From 30 September 2017, the Criminal Finances Act 2017 made businesses criminally liable if they fail to prevent tax evasion by either a member of their staff or any third party who provides services for or on behalf of them, even where the business was not involved in the act or was unaware of it.
A successful prosecution under the new Act could lead to unlimited penalties as well as significant reputational damage and adverse publicity.
The legislation applies to a failure to prevent evasion of any UK tax and also of overseas tax. In common with the Bribery Act 2010, there is a defence of having reasonable prevention procedures in place.
For a company or partnership to be liable under the Act, three things must have occurred:
- Stage one: criminal tax evasion by a taxpayer (either an individual or an entity) under existing law.
- Stage two: criminal facilitation of the offence by an ‘associated person’ – a person acting on behalf of the corporation and knowingly aiding, abetting, counselling or procuring the tax evasion by a taxpayer.
- Stage three: the business failed to prevent its representative from committing the criminal act outlined at stage two.
The new rules target deliberate and dishonest behaviour. They do not create any new offences at the individual level; if activity would be considered to be tax evasion under existing law, then it will continue to be so. Likewise, if the activity would not currently be considered tax evasion, then the new law does not make it so. For a case to be successfully brought under the new Act it is not necessary for there to have been a prosecution under either of Steps 1 or 2.
A business may avoid criminal liability where it can show that it has implemented reasonable prevention procedures, or where it can show that in the circumstances it would have been unreasonable or unrealistic to have expected it to have had procedures in place.
What should you do now?
Businesses will have to ensure that they have reviewed their current practices and procedures to minimize any risks and to put in place appropriate monitoring and training of staff at all levels. It is not just banks and professional services firms that could be affected. The new rules mean all businesses will need to take some action; the level required will depend on the nature and scale of the business.
The first and most important step is for the business to undertake a risk assessment to determine the extent of potential exposure. The assessment needs to define its ‘associated persons’ and consider the areas of higher level inherent tax evasion risks based on its markets, products, customer base etc After the review a business may need to design or upgrade its procedures to cope with any concerns.
For further help in understanding these changes and what steps you need to take please contact our Head of Tax Services, Anne Rose on 01926 451000 or contact us on-line.