Do you have ‘reasonable prevention procedures’ to stop tax evasion?

HMRC has recently updated the data on the number of live cases it is reviewing under corporate criminal offences legislation. The updates act as a timely reminder to all organisations to check that they have procedures in place to identify and mitigate tax evasion facilitation risks.

Background

Two new corporate criminal offences (CCOs) relating to tax evasion were introduced on 30 September 2017. The CCOs cover tax evasion in both the UK and overseas and apply to companies, partnerships and LLPs. Offences will be committed where a relevant body fails to prevent its ‘associated persons’ (which includes employees and agents) from criminally facilitating the evasion of a tax.

The only defence available to a company that may be guilty of a CCO is to demonstrate that it had reasonable prevention procedures in place. If found guilty of a CCO, a company could face an unlimited fine, a confiscation order or a serious crime prevention order. It could also be banned from entering into public procurement contracts.

HMRC information

HMRC regularly publishes data about the number of live cases and opportunities it is reviewing under the CCO legislation. It has confirmed that the legislation is not about simply increasing the number of corporate prosecutions, but also changing industry practice and attitudes towards risk, encouraging organisations to do more to prevent tax crime from happening in the first place.

As of 30 June 2023, HMRC had 9 live CCO investigations (with no charging decision having yet been made) and a further 25 live opportunities were currently under review. The investigations spanned 10 different business sectors, including software providers, labour provision, accountancy and legal services.

With potentially unlimited fines for organisations found guilty of the offences, HMRC warns that organisations must take their responsibilities seriously and put in place reasonable procedures to stop the facilitation of tax evasion.

This insight is a reminder of the main elements of the CCOs and how to implement the required reasonable procedures.

Liability under the CCOs

To be liable for one of the new offences, a three-stage process must be satisfied.

• Stage one: there is criminal tax evasion by a legal entity or an individual;
• Stage two: there is criminal facilitation of the tax evasion by a person associated with the company; and
• Stage three: the company failed to prevent the associated person from acting in that way by not having reasonable prevention procedures in place.

Stage one: tax evasion

There are two different types of tax evasion:

• a UK tax evasion offence of cheating the public revenue or being knowingly concerned in the fraudulent evasion of any UK tax; and
• a foreign tax evasion offence relating to conduct which is an offence under the law of a foreign country, which relates to a breach of duty regarding a tax imposed under that foreign law and which would be regarded as a UK tax evasion offence if the offence were committed in the UK.

Stage two: facilitation of tax evasion

A company will be guilty of an offence if a person associated with it facilitates the tax evasion offence by either:

• being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of tax; or
• aiding, abetting, counselling or procuring the tax evasion.

The foreign tax evasion facilitation offence will apply where the company is incorporated in the UK, it is carrying on at least part of its business in the UK or the conduct constituting the offence took place in the UK.

Stage three: having reasonable prevention procedures in place

If stages one and two are satisfied, then a tax evasion offence has been committed and this has been facilitated by a person associated with the company.

A company will have a defence to this offence if it can show it had in place reasonable procedures designed to prevent persons associated with the company from committing tax evasion facilitation offences.

The company would be expected to carry out a risk assessment to establish which procedures are proportionate to the risk of tax evasion or whether the procedures are required at all.

HMRC guidance on the CCOs lists six guiding principles which illustrate ways in which relevant bodies might comply with the requirement of “reasonable procedures”. The principles are not prescriptive, however, and failure to satisfy all of the suggested methods of prevention does not necessarily indicate that reasonable prevention procedures are not in place.

It is worth remembering that the guidance does not require a company to prevent every instance of tax evasion from being committed, but merely requires it to adopt an approach that is proportionate to the areas of identified risk. Every company is different, so there is no ‘one-size fits all’ approach that should be applied.

What should organisations do?

The CCOs do not change what amounts to tax evasion which has always been, and continues to be, a crime. Instead, they extend the scope of persons that can be prosecuted when tax evasion occurs. The CCOs make it easier for companies to be prosecuted where tax evasion has taken place. A lack of knowledge or intention within the organisation is not a defence.

Companies should conduct a wide-ranging risk assessment to identify any tax evasion risks within their business. Existing policies and procedures should be reviewed and additional procedures implemented to prevent any person associated with the company from facilitating tax evasion, both in the UK and overseas. Ensuring that all staff and third parties know their obligations under the CCOs will count towards having reasonable prevention procedures in place.

As stated above, whether the procedures are reasonable will depend on the nature of the business and the risks it faces, including its size, the complexity of its business and its industry focus and profile. Reasonable procedures will be proportionate to the level of risk faced and excessively burdensome procedures will not be required in order to eradicate all risk.