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What you need to know about tax evasion law

By Phil Mitchell, director, Harbour Key

 

At the end of September two new criminal offences came into effect: failure to prevent facilitation of UK tax evasion and failure to prevent facilitation of non-UK tax evasion. 

These do not just apply to professional and financial services businesses which offer tax planning schemes, but to all corporates and partnerships (not sole traders), although expectations of a large international business will be higher than for a smaller, low risk one.



A recent YouGov survey found that 76 per cent of senior decision makers were unaware of the new legislation. So if you are one of them, you need to consider its impact immediately and implement appropriate measures to protect your business.

In my opinion, two points stand out. First, HMRC can bring a prosecution against the business even if the taxpayer themselves has not been convicted or prosecuted for tax evasion. Tax evasion has to have been committed, which is where the person knows they have a tax liability and forms the dishonest intention not to declare it − it does not arise from mistakes or carelessness.  

Second, the offence applies if any person associated with the business facilitates the evasion – which means anyone performing services for or on behalf of the business, including employees, agents and sub-contractors. For example, your business could be using a sub-contractor and if that other business is committing tax evasion within your contractual arrangement, you as an associate could also be considered to be breaking the rules. The example below is taken from the original consultation document.

A mid-size car-parts maker operating in the UK and Europe enters into a sub-contracting arrangement with an UK distributor. The senior managers of the UK distributor create a false invoicing scheme with the assistance of a purchaser, allowing the purchaser to evade UK taxes due on its purchase of the car parts in the UK. The UK distributor has facilitated tax evasion and is an associate of the car-parts maker.


Both offences are ‘strict liability’, that is, the senior management of the organisation need not have participated in, known about or even suspected either the facilitation or evasion of tax for the organisation to be held criminally liable. If successfully prosecuted, a relevant body could face an unlimited fine as well as significant commercial, reputational and brand damage.

What you need to do


The only defence is that the organisation had in place ‘reasonable’ and robust procedures designed to prevent its associated persons from criminally facilitating tax evasion. All businesses therefore need to ensure that they are aware of, and have control over, how their employees, agents and service providers are operating to reduce their risk.

If this sounds daunting, HMRC has provided guidance under six principles.

Risk assessment


Conduct a full risk assessment of the business to identify where, if any, the risks lie. Even if you conclude that they are negligible, the assessment must be conducted and recorded in writing.

Proportionality of risk-based prevention procedures


Devise and implement prevention policies and procedures proportionate to the identified risks and the size of business. This might include updating existing compliance and ethics policies, adding appropriate terms to employment contracts, and implementing procedures for reporting, monitoring and enforcing compliance.

Top level commitment


Foster a culture of ‘zero-tolerance’ from the board down, and ensure that they are involved in risk assessment and the creation and implementation of preventative procedures.

Due diligence


Apply appropriate due diligence procedures to anyone who is working or performing services on behalf of the business, proportionate to any identified risks.

Communication


Communicate prevention policies and procedures throughout the organisation, ensure they are understood, and provide training for staff and other associated persons.


Monitoring and review


Monitor and review prevention policies and procedures on a regular (at least annual) basis and make adjustments and improvements in response to any changes.

Many professional services firms will have some of the required processes already in place, but these will need to be reviewed, pulled together and if necessary updated. Businesses not used to this type of regulation will need to review the risks, implement appropriate procedures and ensure that all employees and agents understand what is required.