Civil Fraud Quarterly Round-Up: Q1 2021
The 30 September 2017 is an important date for HMRC and its “relentless” clampdown on global tax evasion.
First, it marks the coming into force of the landmark corporate offence of failure to prevent tax evasion under Part 3 of the Criminal Finances Act 2017. Secondly, it is the commencement date for the first exchanges of offshore financial account information by countries who have signed up to OECD’s Common Reporting Standards (CRS).
In somewhat of a pincer movement, on the same date that organisations become liable for the failure to prevent their employees and agents from facilitating tax evasion in the UK and abroad, so automatic exchange of financial information will allow HMRC (and other tax authorities) access to thousands of offshore account details which have previously been out of reach.
Whether the 30 September will in fact mark the “step change” in tackling tax evasion that HMRC is hoping for remains to be seen. What is clear is that corporates and facilitators of on-shore and off-shore tax evasion are under the spotlight like never before as HMRC reacts to public criticism and attempts to hit ambitious targets.
HMRC under pressure to deliver
In the aftermath of the Panama Papers scandal, MPs from the Public Accounts Committee 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 faced fierce criticism for letting “big multinationals off the hook”, achieving “woefully inadequate” numbers of prosecutions for offshore evasion and leaving “an impression that the rich can get away with tax fraud”.
Whilst tax fraud prosecutions in general increased significantly from 420 (in 2010/11) to 1288 (in 2014/15) questions remain over HMRC’s ability (and will) to hold large multi-nationals to account. Critics identified that whilst HMRC may meet its own “corporate targets” the focus is on prosecutions for less complex cases (such as excise fraud) and small and medium sized enterprises (as opposed to multinationals). It is suggested that HMRC has fallen into the temptation of going after the “low hanging fruit” thereby avoiding the difficulties inherent in investigating and prosecuting the complicated tax affairs of well-resourced organisations. Meanwhile, recent years have seen considerable public disquiet in response to a number of high profile cases of well-known multinationals coming under the spotlight for non-payment of UK tax.
In answer to this HMRC pledged in its business plan for 2015-2020 to invest £800 million into additional work to tackle evasion and non-compliance in the tax system, with a clear goal to raise an additional £5 billion a year by 2019 to 2020. In order to reach this target HMRC has pledged to increase the number of prosecutions into “serious and complex tax crime” with a goal to prosecute 100 wealthy individuals and corporates per year by 2020.
Failure to prevent tax evasion
Key to HMRC’s ability to hit its ambitious targets will be the use of the new corporate offence of failure to prevent the facilitation of tax evasion. The offence is committed when a relevant body (normally a company or a partnership) fails to prevent one of its “associated persons” (most likely an employee but can be broader including an agent or sub-contractor) from facilitating either a UK or a foreign tax evasion offence. 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.
What the legislation does not do is to create a further offence of facilitation of tax evasion, nor does it make a company liable for committing a tax evasion offence. Instead, the offence is committed by a company when it fails to prevent a person associated with it from facilitating a tax evasion offence. In other words, it does not alter what is criminal, it changes the focus on to who is held to account.
In the past 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. The aim of the new act is to make the prosecution of corporate bodies easier. It is no longer necessary to make a finding 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 legislation is extremely far reaching. For the UK offence to be committed the organisation’s facilitation can take place anywhere in the world regardless of whether the organisation or the associated person is incorporated or based in the UK; as soon as a UK tax payer is facilitated to evade UK tax by a person associated to the company or firm, that organisation is liable. The foreign offence allows an organisation which fails to prevent a foreign jurisdiction tax evasion to be prosecuted in the UK provided the case has sufficient nexus to the UK and that the foreign offending would constitute a UK tax evasion offence (dual criminality).
An organisation can avail itself of a defence if it has adopted reasonable prevention procedures. Such procedures are set out in the HMRC Guidance for the new offence (published 7 September). The Guidance expressly states that it is not a one-size-fits-all approach. Bespoke prevention procedures will need to be put in place to address risks that are particular to an organisation's work, size and sector. An organisation will be expected to undertake the necessary risk assessment, obtain buy in from senior management and then to have provided training and monitoring across the business. Those that do not are vulnerable to a criminal prosecution facing unlimited fines, potential debarment from bidding for public contracts and the commercial and reputational consequences that ensue from a large scale investigation.
Since 2012 HMRC’s off shore evasion strategy, “No Safe Havens”, has focused on the development of international cooperation and coordination to enhance global tax transparency and information sharing.
In particular the UK has played a central role in the development of the Common Reporting Standards (CRS) implemented by the OECD and its global forum on tax transparency.
The CRS require financial institutions to exchange information regarding their clients automatically on an annual basis with their clients’ local tax authorities. Multilateral agreements have been signed by over 95 different jurisdictions, with so called “early adopters” of CRS (of which there are 49) due to commence exchanging information on 30 September 2017. For the UK this means that they will start to receive a significant amount of previously unseen off-shore information regarding the financial affairs of UK residents that may help identify off-shore tax evaders.
Recent years have also seen a significant increase in the numbers of requests to and from the UK for Mutual Legal Assistance regarding tax investigations. Such requests range from informal intelligence gathering between tax authorities to formal applications for coercive measures such as search and seizure and restraint/freezing orders. The fight against tax evasion has become truly global.
Does the 30 September mark a “sea change” for tax investigations?
There is no doubt that an ability to hold companies to account for failing to prevent tax evasion in combination with increased tax transparency and cooperation between jurisdictions could lead to more prosecutions. However, HMRC must be careful to ensure that its limited resources are deployed selectively in order to gain the maximum benefit.
Whilst it will be tempting for HMRC to target smaller entities for failure to prevent tax evasion offences on the basis that they may not have adopted any prevention procedures at all, such “easy wins” are unlikely to assuage public concerns that large corporates are treated differently to small and medium sized businesses. Equally, pursuing a multinational who has compliance procedures in place albeit that they were arguably not adequate for their size and sector may lead to extended and expensive litigation.
How and when to pursue the foreign failure to prevent offence will cause additional dilemmas. Whilst it is admirable that the UK has offered up its services to prosecute the failure to prevent the facilitation of foreign tax evasion (particularly in jurisdictions which do not have the resources to do so effectively) one has to wonder how investigations into the non-payment of foreign tax liabilities is going to help close the UK’s tax gap?
A further complication is that HMRC itself will not be investigating the foreign offence. The SFO and/or the NCA will hold the investigative authority in such cases. But do these agencies have the requisite personnel or skills to investigate foreign tax evasion offences? Certainly, whilst the SFO may consider the failure to prevent offences as a bolt on to a separate fraud or bribery investigation it seems unlikely that they would have the resources or the appetite to invest in a pure failure to prevent tax evasion investigation at this time.
Of course, the reality maybe that there is no intention to investigate and prosecute every single organisation who may not have applied the Guidelines correctly. Perhaps all the noise regarding prevention procedures is simply a cunning ruse by HMRC to put the onus back on to companies and firms to ensure compliance with a view to prevention rather than cure? Whether deliberate or not, the reality is that organisations are carrying out risk assessments and implementing training and monitoring programmes to ensure they do not fall foul of the legislation. HMRC has therefore managed to push the job of preventing the facilitation of tax evasion back on to corporates with the hope that this will have a knock on effect of preventing tax fraud and reducing the tax gap. In the meantime HMRC will be keen to ensure greater compliance by demonstrating that the new legislation does have teeth – it will probably start by selecting some low hanging fruit to chew on.
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