UK HMRC Increases Focus on Combatting Tax Evasion

HM Revenue & Customs has provided a timely reminder of the need for organisations with a connection to the United Kingdom to review their prevention procedures regarding the failure to prevent the facilitation of tax evasion offence.

The corporate offence of failing to prevent the facilitation of tax evasion is the United Kingdom’s second “failure to prevent” offence, which came into force in the UK on September 30, 2017. An organisation’s sole defence is to have in place and adhere to reasonable prevention procedures, similar to the “adequate procedures” defence for the first failure to prevent offences under the UK Bribery Act 2010. In the 18 months since the law was introduced, HM Revenue & Customs (HMRC) has increased its focus on combating perceived tax evasion, so organisations should consider reviewing and updating these procedures.

‘Failure to Prevent’ Tax Evasion Offences

There are two corporate offences. The first relates to the evasion of UK taxes, which a company or other entity (such as a partnership) can commit even if it has no operations in the UK. The second offence, relating to the evasion of non-UK taxes, requires the organisation to have a connection to the UK. Such connection could be as limited as a non-UK company having a UK office or branch—even if that branch is in no way connected to the non-UK tax evasion.

Both offences are committed if

• an employee or other associated person (which can include contractors) criminally facilitates a tax evasion offence (of either UK or non-UK taxes) committed by another person, and
• the organisation does not have in place, or has not adhered to, adequate procedures designed to prevent such facilitation.

The only available defence is where the organisation has in place reasonable procedures to prevent the facilitation of tax evasion (or it is unreasonable to expect the organisation to have such procedures).

The offences do not change what conduct is criminal in terms of evasion or facilitation of evasion, but instead alter who can be held accountable for such acts. The offences require a taxpayer to have committed tax evasion and the employee or other associated person to have facilitated that tax evasion, but neither person needs to have been convicted of a criminal offence.

HMRC’s Continued Focus on Evasion

It is clear from a number of recent announcements that HMRC is increasing its focus on tax evasion and “unacceptable” tax avoidance. On March 13, HMRC released two papers, No Safe Havens 2019 and Tackling tax avoidance, evasion, and other forms of non-compliance, outlining how HMRC intends to meet its goals of maximising revenues, preventing tax avoidance and tax evasion, and addressing offshore tax noncompliance. HMRC has stated that it intends to lead internationally by “championing international tax transparency” and to “close the tax gap.”

These papers follow the recent introduction of a disclosure facility for organisations that may have failed to prevent an employee or other associated person from criminally facilitating UK tax evasion. While disclosure does not guarantee immunity from prosecution, HMRC has indicated that it may form part of the “reasonable procedures” defence if criminal charges are brought, and may be taken into account by prosecutors considering action and/or in setting any penalties.

Are Businesses Aware of These Offences?

In March 2019 HMRC published the outcome of an IPSOS poll of more than 1,000 businesses to assess attitudes on the introduction of the corporate criminal tax offences. The results are telling.

• 74% of businesses polled were not aware of the corporate criminal offences.
• Larger businesses were more likely to be aware of the offences (58%).
• Perceived relevance was higher among multinational groups (53% versus 30% for UK-only firms).
• 23% of businesses polled had something in place to monitor and review policies and procedures (58% of large businesses).
• Less than 25% of businesses had undertaken a risk assessment.
• Only 8% of businesses reported that they had undertaken internal or external training or awareness-raising activities within the last 12 months.

These results indicate that a relatively high proportion of businesses, especially small and medium-sized enterprises, have limited awareness and preparedness for these offences.

Do Your Procedures Need to Be Updated?

On the introduction of the offence, HMRC acknowledged that it might not be reasonable for all organisations to have full prevention procedures in place immediately, and that some procedures may take time to roll out. Nevertheless, it did expect “rapid implementation,” so it is prudent to assume that if an offence were committed now, prosecutors would expect procedures to be in place and adhered to. Once in place, procedures should be regularly reviewed and updated to reflect business and external developments and increased awareness of potential risks.

What prevention procedures are reasonable will vary depending on the organisation, but we (and HMRC) expect there to be a number of common themes.

• Completion and recording of a risk assessment on which the procedures are based. Anti-money laundering and/or UK Bribery Act 2010 risk assessments may be useful starting points, but are not of themselves sufficient.
• Proportionality of the prevention measures. What is “reasonable” will depend on the nature of the organisation in question, but to ensure the procedures are proportionate to the risks, a considered risk assessment must have been undertaken.
• Top-level commitment. Senior management should be committed to and responsible for measures to prevent the prevention of tax evasion generally. It should be made clear that criminal activity, including the facilitation of tax evasion, is never acceptable, and it may be advisable to have one or more senior managers with express responsibility for the prevention measures.
• Due diligence. Each organisation will need to assess appropriate diligence measures addressing the outcome of the risk assessment, bearing in mind the wide definition of “associated person.”
• Communication and training. The organisation should demonstrate a zero tolerance approach, and may need to consider dedicated training programs on the offences to ensure that procedures are embedded and understood throughout the organisation. Organisations must provide clear and confidential means by which employees can raise concerns over actual or suspected offenses, and should consider “whistleblowing” policies so that concerns can be clearly and confidentially raised.
• Monitoring and review. Prevention procedures need to be reviewed and updated regularly. We recommend prioritising this review if it has not yet taken place.

How We Can Help

Organisations are addressing the risks presented by the Criminal Finances Act offences through a combination of conducting considered risk assessments, adapting and updating their existing policies and procedures (including those relevant to bribery and corruption), and implementing enhancements that are bespoke and proportionate to their businesses. Evidence of this activity can later be used to demonstrate to a court that the organisation’s procedures are reasonable, should the need arise, often along with an external assessment to support that position.

With a team comprising both tax and compliance professionals, we can assist with all aspects of the Criminal Finances Act offences, including conducting risk assessments, designing and monitoring policies, training, and handling external reviews in order to provide outside assessments of the relevant procedures.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

London
Kate Habershon
Chris Warren-Smith
Melanie Ryan
Neil McKnight