Failure to prevent: Will more money for HMRC mean enforcement at last?

Chancellor Jeremy Hunt’s Autumn Statement made newspaper headlines for its tax changes and cuts to public spending. But the statement also included a plan to increase funding to HMRC, in a move which might finally allow the agency to begin enforcing the woefully underused corporate criminal offences (CCOs) of failure to prevent the facilitation of UK and foreign tax evasion.

In the Autumn Statement, the Chancellor granted HMRC an additional £79 million over the next 5 years, specifically to allow the agency to allocate more staff “to tackle more cases of serious tax fraud cases and address tax compliance risks among wealthy taxpayers”.

The last day of September 2022 marked the five-year anniversary of the introduction into UK law of the CCOs; perhaps unsurprisingly, that day passed without fanfare from HMRC, which is responsible for prosecuting the CCOs in the UK.

When the CCOs came onto the UK statute books, by way of the Criminal Finances Act 2017 (CFA), the change to the law was widely described as a ‘landmark’. It represented an extension of the ‘failure to prevent’ approach to founding corporate liability, which provides a far easier route to prosecuting companies than attempting to show the involvement of a ‘directing mind’. There was extensive talk of the CCOs driving a behavioural shift among businesses, and HMRC was expected to be eager to implement its new powers.

However, take up of compliance with the CCOs was slow. A survey carried out in August and September 2018 on behalf of HMRC revealed that three-quarters of the businesses surveyed were unaware of the CCOs, and most who were aware considered the offences to be irrelevant to their businesses. Of course, ignorance is no defence in the criminal law, and HMRC stated there would be no ‘grace period’ following the promulgation of the CCOs.

In February 2019, the agency set up a self-reporting website along with guidance squarely aimed at encouraging employees to blow the whistle on potential CCO offences. By mid-2019, according to the results of a freedom of information (FOI) request made by another law firm, HMRC had commenced a handful of criminal investigations into behaviours relating to the CCOs.

The heat had been turned up. Given businesses appeared to be widely failing to meet their obligations to put in place ‘reasonable prevention procedures’ (the CFA’s equivalent to the ‘adequate procedures’ defence available under the Bribery Act), a prosecution was surely imminent.

But, since then, the fire appears to have died. Enforcement has been – to put it mildly – lacklustre.

Kingsley Napley made its own FOI request in October 2020. This revealed that HMRC had failed to bring any corporate prosecutions since the introduction of the CCOs. This was despite the bold pledge in the agency’s 2015–2020 business plan to increase the number of prosecutions of serious and complex tax crime to 100 per year by 2020.

Our comment then was that the figures were “pretty staggering”, even considering the impact of Brexit and Covid. “HMRC has been gifted 100 new measures to combat tax evasion and avoidance over the last 10 years and knows it is under pressure to deliver a step change in results,” said partner David Sleight, “yet it has undoubtedly failed to use its powers consistently or effectively.”

Another two years on, the immediate impact of Brexit has eased and the burden of Covid has lessened; businesses have now had ample time to get to grips with CCO compliance and most UK companies and their employees should understand, at some level, their obligations and responsibilities in relation to the facilitation of tax evasion.

Yet the most recent figures from HMRC show no further progress on CCO enforcement – in fact the opposite seems to be the case. There have been no CCO prosecutions and the number of live CCO investigations dropped from a high of 14 in 2021 to only seven by May 2022.

The reasons behind the lack of progress in enforcing CCOs are not immediately obvious. Of course, not all investigations will lead to a prosecution, criminal tax investigations are notoriously time-consuming and complex (as noted in a previous article), and HMRC has – as with many public agencies – suffered from a lack of financial resources.

However, other factors mean that this could be an ideal time for enforcement of the CCOs, including the relatively slow compliance take-up among many businesses, and the maturity of the ‘failure to prevent’ approach to corporate liability with a good body of precedent (albeit relating to the Bribery Act) thanks to the Serious Fraud Office’s success with Deferred Prosecution Agreements.

What seems to have become clear from the history of the CCOs, and criminal investigations in relation to corporates in general, is that – in contrast to its record against individuals – HMRC is simply not set up to tackle corporate criminal tax evasion. This may be due to its historic nature – it is after all primarily a revenue collection agency accountable to HM Treasury rather than a law enforcement body – as well as an ingrained culture of focusing on civil enforcement methods where legal tax avoidance appears to be in play.

This approach came under heavy criticism recently in a joint report published by the All-Party Parliamentary Group on Anti-Corruption & Responsible Tax along with the UK charity TaxWatch, which described a “serious enforcement gap in HMRC’s approach to tackling tax fraud”, and proposed establishing a new agency to investigate and prosecute tax crime, under the oversight of the Attorney General's Office rather than HM Treasury.

We may also be witnessing a reluctance on HMRC’s part to take on a corporate prosecution and be seen to fail, although the history of corporate Bribery Act enforcement should provide some encouragement. Enforcing the CCO relating to foreign tax evasion may also be proving a headache due to its complexity, the need to establish dual criminality across jurisdictions, and the requirement for cross-agency cooperation with the Serious Fraud Office.

What is clear is that until enforcement is dramatically stepped up, the CCOs will continue to be misunderstood by businesses and their employees, and companies with lax anti-tax evasion controls will remain largely unaccountable. Perhaps this autumn’s (relatively modest) increase in HMRC’s anti-tax fraud budget will mark a turning point.

FURTHER INFORMATION

For further information on any issue raised in this blog, please contact Nicola Finnerty or a member of our criminal litigation team.

ABOUT THE AUTHORS

Nicola Finnerty is a Partner in our Criminal Litigation team and a leading expert in white collar and business crime, proceeds of crime & asset forfeiture. Over the last 25 years she has been involved in many of the most high-profile, complex criminal and regulatory investigations and prosecutions, both in the UK and in matters which span multiple jurisdictions.