Corporate tax evasion - make sure you’re prepared

The Criminal Finances Act 2017 came into force on 30 September 2017. Part of the Act means that companies and partnerships can be criminally liable where they fail to prevent those who act for, or on behalf of, the business from criminally facilitating tax evasion. There is however, a potential defence against this offence by the business putting into place a system of reasonable prevention measures.

The punishment for the offence includes unlimited financial penalties. The Act doesn’t change what tax fraud is, just who may be liable.

Contents:

An overview
So what is the offence?
Is there any defence against such a charge?
What offences are caught?
Sanctions under the Act

 

An overview

There are three stages that apply to both the domestic and foreign tax evasion facilitation offences. There are additional requirements for the foreign offence but we only cover the UK tax evasion offence here.

• Stage one: the criminal evasion of tax (including NIC) by a taxpayer (either an individual or a legal entity) under existing law.
• Stage two: the criminal facilitation of the tax evasion by an ‘associated person’ of the ‘relevant body’ who is acting in that capacity.
• Stage three: the ‘relevant body’ failed to prevent its representative from committing the criminal facilitation act.

Stage one and two do not create any new offences. These are already criminal offences. Only a ‘relevant body’ can commit the new stage three offence, so it applies to incorporated bodies (typically companies) and partnerships, not individuals. The new offence is a strict liability offence which means that if stages one and two are committed, the relevant body will have committed the new offence (subject to claiming a defence).

So what is the offence?

The offence created by the new rules is the failure to prevent facilitation of UK tax evasion offences.

A relevant body (B) is guilty of an offence if a person commits a UK tax evasion facilitation offence when acting in the capacity of a person associated with B.

Meaning of relevant body

A ‘relevant body’ is subject to the new rules and this means a body corporate (including a LLP) or partnership (wherever incorporated or formed).

A partnership means per the Partnership Act 1890, a limited partnership registered under the Limited Partnerships Act 1907 or a firm or entity of a similar character formed under the law of a foreign country.

And who acts in the capacity of an associated person?

A person (P) acts in the capacity of a person associated with a relevant body if P is:

• an employee of a relevant body who is acting in the capacity of an employee;
• an agent of a relevant body who is acting in the capacity of an agent (i.e. has authority to act for someone else); or
• any other person who performs services for or on behalf of a relevant body who is acting in the capacity of a person performing such services (e.g. a subcontractor).

Is there any defence against such a charge?

It is a defence for a relevant body to prove that, when the UK tax evasion facilitation offence was committed, it had such prevention procedures in place as it was reasonable in all the circumstances to expect it to have in place or it was not reasonable in all the circumstances to expect it to have any prevention procedures in place.

‘Prevention procedures’ means procedures designed to prevent persons acting in the capacity of a person associated with a relevant body from committing UK tax evasion facilitation offences.

What offences are caught?

‘UK tax evasion offence’ means an offence of cheating the public revenue or an offence under the law of any part of the UK consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

A ‘UK tax evasion facilitation offence’ means an offence under UK law consisting of:

• being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax by another person;
• aiding, abetting, counselling or procuring the commission of a UK tax evasion offence; or
• being involved art and part in the commission of an offence consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of a tax.

Sanctions under the Act

A relevant body guilty of an offence under these rules is liable to a financial penalty, possibly unlimited.

How can we help?

James Pitt, Audit and Assurance Partner, comments, “The new legislation does not radically alter what is criminal, but it does change who can be held to account. Companies and partnerships of all sizes need to take action. HMRC accept that any changes (e.g. training and IT systems) will take time to roll out however they do expect to see an implementation plan. We pride ourselves in understanding our clients’ businesses and would be happy to discuss with you where non-compliance may potentially arise and help you develop and document safeguarding measures.  Contact James Pitt on jpitt@jamescowper.co.uk or your regular James Cowper Kreston Audit contact for more information.