UK tax enforcement authorities were given a powerful tool under the Criminal Finances Act 2017 to prosecute companies for tax evasion. Part 3 establishes corporate criminal offences (CCOs) for “failing to prevent” the facilitation of UK or foreign tax evasion by a corporate’s “associated persons”.
As with the similar model of offence under section seven of the Bribery Act 2010, visible enforcement has had a relatively slow start. However, after a two-year hiatus, HM Revenue and Customs, the UK’s tax authority, has opened its corporate investigations ledger, recording nine CCO investigations by the end of December 2019, with a further 21 opportunities under review. In his 2020 Budget, Chancellor of the Exchequer Rishi Sunak announced plans for significant recruitment of HMRC compliance officers and investment in tax investigation technology.
COVID-19 prompted the government to unveil unprecedented support measures, substantially increasing the national deficit. HMRC temporarily suspended tax investigations while it focused on the job retention scheme, but it has now resumed its activities. As the crisis abates, collecting revenue will be a top priority and a heightened focus on investigating and prosecuting suspected tax evasion is anticipated to deter abuse and protect public finances while the Treasury remains depleted.
The CCOs came into effect on September 30 2017. They apply to corporates failing to prevent the facilitation of tax evasion after that date. Notably, the CCOs concern both UK and foreign corporates.
There are two offences:
- Failure to prevent the facilitation of UK tax evasion, wherever the corporate is located; and
- Failure to prevent the facilitation of foreign tax evasion, where the corporate is incorporated in or carrying on business in the UK, or where the relevant facilitation conduct took place in the UK.
For either CCO to apply, there are three stages:
- There was criminal tax evasion.
- The “associated person” criminally facilitated the tax evasion while performing services for the corporate. There is no requirement for anyof the criminal conduct to have taken place in the UK: the CCOs are relevant to businesses located anywhere in the world, if there is a relevant UK tax liability or there is a foreign tax liability and the business has a relevant UK connection.
- The corporate must have “failed to prevent” the facilitation of the tax evasion. This follows automatically from the fact that the facilitation occurred, unless the corporate can show it had “reasonable procedures” to prevent it.
Conviction carries serious consequences, including an unlimited fine and potential debarment from public contracts, along with public condemnation and reputational damage.
‘Reasonable procedures’ defence
A corporate will only have a defence to the CCOs if it can demonstrate it had “reasonable procedures” to prevent the associated person from criminally facilitating tax evasion. HMRC has published guidance on its expectations on reasonable procedures, which focuses on “six guiding principles”. Given the heightened focus on the CCOs, corporates should consider the six guiding principles closely:
- Risk assessment. Corporates must assess, document and review their exposure to the risk of associated persons criminally facilitating tax evasion. HMRC emphasises that the determination of a “reasonable” tax compliance programme “hangs off this”. The guidance states:“You need an assessment of how your associated persons could criminally facilitate tax evasion.” HMRC is carrying out its own risk assessments, and may identify issues which corporates could pre-emptively identify for themselves.
- Proportionality of risk-based prevention procedures. Not all corporates are alike, and the proportionality of reasonable procedures will depend on the nature, scale and complexity of the corporate’s activities. HMRC has confirmed there is no requirement for excessively burdensome procedures, but more than “lip service” is required.
- Top level commitment.Senior management must set the “tone from the top”, fostering a culture within the corporate that strongly condemns the facilitation of tax evasion. The message must be carefully considered to ensure it is not just heard but understood, implemented and disseminated by middle and lower management. The message must specifically address tax evasion risks – not simply ethics and compliance in a general sense.
- Due diligence. Certain areas of a corporate’s activities may pose a higher risk and require additional scrutiny. This is particularly relevant for multinationals acting in diverse industries and/or in high-risk jurisdictions.
- Communication. The policies should be clear and reiterated through regular training, targeted at those employees, agents and service providers who pose the highest risks of misconduct.
- Monitoring and review. Corporates should regularly seek internal feedback, prepare periodic documented assessments and coordinate and share experiences with other businesses operating in their sector. External reviews by professional advisers can provide an assurance of independence.
While the six guiding principles are similar to the procedures required under the Bribery Act guidance, a corporate’s compliance programme must be tailored to tax evasion risks. It is not enough to simply alter existing policies, where these are not sufficient to highlight the specific risk factors surrounding tax activity.
HMRC has confirmed that what is “reasonable” will differ between corporates. However, sizeable businesses with complex operational, sales or finance functions, or who outsource a large part of their functional support, will require some form of tailored procedures, properly implemented throughout their organisation and among their associated persons – monitored, updated and tested over time.
HMRC is responsible for investigating the UK tax evasion CCO and the Serious Fraud Office (SFO) and/or the National Crime Agency (NCA) are responsible for investigating the foreign tax evasion CCO.
HMRC’s fraud investigation service (FIS) appears committed to utilising the full extent of its powers for the UK tax evasion CCO. The FIS is targeting a wide range of business sectors, where its analysis identifies issues including complex supply chains, activities in high-risk jurisdictions or irregular labour arrangements.
By 2022, HMRC intends to bring 100 prosecutions a year for serious and complex tax crime, which includes prosecutions under the CCOs. The focus on corporates is centred on HMRC’s policy of “changing industry practice and attitudes towards risk,” by “encouraging organisations to do more to prevent tax crime happening in the first place”.
In cross-border cases, HMRC has significant and increasing powers to obtain information from EU and international authorities. Recent developments include the international roll-out of the common reporting standard (CRS), and the implementation of EU Council Directive 2011/16 (DAC6, delayed to January 2021 as a result of COVID-19 in the UK).
Beyond the exchange of information, HMRC also coordinates internationally with other tax authorities on enforcement action. This includes HMRC’s recent participation in the Joint Chiefs of Global Tax Enforcement (J5).
Formed in 2018, J5 is a multinational tax enforcement group, comprising the UK, US, Canadian, Australian and Dutch tax authorities. In January 2020, the J5 announced their first major operational activity, involving a series of investigations into an international financial institution suspected of facilitating tax evasion and money laundering.
Simon York, chief and director of HMRC’s FIS commented on the action: “Tax evasion is a global problem that needs a global response and that is what the J5 provides.” HMRC has delivered training to J5 investigators on the scope of the CCOs, which will aid future referrals.
Action to take
In this enhanced enforcement environment, corporates face an increasing risk of finding themselves embroiled in prolonged tax investigations, particularly where they operate in high-risk industries or jurisdictions, or have complex business operations and/or novel tax arrangements.
The sharing of information within the EU and internationally is likely to increase the prospect of issues being identified and investigated across borders by one or more tax authorities.
As tax investigation activity resumes and likely increases in the wake of COVID-19, corporates should prudently consider the following:
- Prevention: If a corporate implements suitable prevention measures, it may be able to detect, monitor and proactively respond to any issues. In view of the wide territorial scope of the CCOs, corporates around the world, and particularly those exposed to UK taxes, should consider their risks and whether their systems and controls sufficiently address potential compliance concerns and meet HMRC expectations.
- Investigation: If potential CCO issues are identified, HMRC or the SFO/NCA will likely investigate and criminal prosecution is a possibility. However, if the corporate proactively reports its conduct, cooperates with investigators and remediates its compliance programme to prevent future breaches, it may be able to avail itself of a deferred prosecution agreement (DPA), which may mitigate or avoid the most detrimental consequences of prosecution. Furthermore, timely identification and self-reporting may demonstrate that, albeit not perfect, the corporate’s procedures were reasonable.
- Resolution: HMRC will reward good corporate governance – offering more lenient outcomes, including DPAs, for corporates proactively self-reporting conduct. On the contrary, failure to engage may lead to prosecution. For companies with reputational concerns or who bid for public contracts, avoiding prosecution through negotiation may not just be a desirable but a necessary outcome.
This article was written for ITR by Tim Bowden, partner, and Richard Hodge, associate at Dechert in the UK.
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