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Fraud Insights: Failure to prevent facilitation of tax evasion

Posted on 08 January 2018

Fraud Insights: failure to prevent facilitation of tax evasion

The new regime of failing to prevent the facilitation of tax evasion came into force on 30 September 2017, pursuant to Part 3 of the Criminal Finances Act 2017 (the "Act"). The Act has created two offences; failure to prevent facilitation of UK tax evasion (the "UK Offence"), and failure to prevent facilitation of foreign tax evasion (the "Foreign Offence"). The offences apply to companies and partnerships, and apply when the following requirements are satisfied:

  1. Stage One – criminal tax evasion by a taxpayer (either by an individual or an entity);
  2. Stage Two – criminal facilitation of the tax evasion by an "associated person" of the relevant body acting in that capacity; and
  3. Stage Three – the relevant body failing to prevent the associated person from committing the criminal facilitation act.

The UK Offence applies to all businesses, regardless of where they are located. The Foreign Offence applies to a relevant body (i) incorporated under UK law; (ii) carrying on a business or part of a business in the UK; or (iii) any aspect of the foreign tax evasion facilitation offence takes place in the UK. An associated person could be an employee, agent or other person who performs services for or on behalf of the relevant body (which could be an individual or an incorporated entity).

It is a defence for the relevant body to have in place reasonable prevention measures to prevent the UK Offence and/or the Foreign Offence by an associated person. HMRC's guidance on assessing reasonable prevention measures are informed by six principles which are not prescriptive and are intended to be flexible and outcome focussed:

  1. Risk assessment
  2. Proportionality of risk based prevention procedures
  3. Top level commitment
  4. Due diligence
  5. Communication (including training)
  6. Monitoring and review

The penalties for these offences include an unlimited fine and ancillary orders such as confiscation orders.

Kathryn Garbett, Partner in the Mishcon de Reya Fraud Defence group:

"In similar fashion to the Bribery Act 2010, these are new strict liability offences. Therefore, to maximise the prospects of being able to rely on the defence of having in place reasonable prevention measures, all businesses must undertake a thorough risk assessment to assess the nature and extent of their exposure to these offences. Based on the findings of those risk assessments, businesses may need to implement additional procedures and controls and also keep those under review. Whilst not all businesses will require an external consultant to assist with this review, the higher risk sectors such as financial services, tax advisory and accounting may wish to seek advice from legal advisers who have experience implementing similar procedures when the Bribery Act 2010 was brought into force. I envisage that similar considerations will be relevant as and when the proposed offence of failing to prevent economic crime is brought into law."

Mehmet Karagoz, Associate in the Mishcon de Reya Fraud Defence group:

"A risk assessment requires an organisation to carefully consider its exposure to the risk of an associated person facilitating tax evasion offences. This often requires liaising closely with employees and agents about opportunities and means to facilitate tax evasion, as well as considering wider factors such as country and business partnership risks and considering how to manage those risks. Processes should be proportionate and focussed on both preventing and detecting the risks materialising. It is also extremely important for those processes to be communicated throughout the organisation, ideally through a written policy and supported with regular training. The message from the top should make it absolutely clear that tax evasion will not be tolerated and that a breach of the procedures and policies will result in disciplinary action. It will be important for businesses to keep these matters under review, and to update them as their circumstances and risk profiles change."

Waqar Shah, Managing Associate in the Mishcon de Reya Tax Litigation group:

"The new offences demonstrate, once again, the serious way in which HMRC deals with tax evasion. This includes the offences of cheating the public revenue and being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of tax.

This is not the same as legitimate tax planning, or where there has been a mistake, careless or otherwise.  Tax evasion requires an intention not to declare a tax liability. 

In any case, the potential penalties that may be levied on an offender would be coupled with the more immediate negative reputational impact that any involvement with tax evasion is likely to raise.  Given its importance, organisations cannot turn a blind eye to this.

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