The Criminal Finances Act created a corporate criminal offence for failing to prevent the facilitation of tax evasion. Under this revolutionary law, if an employee or a contractor helps someone evade their taxes, that business can be prosecuted for failing to prevent it from happening.
Implementing reasonable procedures to prevent tax evasion is a key defence against prosecution, but it requires a thorough risk assessment, a top-down commitment and a roll out of staff training. Procedures should be proportional to the risks faced, so a law or accounting firm who gives tax advice to their clients will come out as having a much higher risk.
The Act is not only aimed at the regulated sector. All companies could be caught up in it. Criminal facilitation can occur even without the knowledge of the business. Guidance from HM Revenue and Customs says procedures that successfully detect and disclose wrongdoing would likely be reasonable. Timely self-reporting is also an indicator that reasonable procedures are in place.
While some businesses may feel that they aren’t at great risk or their employees would never do something like that, without reasonable procedures in place, the business remains wide open to possible prosecution. At minimum, a risk assessment would need to be completed to defend the decision of taking no additional action.
Is your business at risk?
The criminal offence covers all companies operating in a UK nexus, i.e. they have an office or staff members based in the UK. As it covers contractors as well as staff members, the net of who might be caught is cast wide.
Example 1 – subcontracting
A UK manufacturer subcontracts to a European logistics company to distribute its goods around the UK and Europe. An operations manager of the logistics company based in the UK and the director of a small company that purchases the goods have set up a false invoicing scheme in order to evade tax.
While it’s not the manufacturer’s role to prevent tax evasion taking place, if they didn’t have reasonable procedures in place to at least assess the risk of their contractors engaging in tax evasion, they could be found liable. Reasonable procedures may have also caught fraudulent invoicing.
Example 2 – hiring self-employed salespeople
An alcoholic drinks importer and wholesaler has a workforce of self-employed salespeople who distribute to local bars and clubs. Several of the salespeople have colluded with a number of the venue managers to evade VAT and income tax payments.
The drinks importer, along with the bars and clubs, could be prosecuted under the Criminal Finances Act if their reasonable procedures weren’t able to catch the tax evasion taking place. Even if those actually doing the tax evasion were not convicted, the businesses could still be for failing to prevent.
Know your risks to understand which procedures are required
Reasonable procedures need to be proportionate to the risks faced. A risk assessment of your business, its products and services, as well as internal systems and client data that might be used to facilitate tax evasion should be undertaken.
Some key procedures that can be implemented include:
- Clear reporting and whistleblowing procedures for staff and contractors
- Rolling out training across the workforce
- Prominent statements against tax evasion by senior management
- Understanding risk areas in the business and putting in place specific procedures
- Monitoring and reviewing compliance with prevention procedures
Customisable tax evasion course for all staff
VinciWorks course, Tax Evasion: Failure to Prevent, enables users to gain a real understanding of the tax evasion risks faced by their organisation. The course covers:
- The relationship between tax evasion, tax avoidance and tax mitigation
- The social and economic effects of failing to prevent tax evasion
- Understand what is meant by “reasonable procedures”
- The penalties for committing an offence under the Criminal Finances Act
- Red flags for spotting facilitation of tax evasion
- Practical advice and personalised guidance to prevent facilitation of tax evasion
- Interactive quizzes to review knowledge learnt
There are two versions of the course, a 45 minute version for high-risk staff and a 15 minute version for all other staff. You can demo the course for free below.