Civil Fraud Quarterly Round-Up: Q1 2021
30 September 2017 marks a major milestone in HMRC’s commitment to be “relentless in its crackdown on tax evasion and avoidance”. From this date companies can be held to account for failing to prevent the facilitation of tax evasion by an associated person – at home or abroad – unless it can prove that it had reasonable prevention procedures in place, or that it was unreasonable to expect it to have such procedures.
This new legislation is seen as a way for HMRC to answer much publicised criticism that it has not done enough to tackle tax evasion by companies – in particular large scale corporates with global reach. Both the Public Accounts Committee and the National Audit Office have published reports critical of HMRC’s performance and the failure of the compliance yield to fill the “tax gap”.
HMRC presents this new regime as a way to overcome the difficulties posed by the “identification principle”: the requirement to identify a “directing mind” within a corporate in order to attribute criminal liability for the criminal acts of employees, agents or those that provide services for or on their behalf. Criticism of the principle is a familiar refrain from SFO Director David Green QC as to why tackling corporate crime in the UK is such a challenge.
Two new offences
Part 3 of the Criminal Finances Act establishes the new regime, introducing two new offences.
Section 47 states that the Chancellor must prepare and publish guidance about procedures that relevant bodies can put in place to prevent persons acting in the capacity of an associated person from committing UK tax evasion facilitation offences or foreign tax evasion facilitation offences.
The Guidance offers a comprehensive overview of the offences and HMRC expectations and is addressed in more detail below.
The Criminal Finances Act 2017 (Commencement No. 1) Regulations 2017 set down 30 September 2017 as the date on which provisions apply. It also set 17 July 2017 as the date on which HMRC would produce Guidance on the new offences.
This was ultimately published on 7 September 2017 (dated 1 September 2017).
What is a tax evasion offence?
HMRC makes clear that it is not seeking to “radically alter” what is “criminal” but “simply” focus on who is held to account for acts contrary to the current criminal law. The Act sets out (under s45(4)) that a “UK tax evasion offence” means: (a) an offence of cheating the public revenue, or, (b) an offence under the law of any part of the United Kingdom consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax. For example, income tax, corporation tax, VAT (including Missing Trader/Carousel frauds). It also includes being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person, and aiding, abetting, counselling or procuring the commission of a UK tax evasion offence (s45(5)).
Who is an associated person?
These offences are corporate offences - they can only be committed by “relevant bodies”, that is, companies and partnerships. This is set out under s44.
Moreover, the offences are only committed in circumstances where a person acting for or on behalf of that body, acting in that capacity, criminally facilitates a tax evasion offence committed by another person.
Although this new approach is seen as following the trend set by the Bribery Act, there is a key difference under the Criminal Finances Act where it does not matter that the company gained no benefit from the facilitation of tax evasion. It can still be liable for either offence.
A person is “associated” with a relevant body if that person is an employee, agent or other person who performs services for or on behalf of the relevant body. The associated person can be an individual or an incorporated body. The Guidance outlines that the provisions are intended to be purposive, broad in scope and not focused on contractual status or “label” of a person performing a service. The Guidance confirms that reference will be had to “all the relevant circumstances” and not merely by reference to the nature of the relationship between that person and the organisation. This is an important consideration for companies when assessing the extent and nature of their business relationships.
Route to prosecution
The Guidance issued by HMRC sets out a three stage process:
Extra-territorial application and jurisdiction is addressed by s48. The Guidance makes clear that where there is a UK tax evasion facilitation offence it matters not whether “the relevant body is UK-based or established under the law of another country, or whether the associated person who performs the criminal act of facilitation is in the UK or overseas”.
In such cases the new offence will have been committed and can be tried by the courts of the United Kingdom.
The foreign offence, however, is slightly narrower in scope, in that only certain relevant bodies with a UK nexus can commit the foreign revenue offence. In addition there is the requirement for dual criminality, meaning that the underlying criminal tax evasion offence must be outlawed in both the foreign jurisdiction and the UK.
The foreign tax offence will be investigated by the Serious Fraud Office (SFO) or National Crime Agency (NCA) and prosecutions will be brought by either the SFO or Crown Prosecution Service. No proceedings in relation to the foreign tax offence may be instituted in England and Wales except by or with the consent of the Director of Public Prosecutions or the Director of the Serious Fraud Office.
Companies can enter into a Deferred Prosecution Agreements for either offence. Just as with the new offences, DPAs apply only to cases of corporate wrongdoing.
Defence: reasonable procedures
The Act provides defences (under s 45 and s 46) where the relevant body has in force reasonable prevention procedures, that is, procedures designed to prevent persons associated with it from committing tax evasion facilitation offences. Or that it would be unreasonable “in all the circumstances” to expect a company to have such procedures.
Again, though modelled on the Bribery Act 2010 this not a direct reproduction of the “adequate procedures” defence. Arguments on these concepts were rehearsed during the consultation stage and it appears that the decision to focus on “reasonable procedures” was based on proportionality. In the December 2015 response to the consultation, the Government states that it “is mindful of stakeholders’ concerns around the use of “adequate procedures” and accepts respondents’ request that the defence be one of “reasonable procedures” rather than “adequate procedures” to reflect that it would not be reasonable to expect a corporation to be able to stop every instance of non-compliance by their representatives”.
A risk-based approach
The Guidance is designed to explain the policy behind the new offences and “is intended to help relevant bodies understand the types of processes and procedures that can be put in place to prevent associated persons from criminally facilitating tax evasion”.
Further assistance for the legal community has been issued by the Law Society of England and Wales in the form of the Practice Note (Law Society Practice Note Criminal Finances Act 8 September 2017).
The Guidance is designed to be of general application and is formulated around the following six guiding principles:
These are familiar from the Bribery Act Guidance of 2010.
Although the Guidance spells out that “burdensome procedures designed to perfectly address every conceivable risk, no matter how remote, are not required” companies must be clear that a nod to compliance at the outset will not suffice. Though some time may be needed to implement new training programmes or IT systems, the Guidance confirms that “the Government expects there to be rapid implementation, focusing on the major risks and priorities, with a clear timeframe and implementation plan on entry into force.”
In addition, HMRC expects procedures to be kept under regular review and to evolve as a relevant body discovers more about the risks that it faces and lessons are learnt. Be they geographical, supply chain focused or customer base. Or as put in the Bribery Act Guidance: sectoral risk, country risk, transaction risk.
Not a tick-box exercise
The Guidance makes clear that examples of procedures given are “illustrative” and the procedures identified not to be taken as “a one-size-fits all” solution. The Guidance itself states that it should be used to “inform the creation of bespoke prevention procedures designed to address a relevant body’s particular circumstances and the risks arising from them.”
Given the broad range of circumstances in which the provisions of the Act might bite, this is unsurprising.
Ultimately it will be for the courts to decide what constitutes reasonable prevention procedures.
Corporate bodies must be under no illusion about HMRC’s will to use their new powers and the potentially catastrophic reputational and commercial consequences of failing to put in place appropriate safeguards: from disruptive dawn raids to huge fines, confiscation of assets and even debarment from bidding for public contracts.
HMRC investigations invariably take months or years to conclude, so even if there is ultimately no prosecution or DPA, there is likely to be a significant impact on a company’s ability to carry on business as usual.
These new offences have teeth, and relevant bodies need to take care not to be bitten.
This article first appeared in Criminal Law & Justice Weekly 30th September issue.
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