Failure to prevent the facilitation of tax evasion
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Failure to prevent the facilitation of tax evasion
Are you aware of the new offence?
What is the new law?
A new offence came into effect on 30 September 2017 under the Criminal Finances Act 2017 – the failure to prevent facilitation of tax evasion, both in the UK and abroad.
Who does it apply to?
The offence is potentially applicable to all “relevant bodies” namely any company or partnership anywhere in the world. It is committed where a person acting on behalf of such relevant body (an “associated person”), facilitates a tax evasion offence (requiring deliberate and dishonest action). If found guilty, the penalty is an unlimited fine.
Who can be an “associated person” of the company/partnership?
- An employee
- An agent
- Any other person performing services for and on behalf of them – for example, a sub-contractor or consultant.
This is an intentionally broad definition and includes both individuals and companies.
Examples:
- If a UK manufacturer has appointed a US distributor and that distributor enters into an arrangement with its customer designed to help the customer evade US taxes, the UK manufacturer could be held liable.
- A recruitment agency that supplies temporary staff to its clients will be an associated person of the client and the client may be criminally liable where that recruitment agency structures payment arrangements in a way designed to assist the workers evade tax.
- Where a franchisee does national account work on behalf of its franchisor, it is likely to be an associated person of the franchisor and the franchisor held liable if the franchisee facilitates a tax evasion offence.
Is there a defence?
Yes. A company/partnership will have a defence if, at the time the offence was committed, either:
- it had in place reasonable “prevention procedures”; or
- it was not reasonable in the circumstances to expect the relevant body to have prevention procedures in place.
The Government’s guidance takes a similar approach to the guidance relating to offences under the Bribery Act. A risk-based and proportionate approach is needed and what is reasonable will very much depend upon the size, nature and complexity of the relevant body. What is important is that the relevant body can demonstrate that it has implemented a system of reasonable prevention procedures that identify and mitigate its tax evasion facilitation risks. If it can do this, then prosecution is unlikely.
It is also recognised that the reasonableness of procedures should take account of the level of control, proximity and supervision the relevant body is able to exercise over a particular person acting on its behalf.
Additional contractual protection
As well as taking the above measures, companies and partnerships contracting with associated persons can include appropriate anti-facilitation of tax evasion provisions within their commercial agreements, depending on the level of risk involved.
For example, in a high risk arrangement a client might be well-advised to include a long form clause including warranties and indemnities from the counterparty as well as rights of audit and termination if the counterparty engages in the facilitation of tax evasion or does not comply with the client’s policies on such matters. If the arrangement is deemed extremely low risk, it may be safe to dispense with specific contractual clauses but instead rely on a general “compliance with laws” clause, commonly found in commercial agreements.
If you would like any further guidance on this subject, please contact me.