Is your business ready for the Criminal Finances Act 2017?

4 July 2017

The dangers of turning a blind eye

With so much red tape passing your desk, you can be forgiven for taking little notice of this latest piece of legislation passed by Parliament last April. As yet, there is still an undetermined date for commencement, but the likely date is September.

So what does it do? Well there are a number of extended powers for the authorities to use but the one of most relevance will be the new offence of ‘corporate facilitation of tax evasion’.

Just as a reminder, tax evasion is (and always has been) a crime. In essence it includes fraudulently making a misstatement concerning your tax affairs to reduce income, increase your eligible costs or deliberately conceal income. Tax avoidance by contrast is using the literal meaning of tax law in order to reduce or eliminate your current or future tax liabilities. The latter is legal although its current usage tends to refer to highly artificial schemes and is generally frowned upon by the courts (and press).

The Criminal Finances Act 2017 is however concerned only with evasion and how the impact can now be extended to not only those who have directly committed this offence, but to those who have passively allowed such an offence to happen.

There have been a number of triggers for this including the now notorious ‘Panama Papers’ – but another notable example has been the BBC Panorama allegations concerning HSBC’s private client team in Switzerland and its use of offshore accounts to conceal funds. Although prosecutions are going on in other countries following this, there was no equivalent legislation in the UK to permit prosecution proceedings of the UK parent company as being directly or indirectly responsible.

The new offence of corporate facilitation of tax evasion now makes it clear that any company or partnership actively or passively enabling tax evasion to take place will be prosecuted. There are two key parts to this – evasion must have actually taken place and a person (employee, agent or other performing services to the company in question) must have facilitated. The additional test is that the company in question did nothing to prevent it happening.

The new prosecution offences are not aimed at just UK tax – there is an additional offence to target evasion of tax in overseas jurisdictions.

The level of ‘dishonesty’ being targeted can include non-disclosure, concealing evidence and even ‘turning a blind eye’.

It will be some time before this is properly tested in the courts, but the shift from proving that the business actually directed someone to commit an illegal act (this still needs to happen for the offence to be activated) to merely being in a position of authority and doing nothing about it, will mean a far wider and possibly easier net from which the authorities can trawl.

Making your ‘blind eye’ see again

So how can you protect your business?

If you haven’t already, a clear starting point is to put in ‘reasonable prevention procedures’ (HMRC Guidance) to identify and mitigate tax evasion facilitation risk. HMRC have already stated that if companies can clearly demonstrate that adequate measures have been put in place, then ‘prosecution is unlikely.’

If you are already familiar with the Bribery Act 2010 (as you should be) then there will be strong parallels with this.

Areas to consider include:

  • Setting up risk assessment procedures – establish an audit trail to support any policy decisions.
  • Consider whether ‘low risk’ or not. If it can be shown that additional procedures are disproportionate or cost-prohibitive then the Guidance published envisages no further action is needed. However, this is of course highly subjective and clear documentation should be used to demonstrate the thought process. A separate meeting possibly between the directors and their advisors might be necessary and all risk considerations, cost issues and decisions should be clearly minuted. I would personally recommend this is at least an annual meeting.
  • That said, can you safely say you are low risk? You should consider where and how your payments for goods and services are made. Are transactions in cash? Are payments made to offshore accounts? Do you use offshore accounts and in what way? A walkthrough of your typical sales and purchase processes may help to draw out any wrong conclusions. A more detached professional adviser would be a very useful sounding board to achieve this.
  • As a main board director you have now become responsible for the actions of employees in subsidiaries, wherever located. Consider how guidance and training is provided – do you have an intranet where the staff policies are clearly posted (in old language this is a staff handbook)? An HR consultant can provide a template set of policies if you haven’t yet taken this step.
  • If your group is acquisitive, then you need to ensure you have appraised the risks attached to new subsidiaries and that the same training and policies are made quickly available.

The potential penalties can include unlimited financial penalties, possible confiscation orders, and where relevant, loss of public contracts.

So the screw gets turned tighter and it is imperative that advice is sought to see you through this.

If you would like to discuss this further to see how your business can be safeguarded, then please contact me on 020 7216 4603, or your local UHY tax adviser.