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Mon 13 Nov 2017

Tax Evasion - the new corporate offence



On 30 September 2017, The Criminal Finances Act 2017 introduced a new corporate offence of failure to prevent the criminal facilitation of tax evasion. So what do you need to know?

 

Who does it apply to?


The new offence of corporate, rather than an individual’s, failure to prevent criminal facilitation of tax evasion applies to companies, partnerships and LLPs. This could also include charities regardless of the fact that they do not operate commercially.


Effectively a business becomes responsible for the criminal acts of its employee and other “associated persons” including agents, contractors, suppliers and intermediaries that perform services on behalf of a business.


What is tax evasion and how do you spot it?


Under the Criminal Finances Act, tax evasion includes cheating the public revenue and/or being knowingly concerned in or in taking steps with a view to the fraudulent evasion of tax. The definition is intentionally wide so that it includes all taxes and national insurance contributions.


On a day to day basis and in the course of your work, this means that the following scenarios could be “red flags” that require your immediate attention:

  • a third party has made or plans to make a false statement relating to tax, has failed to declare income or intends to set up a structure to try to hide income, gains or assets from HMRC.
  • a third party working for your business as an employee asks to be treated as a self employed contractor without there being any material changes to their work.
  • a third party that you have provided services to asks you to change the description of services on their invoice in a way that could mislead or you are asked to address the invoice to a different entity that you did not provide the services directly to.
  • a third party requests that payment is made to a country that does not correspond with where it is based or conducts business.
  • you notice that you have been invoiced for a commission or fee payment that appears either too large or too small.

What is the penalty?


If a business is convicted of this new offence it will face an unlimited fine in respect of the acts of its employees and “associated persons”. Therefore, regardless of whether a business benefits from its employees’ actions or not, if it is found that there has been criminal tax evasion under either UK or foreign law, then the business will be responsible.

 

What do businesses need to do next?


If your business is faced with an allegation of corporate tax evasion, it is possible to defend your position if you can show that you have put in place reasonable prevention methods to prevent the facilitation of the tax evasion or that it is unreasonable to expect to have such procedures in place. The Government has confirmed that businesses will rarely be able to rely on the latter as this will only be relevant if the outcome of a risk assessment is “extremely low risk” and the costs of introducing any prevention procedures are “disproportionate” or “cost prohibitive”.


Businesses must consider their obligations and what they need to do next to avoid potential fines and the negative impact on their professional reputation. To help, HMRC has issued draft guidance on what it considers “reasonable procedures” to be, which include:

  • Risk assessments
  • The proportionality of risk-based prevention procedures
  • Due diligence
  • Effective communication and training for employees
  • A commitment from senior management to create a business culture that has a zero tolerance approach to tax evasion
  • Monitoring and review

The first step for all businesses is to conduct a risk assessment across all business areas to understand what risks you face and how tax evasion could take place. It is important that this stage is clearly recorded so that should it be necessary to defend an allegation of tax evasion, the necessary paperwork is in place.


Your employees are the people most likely to encounter “red flag” scenarios so it is important to ensure that you consider implementing a new policy that sets out the business’ stance on tax evasion. This should make it clear that appropriate action will be taken under the disciplinary procedure should the situation arise and the appropriate procedures have not been followed in relation to reporting any concerns. It is also worth considering updating your contracts of employment with a new clause, again making it clear that a zero tolerance approach will be adopted as this will highlight the seriousness of the potential situation and ensure that all your staff are fully aware of what is expected from them.


The way in which this is communicated to employees is vital as they should feel able to report any concerns and know who to direct any questions to. This could be done through training, reiterating to them the existing whistleblowing procedures that should already be in place for them to raise any genuine concerns.


If you have any questions in relation to the next steps that your business should be taking, what documentation you need to have in place and what training should be arranged, please contact us.

 


Julie Edmonds is Senior Associate specialising in Employment at JPC Law.

For more information on all employment matters, please contact her:

E: jedmonds@jpclaw.co.uk

T: +44 (0)20 7644 7286

General Enquiries:

E: enquiries@jpclaw.co.uk

T: 020 7625 4424

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