Trusts & Trustees Article: The Criminal Offences Of Failure To Prevent Tax Evasion

On 30 September 2017, the UK Criminal Finances Act 2017 (the CFA) came into force, along with its newly-focused corporate criminal offences of failure to prevent facilitation of tax evasion. Given the extraterritorial ramifications of the CFA, businesses in the UK and those with a UK nexus, especially those in the financial services and accountancy sectors, including branch offices, fiduciaries and trustees, promotors and managers of investment products, and wealth managers, will need to be astute to its challenges and effects, and take what H.M. Revenue & Customs (HMRC) has called a, 'risk-based and proportionate' approach to implementation of preventative procedures.

Introduction

Sir Winston Churchill, with inimitable wit, contended that, 'for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle'.

For decades successive UK Chancellors of the Exchequer, and their often beleaguered governments, have bemoaned the curse of lost revenue and talked tough on tax evasion: from Dennis Healy's pledge that, 'The difference between tax avoidance and tax evasion is the thickness of a prison wall', to (latterly) Alistair Darling's and George Osborne's open commitment to target tax evasion and dubiously and self-servingly labelled, 'off-shore tax havens'.

Those commitments often floundered when it came to quantifiable results, especially last year when the UK Office for Budget Responsibility decried the lack of resources which had resulted in a failure by HMRC to reach its £1.05 billion target for recoupment (it in fact fell short by circa £780 million).

The latest addition to HMRC's tax evasion armoury is the CFA, and its newly-focussed criminal offences of:

failure to prevent the facilitation of UK tax evasion offences (section 45, CFA); and failure to prevent facilitation of foreign tax evasion offences under certain circumstances (section 46, CFA). In this article, we will review the newly introduced measures, showing that they do not introduce any new offences, but widen the liability for existing offences. We will then review the mechanics of the application of section 45 and 46 CFA, followed by a closer look at the only defence, being that a business has in place robust procedures designed to prevent associated persons from committing the facilitation of tax evasion.

The offences

In brief, section 45 CFA imposes liability on a business for tax evasion facilitation offences committed by an 'associated person'. Similarly, section 46 CFA imposes liability on a business for foreign tax evasion facilitation offences committed by an 'associated person'.

The offences do not therefore introduce any new liability; neither do they change the definitions of existing offences with regard to tax evasion fraud. Instead, they alter the application of existing offences, and for the first time seek to impose liability on incorporated bodies and partnerships for offences committed by their employees and agents. Advice relating to tax avoidance will remain legal. Also, legitimate advice and services provided in good faith, which clients misuse to commit tax evasion offences will not be caught.

As stated, sections 45 and 46 CFA will apply to incorporated bodies (typically companies) and partnerships (section 44(2) CFA), definitions of which will be interpreted in the widest sense. Throughout this article we will use the term 'businesses' to describe any entity potentially covered by these new measures.

The only defence provided under sections 45 and 46 CFA is for businesses to have in place procedures which prevent the facilitation of tax offences, or to show that such procedures would have been unreasonable. As such, practitioners may be familiar with some existing requirements, for example imposed by anti-money laundering (AML) legislation and the Bribery Act 2010. There are a number of differences, however, and relying on existing policies and procedures alone will not be sufficient to comply with the CFA requirements.

Operation of the offences

Associated persons

Sections 45 and 46 CFA extend liability of 'associated persons'. According to HMRC, the class of 'associated persons' is drafted deliberately widely, and designed to be fact-dependent. Its guidance clarifies that the associated person 'must commit the tax evasion facilitation offence in the capacity of an associated person'. Any facilitation committed in a personal capacity will not be deemed relevant.

The determination of a relevant association is conducted by analysing the way in which services are carried out. For example, advice obtained from external Counsel or an overseas law firm, which is charged for by way of disbursement to the client, would fall to be within the definition of 'on behalf of' a business. Importantly, this could for example also include a payroll services provider who, in that capacity, facilitates tax evasion by employees. HMRC has stated that for the purposes of sections 45 and 46 CFA the important factor is that the business continues to control the ongoing relationship between the client and the external adviser. In this respect, the principle is virtually identical to that of section 8 of the Bribery Act 2010.

In the final analysis, therefore, businesses will become...