Article

Prevention procedures are key to avoiding new taxation law penalties

The Government has repeatedly promised to crack down on tax evasion, and the inclusion of a new criminal offence in the Criminal Finances Act is a significant step in fulfilling that promise.

Under the Criminal Financing Act companies or partnerships (a relevant body) will be held criminally liable where they fail to prevent those who act for them, or on their behalf, from criminally facilitating tax evasion. Although the legislation places greater responsibility on business, a survey carried out in April showed that 76% of senior decision makers in UK businesses were however unaware of this new law.

All businesses will have to undertake a documented risk assessment to identify the risks of facilitation of tax evasion within their organisation. However it is likely to be mainly relevant to solicitors or other professionals providing any form of tax advice.

Prior to this new legislation, attributing criminal liability to a relevant body required prosecutors to show that the senior members of the relevant body were involved in and aware of the illegal activity.

The new offence does not radically alter what is criminal, it simply focuses on who is held to account for such acts. It does this by focussing on the failure to prevent the crimes of those who act for or on behalf of a corporation, rather than trying to attribute criminal acts to that corporation.

There are three stages to the new offence; criminal tax evasion by a taxpayer (either an individual or a legal entity), criminal facilitation of the tax evasion by an ‘associated person’ acting on behalf of the relevant body; and the relevant body failing to prevent its representative from committing the criminal facilitation act.

An associated person is someone who is an employee, agent or other person who performs services for or on behalf of the relevant body. Therefore sub-contractors can be associated persons.

A business which commits this offence could face unlimited financial penalty.  Furthermore a criminal conviction could have more wide-ranging implications because it may require disclosure to professional regulators and could prevent the business being awarded public contracts. It could also create serious reputational damage. 

If a relevant body can show that it has put in place reasonable prevention procedures that identify and mitigate tax evasion facilitation risks then prosecution is unlikely as it will be able to raise a defence.

To demonstrate that a firm has reasonable procedures in place to prevent such facilitation, HMRC has published six overall guiding principles that firms should follow; risk assessment of business lines, risk-based prevention procedure, top level management commitment, due diligence (of all employees, agents or service providers who act for them), communication and training, and monitoring and review.

The new law received Royal Assent before parliament was dissolved for the general election in April 2017 and the new offences will apply from 30 September 2017.