The Corporate Offence of Failure to Prevent the Facilitation of Tax Evasion: Two years on

11 October 2019

Do you remember the fallout from the Panama Papers? Do you remember HMRC’s response pledging to prosecute 100 wealthy individuals and corporates per year by 2020? Do you remember the new corporate offence of failure to prevent the facilitation of tax evasion announced with much fanfare as part of the Criminal Finance Act 2017?

With Brexit dominating both the headlines and HMRC’s limited resources over the last two years, it’s easy to forget the extent of the public and political condemnation concerning businesses and high net worth individuals “getting away” with tax fraud. The furore led to a raft of new legislation and measures being introduced which aimed to hold corporates to account.

Last week marked the two year anniversary of HMRC’s “landmark” corporate offence of failure to prevent the facilitation of tax evasion. This legislation came with a Government warning that it is committed to cracking down on tax evasion and would be “relentless” in its pursuit of evaders. 

The offence, which came into force on 30 September 2017, allows for the first time, a company or partnership to be prosecuted for failing to prevent its employees and other ‘associated persons’ (such as subcontractors or agents) from facilitating tax evasion in the UK and abroad. The company has a defence if it is able to show that it has “reasonable procedures” in place to prevent its associated persons from facilitating tax evasion. The legislation was accompanied by detailed guidelines setting out the kind of reasonable prevention procedures that companies would need to implement to protect themselves.

Limited progress

So, how has HMRC done in holding corporates to account and prosecuting those businesses who have failed to prevent tax evasion?

The answer according to a Freedom of Information request in March 2019 suggested that progress had been extremely limited, with reports of less than five investigations underway and no prosecutions to date.   More recently my firm approached HMRC directly to ask whether this was still accurate and why in that case have there been so few investigations and prosecutions? We received the following response:

Our track record speaks for itself. Since 2010, the UK government has introduced more than 100 new measures to tackle tax avoidance, evasion and non-compliance. These have secured and protected more than £200 billion, including £2.9 billion from those who wrongly thought they could hide money offshore..........The powers in the Criminal Finances Act are a useful addition to our toolbox but they are still relatively new. These investigations can be hugely complex and it is only right that we take the necessary time to build robust cases.”

The large number of measures implemented by the Government, but the small numbers of prosecutions under the Criminal Finance Act are unlikely to assuage HMRC’s critics, most notably the Public Accounts Committee who in the wake of the Panama Papers provided a damning indictment of HMRC’s performance in tackling tax evasion. With losses from tax fraud of a staggering £16 billion and a tax gap of £34 million, HMRC was sharply criticised for letting “big multinationals off the hook” and leaving “an impression that the rich can get away with tax fraud.”

However, to those like myself who work in this field, HMRC's defence is plausible as an explanation for why there have been no criminal charges to date. Criminal tax investigations are indeed notoriously time-consuming and complex and it is often several years after an investigation has commenced that a file is ready to be passed to the Crown Prosecution Service for a charging decision to be made.  

Paltry number of investigations

Nevertheless, whilst a delay in prosecutions might be expected, the small numbers of investigations is surprising. The whole point of the new legislation was to make the prosecution of corporates easier.  Previously attributing criminal liability to a company or partnership required prosecutors to show that the senior members of the relevant body were involved with or aware of the illegal activity (“the identification principle”) which legally and evidentially was often difficult to prove. Under the Criminal Finances Act it is no longer necessary to prove that the “controlling will or mind” of a company was aware that the facilitation was taking place, merely that the company had failed to prevent such facilitation.   

The low numbers of investigations may simply be a product of resourcing constraints due to Brexit. HMRC's 2018-19 Annual Report confirmed that 5,400 full time employees were working on Brexit preparations including “building the customs, VAT and excise systems the UK will need and preparing our customers for leaving the EU, with or without a deal”, whilst conceding that “This important work has affected our ability to meet some of our broader targets.”

Alternatively, it may be that HMRC never had any intention to investigate and prosecute multiple organisations that had failed to prevent the facilitation of tax evasion. Perhaps all the noise regarding the implementation of the new offence was a cunning ruse by HMRC to put the onus back on companies to ensure compliance with a view to prevention rather than cure?

Self-Policing fallacy

Unfortunately for HMRC any idea of extensive self-policing by corporates may just be wishful thinking. A recent Ipsos Mori poll commissioned by HMRC reported that only one quarter of all businesses surveyed were even aware of the Criminal Finance Act 2017 and only 24% had assessed the potential risk of being exposed to the facilitation of tax evasion by their business. The reality is that until some successful prosecutions take place, many businesses will remain blissfully ignorant of this offence. As a consequence the existence of the legislation by itself will have a limited deterrent effect and is certainly not one that is likely to substantially reduce the tax gap.   

When tax evasion is back on the front pages and the number of investigations and prosecutions of corporates properly scrutinized it may be that HMRC will find it is not only businesses that will be held to account. 

This blog was first published in Accountancy Daily on 10 October 2019.

Further information

For further information on the issues raised in this blog post, please contact a member of our criminal litigation team in confidence.

About the author

David Sleight is a Partner in the criminal litigation team who regularly acts for individuals and companies in high profile cases, and specialises in providing advice at the crucial early stages of an investigation. He acts for companies and individuals accused of complex financial investigations involving fraud, overseas corruption and mutual legal assistance (MLA). He specialises in defending tax evasion/fraud allegations brought by HMRC and has developed a specialist expertise in advising in cross border tax litigation involving MLA requests between Member States.

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