New Corporate Tax Facilitation Offence - Part 2 of our Criminal Finances Act 2017 Summary

Roger Sahota's summary of the new corporate tax facilitation offence as published in this weeks Law Society Gazette. 

Corporate Facilitation of Tax Evasion

In recent times the Government has oft-pronounced its intention to target the facilitators and enablers of tax evasion. This new offence is directed at holding companies to account for the actions of their employees in facilitating tax evasion or assisting customers to evade tax. Only a relevant body i.e. a legal entity such as a company or partnership (wherever incorporated or organised) can commit the offence, not an individual. Two new failure to prevent offences apply – failure to prevent facilitation of domestic tax evasion and failure to prevent facilitation of foreign tax evasion. Where a person “associated with” a relevant body commits a foreign or UK tax facilitation evasion offence the relevant body will be vicariously liable. An “associated person’ is broadly defined to include an employee, agent or any other person performing services on or behalf of the relevant body. Any prosecution requires the consent of the DPP or Director of the SFO. Potential fines are unlimited.

 UK Offence (s.45)

The s.45 facilitation offence is founded on tax evasion crimes such as cheating the revenue or other fraudulent evasion offences.  Strict liability offences are excluded. Dishonest intent for the underlying offence as well as dishonest facilitation must be proved. According to the Explanatory Notes accompanying the Bill, aggressive avoidance falling short of evasion or inadvertent or negligent facilitation is not criminalised. In practice, evidence of dishonesty could include concealment, misrepresentation, non-disclosure or even recklessness in the form of turning a blind eye to wrongdoing.

Foreign Offence (s.46)

The s46 offence criminalises non-UK tax evasion by a UK company. It applies where the relevant body has a nexus with the UK, the conduct concerned amounts to an offence where the tax is levied and a dual criminality test is satisfied. Whether the HMRC should have the power to bring a prosecution in the UK for tax evasion in a foreign jurisdiction is a topic of some debate.

Reasonable Prevention Procedures Defence

Modelled on s.7(2) of the Bribery Act 2010, the Act provides for a defence where at the time of the offence the relevant body has in force “reasonable prevention procedures.” HMRC draft guidance is available and states that “If a relevant body can demonstrate that it has put in place a system of reasonable prevention procedures that identifies and mitigates its tax evasion facilitation risks, then prosecution is unlikely as it will be able to raise a defence.”

Much controversy has arisen over the new tax offences. Traditionally, to hold a company liable for the illegal acts of directors, employees or agents it was necessary to show that the individuals responsible represented it’s ‘directing mind or will.’ This approach was criticised for making it too difficult to prosecute companies, particularly large- or medium-sized ventures where the directors are some distance removed from the day-to-day actions of their employees. In the one words of one academic, this identification doctrine ‘works best in cases where it is needed least (i.e. small businesses) and works least where it is needed most’.

In expanding the scope of criminal liability for companies accused of facilitating tax evasion many observers believe that the Government has swung the pendulum too far the other way. Rather than focusing on attributing the criminal act to the company, the offences focus on and criminalise the company’s failure to prevent those who act for or on its behalf from facilitating tax evasion. Because the Act is broadly drafted it is capable of wide application. It has the potential to criminalise inadvertent facilitation in cases where senior management were unaware of and uninvolved in any criminal conduct by employees. Liability also arises even where no benefit has accrued to the company.

Time will tell if the HMRC has the resources to prosecute such cases successfully. What is clear is that the “failure to prevent” model employed here and in the Bribery Act 2010 appears to the preferred choice of Government in its efforts to reframe the law on corporate criminal liability to meet the political imperative of corporate accountability. In March this year a MOJ consultation on proposals for a new corporate liability offence for economic crime came to a close. It should come as no surprise to practitioners if the legislation proposed for this new offence, expected to be announced in the Autumn, adopts a similar format. If so, companies will have an even greater incentive in future to ensure that their compliance procedures adequately address any risk of exposure to economic crime by their employees.