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03 Feb 2016

Failure to prevent facilitation of offshore tax evasion

This article was co-authored by Nick Barnard.

Following on from the efforts of the UK’s coalition government, offshore tax evasion has appeared to be something of a pet project for the Conservative Party. Prior to the 2015 general election, George Osborne announced that a ‘whole set of new weapons’ would be unleashed against individuals and companies who attempt to evade tax by moving and keeping assets offshore. Following on from this, in July 2015 HMRC opened four consultations on specific new powers and offences aimed at tackling offshore avoidance. The focus, in part, was an inevitable consequence of the UK’s ratification in June 2011 of the Protocol to the Convention on Mutual Administrative Assistance in Tax Matters. This OECD initiative formed the legal framework for the Common Reporting Standard which will see the automatic exchange of account information from 2017.

One of the consultations concerned a new criminal offence aimed at corporate bodies whose agents and employees facilitate others in evading tax. This newly proposed offence represents an extraordinary shift in the emphasis of criminal enforcement towards a lower threshold for corporate criminal liability.

However, compared with other recent proposals this represents something of a quiet row-back for the government, who had previously floated the idea of an all-encompassing corporate offence of failing to prevent economic crime. Announced with moderate fanfare in the UK Anti-Corruption Plan of December 2014, and included in the Conservatives’ election manifesto, a new broader criminal regime has apparently been abandoned on the basis that (following a lack of action in respect of the offence introduced under s7 Bribery Act 2010 of a commercial organisation failing to prevent bribery) there is “little evidence of corporate economic wrongdoing going unpunished”.

This move will come as a particular disappointment to SFO director David Green QC, who spoke out in September for the need for an increase in corporate prosecutions, if only to ensure that the carrot of a Deferred Prosecution Agreement (another recent addition to the arsenal) has a sufficiently sturdy stick to accompany it.

HMRC has now published its consultation response which includes draft legislation for the new offence. Although there is still another round of consultation scheduled for early 2016, given that the draft legislation closely follows the expected format, any major departure would presumably require some significant new ideas to emerge.

An offence would be committed by a business where an associate person ‘facilitates’ the commission of a relevant UK or overseas tax offence. In other words if, for example, one of your staff knowingly assists the tax evasion by a customer you may have committed an offence.

In summary, the draft offence applies to any body corporate or partnership which is incorporated or formed in the UK or carries on a business or part of a business or undertaking in the UK. It also applies to the facilitation of all UK tax offences which are committed knowingly (i.e., cheating the public revenue, as well as specific VAT and income tax offences). Unsurprisingly, the offence does not envisage companies being vicariously liable for the facilitation of strict-liability tax offences; both the facilitator and the taxpayer would need to be knowingly involved in a fraud. However, the consultation makes clear that the government has no intention of including a requirement that the organisation approved of, or was even aware of the facilitation.

The offence also applies to overseas tax evasion offences where the conduct concerned is both an offence in the territory where it is committed and there is a corresponding offence which would apply if it was committed in the UK. The Consultation notes that it would not be necessary for the party committing the substantive tax offence to have been convicted, citing instances such as where the potential defendant has died or there is insufficient public interest in bringing a prosecution against an individual.

The draft offence also applies to the acts of ‘associated persons’, meaning those who ‘perform services’ for the defendant company. The draft notes that this is to be determined by all of the relevant circumstances, and so could potentially include agents, contractors and subsidiary companies and employees. Employees of the defendant are presumed to be included unless the circumstances show otherwise.

This is likely to be one of the aspects of the offence which sees a great deal of challenge in practice, as several consultation respondents raised concern about borderline cases such as agents and subcontractors. The description deliberately echoes the wording of the Bribery Act 2010 and lawyers will be analysing the recent cases concerning the Sweet Group plc and Standard Bank for clues as to how far prosecutors will extend the concept of ‘associated person’.

Under the draft, ‘facilitation’ is given an extremely broad meaning, including encouraging, assisting, aiding, abetting, counselling, procuring or “doing anything that constitutes the commission of a UK tax evasion offence by virtue of being knowingly involved in, or taking steps with a view to, the fraudulent evasion of tax by another person”.

If the elements above are established, the company may be guilty of a criminal offence unless it can demonstrate that it has a defence. The statutory defence requires that, firstly, it had procedures in place designed to prevent its associated persons from facilitating tax evasion offences, and secondly, that those procedures were reasonable.

There had been some expectation that the requirement for procedures to be ‘reasonable’ would be amended to ‘adequate’, to align with the corresponding defence under s7 Bribery Act 2010, which some consider a more onerous test (the implication being that the very occurrence of the bribery is evidence that the procedures were inadequate). However, its consultation response indicates that the government has specifically stuck with ‘reasonable’.

The second limb of the test is, unsurprisingly, the point on which most consultation respondents expressed the most uncertainty. In response, the legislation includes an obligation on HMRC to publish guidance about procedures which relevant bodies can put into place to prevent facilitation (i.e., ‘reasonable procedures’). The government’s consultation response indicates that it is amenable to producing further sector-specific guidance addressing particular risks which particular industries face.

Further, the government intends to include a specific provision stating that where a company has successfully identified wrongdoing and reported it to the authorities, and this is likely to be considered a reasonable procedure.

One of the recurring themes of the consultation feedback is whether any new regulation results in an excessive ‘burden’ on those affected. If agents and employees facilitating tax evasion is a widespread problem, then HMRC has shown little to evidence this (as per the explanation for the change of heart on the overarching economic crime offence). Consultation respondents also suggested that existing civil and criminal deterrents were underutilised, and that further efforts should be made in this regard before new and convoluted offences were introduced.

As illustrated by the length of the above explanation, the new proposed offence is complex and specific. It would require HMRC to prove deliberate wrongdoing by both the taxpayer and the associated person, and then to address any defence which the company might raise. This has led some to question whether there will actually be any prosecutions for the new offence. However, this may not be the intention. Although the Bribery Act has seen few prosecutions since coming into force in 2012, there has been a great deal of work done by UK companies to revise and strengthen their anti-corruption procedures. HMRC may be hoping that the new offence will have the same effect with regards to the facilitation of tax evasion.

The new offence is expected to come into force to coincide with the first data exchanges under the Common Reporting Standard in September 2017, and so there is time to get your house in order. How much certainty HMRC can offer you in doing so remains to be seen.


This article is published in Financier Worldwide

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