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Beyond the balance sheet

How to prevent the facilitation of tax evasion in your business

Edward Parker 29/6/2017 5 minute read

Eddie Parker FCCA explains the steps you will need to take to prevent tax evasion occurring in your business.

Could you face an unlimited penalty for not putting the right procedures in place to prevent tax evasion in your business? A new corporate offence is being introduced with the intention to stop businesses (includeing SMEs) ignoring such activities being committed by their staff and other representatives.

Are you aware of the new law coming in to place? According to a YouGov survey carried out in April 2017, more than three-quarters (76%) of senior decision makers in British businesses are oblivious to the new law and how their failure to prevent the facilitation of tax evasion could be a criminal offence. It's why we've written this blog post: read on to find out more about what you need to know and action in your business.

What’s happening?

Under the new law, your business could be found guilty of a criminal offence if an employee or associated person assists in another person’s tax evasion. Even if management is not involved in or aware of what’s going on, it will still be deemed a committed offence. Whilst this may seem harsh, your business will have a defence if you put ‘reasonable prevention procedures’ in place. Those prevention procedures are what should be an area of focus moving forward.

The reasonable prevention procedures you can take

The HMRC have published draft guidance on the offences and this details 6 guiding principles businesses should take into account when establishing procedures to prevent tax evasion taking place.

 

The 6 guiding principles

  • Risk assessment
  • Proportionality of risk-based prevention procedures
  • Top level commitment
  • Due diligence
  • Communication (including training)
  • Monitoring and review

All businesses will have to undertake a risk assessment to identify the likelihood of tax evasion within the organisation and the potential gaps in the existing control environment.

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You need to assess your employees and associated persons to understand whether they have the motive, opportunity and means to facilitate tax evasion and if so, how that can be managed. If you’ve put all reasonable prevention procedures in place then your business may have a defence.

 

As a business, you’ll be expected to:

  • Monitor and enforce compliance with the procedures
  • Review regularly the effectiveness of these procedures

The new offence was announced in 2015, after the revelations in the BBC Panorama programme about the activities of HSBC employees in Switzerland which, under existing rules, couldn’t be attributed to HSBC. The new rules are designed to prevent businesses from turning a blind eye to the activities of their staff and other representatives.

It’s important to note that it’s not just the banks and professional service firms which could be affected. The new rules mean all businesses will need to take some action. The minimum expected for all businesses will be to have at least carried out a risk assessment.

When will it come into force?

At present, there isn’t a confirmed date; however it’s likely to be at the end of September this year. But, you shouldn’t wait until then to take action, as you may have insufficient time to take the necessary steps to prevent the business being exposed.

There will be two new offences. The first will apply to all businesses, wherever they’re located, in respect of the facilitation of UK tax evasion. The second will apply to businesses with a UK connection in respect of the facilitation of non-UK tax evasion. This will apply to both companies and partnerships.

 

There are two stages for the new corporate offences to apply:

  • Criminal tax evasion - not avoidance - must have take place and;
  • A person or entity associated with the business must have criminally facilitated the tax evasion while performing services for that business

Whilst businesses aren’t expected to have everything ready on day one, the draft guidance details that HMRC expects there to be fast implementation focusing on the major risks and priorities, with a clear time frame and implementation plan when the legislation comes into force. Whilst you may not have everything ready on day one, it is expected to see a clear commitment to compliance of day one and most likely a risk assessment to have been completed.

What is criminal tax evasion?

Criminal tax evasion takes pace when there is an intention to cheat the public purse or statutory offences of fraudulently evading taxes, such as income tax and VAT.

It occurs when a person knows they have a tax liability and forms a dishonest intention not to declare it. However, it doesn’t arise when a person makes a mistake or is careless. It also doesn’t apply when a person actively seeks to avoid tax, even if the planning in question does not work, provided that the person has an honest belief when filing his or her tax return.

The employee or associated person must have a criminal intent and this would the fraud.

Associated persons

The offence applies if an associated person facilities evasion. Associated persons are employees, agents and other persons who perform services for or on behalf of the business and can include subsidiaries and joint ventures.

 

Smaller businesses

Smaller businesses are required to make a risk assessment. The measures taken must be proportionate to the potential risks.

For smaller organisations in low risk sectors, suggested steps to take include:

  • Regular training for staff on financial crime detection and prevention
  • Commitment to preventing the involvement of those acting on the business’s behalf in the criminal facilitation of tax evasion
  • Clear reporting procedures for whistle blowing of suspected tax fraud
  • Ensuring that pay/bonus policies encourage reporting and discourage pursuing profit to the point of condoning tax evasion
  • Terms in contracts with employees and contractors requiring them to not engage in facilitating tax evasion and to report concerns immediately

The crackdown on tax evasion and the risk of stringent penalties

HMRC has been reported in The Times to be boosting its fraud investigation service as part of a major prosecution drive over tax evasion. Investment in fraud investigation service staff rose 10% from 2015/16 to  2016/17. It's all part of the preparation for the Criminal Finances Act becoming operational in September 2017. 

If your business commits one of these tax evasion offences you could face an unlimited financial penalty, as well as ancillary orders such as confiscation orders or serious crime prevention orders.

Action you need to take

Now is the time to start implementing these changes for the new law, a date for which is yet to be confirmed.

All businesses should consider this now and ensure they’re aware of and, have control over how your employees are operating to reduce your risk of exposure to such offences. Not only are you potentially exposed to a heavy fine, a successful prosecution could cause you serious reputational damage, definitely not something to overlook!

You can find the consultation documentation here.

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The content of this post is up to date and relevant as at 29/06/2017.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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