HMRC issues guidance on the new Criminal Finances Act 2017

Published 31 octubre 2017

The Criminal Finances Act 2017 ("the Act") came into force on 30 September 2017 and improved the UK government's ability to tackle tax evasion, money laundering, and terrorist financing, and to recover the proceeds of crime.

The Act introduced two new corporate offences which make it easier for companies and partnerships to be held criminally liable for the actions of their employees and other associated persons around the world. The aim is, therefore, to encourage companies and partnerships to take adequate precautions to prevent employees facilitating tax evasion in the UK and overseas.

Accountancy firms and tax advisors are particularly exposed because of the nature of their work; they need to understand the implications of the new offences and the reasonable measures which that they can put in place to prevent the facilitation of a tax evasion.

The new corporate offences

The new offence is committed where a "relevant body" (e.g. a company or partnership but not a natural person, or individuals acting in their private capacity) fails to prevent the facilitation of tax evasion by a person "associated" with it, either in the UK or overseas. If found guilty of an offence, companies/partnerships can receive unlimited fines (with a minimum being 100% of the tax evaded with aggravated or mitigating circumstances taken into account), a criminal conviction and ancillary orders (such as confiscation orders). In addition, they are likely to suffer long-term reputational damage.

There are three stages to assessing whether an offence has been committed under the Act and these apply to both the UK and overseas tax evasion facilitation offences:

Stage 1: A criminal tax evasion by a taxpayer (either by an individual or legal entity) must have occurred under existing law.

Stage 2: The criminal facilitation of this offence by a person associated with the company or partnership with a view to aiding, abetting, counselling or procuring the evasion of tax by the taxpayer.

Stage 3: Liability is strict. Accordingly, if stages 1 and 2 are satisfied, the company/partnership will have committed an offence unless it shows that:

(i) it has put in place reasonable measures and procedures to prevent the criminal facilitation of tax evasion (the "reasonable prevention procedures" defence); or

(ii) that it was not reasonable in all the circumstances to expect it to have prevention procedures in place.

HMRC Guidance

In light of the uncertainties and risks, what "reasonable prevention procedures" should accountancy firms implement to prevent the facilitation of tax evasion?

Last month, HMRC issued guidance to help businesses understand the types of processes and procedures which they might put in place to prevent associated persons from criminally facilitating tax evasion. HMRC stresses that its guidance is intended to be of general application and applied in a proportionate way; it is not prescriptive or a one-size-fits-all document and what is classed as "reasonable" may evolve over time, and may differ from one organisation to another depending upon what work is performed and the level of associated risk.

The HMRC guidance mirrors the 6 guiding principles in the Bribery Act 2010 and focuses on:

(i) Risk Assessment – the relevant body should undertake a risk assessment to determine the nature and extent of its exposure to the risk that its employees/agents may engage in the facilitation of tax evasion. The assessment should focus on the opportunities and means by which employees/agents may engage in criminal activity and consider what prevention measures may mitigate such risks.

(ii) Proportionality – prevention measures should be proportionate to the risk the relevant body faces and reflect the nature, scale and complexity of its activities.

(iii) Top level commitment – senior management of the company/partnership should be committed to developing and implementing the prevention procedures.

(iv) Due diligence – the relevant body should apply due diligence procedures to identify and respond to risks.

(v) Communication – the prevention procedures should be adequately communicated, understood and embedded throughout the organisation.

(vi) Monitoring and review – the prevention procedures should be monitored and reviewed regularly, and necessary improvements made.

Ultimately, it will be the courts which determine whether a relevant body has "reasonable prevention procedures" in place to prevent the facilitation of tax evasion and HMRC has made it clear that even strict compliance with its guidance will not necessarily be "reasonable" where a business faces particular risks which it fails to address.

Comment

Due to the nature of their work, accountancy firms and tax advisors are exposed to prosecution should an associated person facilitate tax evasion. It is, therefore, imperative that such organisations undertake a risk assessment and implement reasonable prevention procedures without delay. This may involve identifying the employees most at risk of facilitating tax evasion within the business and ensuring these individuals are given appropriate internal training. It may also require the imposition of additional administrative processes in high risk areas of the business so that any risk of facilitating evasion is mitigated.

Ideally, these measures should prevent any allegation of involvement with tax evasion from arising. Alternatively they should enable firms to demonstrate – in the event of prosecution under the Act – that reasonable procedures exist and are embedded within the organisation, and this may amount to a complete defence to the offence, or at the very least, a point in mitigation leading to a smaller fine.

We anticipate that professional indemnity insurers will make enquiries about the prevention procedures accountancy firms have in place to prevent tax evasion as part of their underwriting process.