HM Revenue & Customs (HMRC) has published a consultation on the new criminal offence by corporations which fail to take adequate steps to prevent the criminal facilitation of tax evasion. This includes draft guidance on the procedures which can be put in place to prevent a corporation from committing this offence.
This offence was first announced in the March 2015 Budget, with initial consultation on policy issues taking place last year. This concluded with an announcement in the Autumn Statement that the Government would legislate for the new offence. Although draft legislation has been in circulation since December 2015, concerns were expressed about its scope and, on April 17, 2016, HMRC published revised draft legislation and guidance for further consultation on the detail.
Why introduce a new criminal offence?
The Government is concerned about the difficulty of prosecuting corporations for the criminal acts of those who act on their behalf; this typically requires the involvement of senior management in the illegal activity, which is very rarely the case. By its nature, criminality is likely to be hidden from a company’s directors, and there is a concern that corporations are not always fully aware about how staff in, for example, non-UK operations or agents are conducting themselves.
The purpose of the new offence is to encourage corporations to monitor the activity of their staff, and others who act for them (e.g. consultants) more closely and to report any criminal activity which is discovered. This is to be achieved by penalising companies which do not take reasonable steps to prevent their agents (e.g. employees) from facilitating tax evasion by someone else, such as the corporation’s customers or suppliers.
What does it mean for my organisation?
The main defence to such an offence will be to have reasonable “prevention procedures” in place; i.e. procedures designed to prevent an organisation’s agents from facilitating tax evasion by others. Most businesses will build in these procedures alongside their other similar measures.
It is helpful that the requirement is not an absolute one, but rather to have “reasonable” prevention procedures in place. However, this does introduce an element of uncertainty as to what procedures each organisation will have to put in place. Businesses should examine their risk areas, and put in place well documented procedures to minimise the chances of any tax evasion being facilitated.
There are some points to bear in mind about the requirement to monitor and report:
- it applies to persons who perform services on behalf of the corporation, not just its employees. This can include contractors and subsidiaries, although it is intended to exclude activity carried out in a private capacity;
- partnerships, 1907 Act Limited Partnerships and Limited Liability Partnerships are within the scope of the new offence, not just companies;
- the aim is to identify the facilitation of tax “evasion” offences, and this requires the organisation’s customer, supplier etc. to have done more than making an innocent (or even potentially negligent) error in filing their taxes; and
- although the focus is on having procedures in place to prevent evasion of UK tax, UK companies/partnerships will also need to identify and report certain types of overseas tax evasion.
Although the revised legislation is narrower than the original draft (reflecting concerns about the ordinal drafting) and the guidance contains some helpful material, there are still points which merit attention. Businesses have until July 10, 2016 to comment on the drafting, and respond to the specific questions raised by HMRC. This is your opportunity to have particular concerns addressed; for example, by ensuring that the guidance adequately addresses how your business operates. At the same time, businesses should start to examine how they operate, what risks they have and what procedures should be put in place.
(HMRC, Tackling tax evasion: legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion, 17.04.16)