It has now been confirmed that, as expected, legislation providing for new corporate criminal offences of failure to prevent the facilitation of tax evasion will have effect from 30 September this year.
The new offences, contained in the Criminal Finances Act 2017, will make businesses vicariously liable if an employee or other 'associated' person criminally facilitates tax evasion whilst acting in that capacity for the business, even if the senior management of the business was not involved or aware of what was going on.
Meanwhile, HMRC have been stepping up investment in their specialist fraud investigation unit, suggesting that they are gearing up for a crackdown on tax evasion. As a result of the new offences, businesses are likely to be firmly within HMRC's sights and no doubt they will be looking for a few major scalps.
However, a survey commissioned by Pinsent Masons in May revealed that 76% of UK executives were not aware that the new offences were being introduced. Lack of awareness from business and HMRC preparing to take action could be a lethal combination.
The new offences
The new offences will apply to both companies and partnerships. The first will apply to all businesses, wherever located, in respect of the facilitation of UK tax evasion. The second will apply to businesses with a UK connection in respect of the facilitation of non-UK tax evasion.
Businesses will have a defence if they can prove that they had reasonable prevention procedures in place to prevent the facilitation of tax evasion, or that it was not reasonable in the circumstances to expect there to be a procedure in place.
Businesses now need to be focusing on conducting a risk assessment and drawing up an implementation plan to introduce new, proportionate prevention controls and procedures. Although HMRC will not necessarily expect everything to be in place by 30 September, they will expect, at the very least, a risk assessment to have been substantially carried out and an implementation plan to be in place. With the holiday season upon us, time is short.
The consequences of falling foul of the new rules could be extremely costly. In addition to the damage to reputation and adverse media attention, a criminal conviction could make it more difficult for a business to win government contracts in the UK or overseas, or restrict it from operating in regulated markets.
The financial services, accounting, tax advice and legal sectors are likely to be most affected by the new legislation. These sectors will face the biggest challenges when it comes to carrying out risk assessments, and ensuring that adequate procedures are in place to prevent any potential facilitation of tax evasion.
However, other sectors are also at risk. HMRC want to make sure that large businesses are taking more notice of whether people who make money in their markets and supply chains are tax compliant. Businesses which pay large sums to consultants, do cross-border business, engage casual or itinerant labour and contractors, or handle goods and services where organised fraud is a risk, are at high risk of falling foul of the new legislation.
The rules will not just impact upon big businesses, smaller and medium sized businesses could also be at risk.
Increase in HMRC investment
Investment by HMRC into their 'Fraud Investigation Service' increased to £204 million over the 2016/17 tax year, up from £186m in 2015/16, according to figures obtained by Pinsent Masons. This unit, which is made up of the specialist tax and criminal justice experts who deal with the most serious investigations, was set up in July 2015 as part of an internal restructuring by HMRC. The increase in investment suggests that HMRC could already be carrying out initial investigations into firms, ahead of the new laws coming into force.
The 30 September start date for the new offences corresponds with the date by which the first automatic exchanges of information under the Common Reporting Standard must take place. HMRC are already ploughing through data about accounts held by UK residents in the Crown dependencies (Jersey, Guernsey and the Isle of Man) and the Overseas Territories (including Gibraltar, Bermuda and the BVI), to see if any rules have been broken. By 30 September they will have information about accounts held in a raft of other overseas locations. Once they identify a tax evader they are likely to look back up the chain to see whether anyone has facilitated the evasion.
Tax evasion tends to be a longer-term course of conduct rather than a single act. This means that, although the new offences will only apply to conduct which takes place after the change in the law, scope for prosecution under the new rules may still exist even if a device for tax evasion was set up before that point, if the evasion is continuing to be facilitated.
Investigations into corporates will climb steeply after the new corporate offence becomes operational. Businesses must not wait for the new rules to take effect, but should begin preparing their prevention measures. The first a business might know about an investigation is when HMRC turn up in reception to execute a 'raid' or serve formal notices. Critical incident procedures should therefore also be reviewed now.
HMRC is getting ready – are you?