products or services provided by your company or its partners being utilised in a way that facilitates tax evasion, this again may raise the suspicions of HMRC and could see you investigated for the facilitation of tax evasion.

In any of the above circumstances, there should be no cause for concern as long as you have ensured that your organisation has undertaken a full risk assessment and has put efficient processes in place.