Due to the Criminal Finances Act 2017, from 30 September 2017 a company or a partnership (A “Firm”) could be criminally liable if they fail to prevent tax evasion or the facilitation of tax evasion by a member of staff, external agent, contractor or consultant (an “Associated Person”) acting on their behalf.

Whilst financial services, accounting and legal sectors are likely to be most affected, other sectors that have a high risk of being caught by the new legislation include those that: have casual/agency labour and contractors, trade internationally, pay large sums to consultants or source/supply goods and services in areas with a high fraud risk.

Firms can face criminal conviction and unlimited financial penalties if successfully prosecuted and therefore compliance with the new legislation is not something that businesses should ignore.

Criminal Finances Act 2017

The Offence

In order for a corporate criminal offence to have been committed, the following 3 stages need to have occurred:

 

Stage 1        Criminal tax evasion (deliberate dishonest evasion of tax, not tax avoidance strategies) by a taxpayer (either an individual or an entity under existing law)

Stage 2       Criminal facilitation of this offence by an “Associated Person” – in other words, a person acting on behalf of the firm and knowingly aiding, abetting, counselling or procuring the tax evasion by a taxpayer.

Stage 3       Failure by the Firm to put in place reasonable procedures to prevent an Associated Person from committing a tax evasion facilitation (i.e procedures to prevent stage 2)

Examples where the Criminal Finances Act 2017 could be applied

Stage 1Stage 2Stage 3

 

Employees of an agency deliberately do not declare all of their incomeThe agency is aware of this but does not put the payments through the payrollThe Firm using the agency cannot demonstrate reasonable procedures are in place to prevent the agency it uses from facilitating the offence in stage 2
A supplier falsifies the amount paid on an invoice and reduces it’s tax payableAn employee of the Firm using the suppliers’ services deliberately conspires with the supplier to falsify the amount and reduce the tax payableThe Firm cannot demonstrate reasonable procedures are in place to prevent the employee  facilitating the offence in stage 2
A supplier conceals the true source of goods to avoid paying Customs dutiesAn employee of the Firm deliberately collaborates with the supplier to conceal the true source of the goods, therefore, avoiding Customs dutiesThe Firm cannot demonstrate reasonable procedures are in place to prevent the employee  facilitating the offence in stage 2
A Subcontractor asks to be paid via a company in the Cayman Islands and does not declare the income in the UK (or other countries where the Subcontractor is resident)The Contractor, who uses the Subcontractor, is aware the Subcontractor is not declaring all of the income and is deliberately facilitating this by invoicing the company in the Cayman IslandsThe Firm, that contracts the Contractor, cannot demonstrate reasonable procedures are in place to prevent the Contractor it uses from facilitating the offence in stage 2
An individual is treated as self-employed rather than an employee, however, given the true nature of the services, they should be an employee. Employment taxes are therefore not being paid.The Firm HR department deliberately falsifies information relating to the individual in HR records or to HMRC so they are treated as a contractor rather than an employee in order to pay less taxThe Firm cannot demonstrate reasonable procedures are in place to prevent the HR department from facilitating the offence in stage 2

 

The only defence a Firm has against the Criminal Finances Act 2017 is that it had reasonable procedures in place to prevent the Stage 2 action, or that it was not reasonable for that Firm to have procedures.

Firms should complete a risk assessment to identify where tax evasion could occur and how likely it is to happen, and then implement preventative procedures that are proportionate to the risk identified.

Specific procedures will differ from business to business depending on the size and the risks identified, for example, to cover the scenarios identified in the examples above. However, common policies and procedures could include:

  • Providing training for relevant staff both in the application of the procedures to be implemented and a general awareness of the new rules
  • Implement a whistle-blowing process with protection and no retribution for those that speak up
  • Undertake due diligence on new contractors/agencies to ensure their commitment to abide by the legislation
  • Include a clause in employee and agent contracts requiring them not to commit or facilitate tax evasion and to report any concerns immediately
  • Clear consequences of wrongdoing
  • Ensure staff are taking holiday through the year (taking no holiday could indicate facilitation of tax evasion)
  • Ensure remuneration packages are not incentivising employees to facilitate fraud

Please contact Sophie Parkhouse for more detailed guidance on the Criminal Finances Act 2017 or visit “Tackling tax evasion – legislation and guidance for a corporate offence of failure to prevent the criminal facilitation of tax evasion for the Government guidance document.

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