Under a new law, advice firms could be guilty of a criminal offence if an employee or other associated person facilitates someone’s tax evasion.
The management of the business might not have been involved in the activities themselves – indeed, they might not have even been aware of them – but they could still be found guilty.
The new law in question is the Criminal Finances Act, which received Royal Assent just before the election. The act could well come into force in the autumn, although it may be a few weeks before we know for sure. Businesses have a defence if they have “reasonable prevention procedures”, so there is still time to take action.
When is evasion not evasion?
To be clear, it is criminal tax evasion being covered here; not tax avoidance. The key is intention. Broadly speaking, a person evades tax if they know they have a liability and dishonestly intends not to declare it.
Carelessness or making a mistake does not usually constitute tax evasion, nor does using a tax avoidance scheme – usually.
Likewise, the employee or associate of the business who facilitates the evasion must have criminal intent and know what they are doing.
As HM Revenue & Customs says in its draft guidance: “The new offence… does not radically alter what is criminal, it simply focuses on who is held to account for acts contrary to the current criminal law.”
And it is not just UK tax evasion that counts. There are two separate offences – one relating to UK tax and the other to overseas tax.
Where UK tax is involved, the UK offence can be committed by any company or partnership, regardless of where it has been set up or where it operates. If it concerns the evasion of non-UK tax, then the business will commit an offence if the facilitation of the evasion involves a company or partnership resident in UK or with a place of business here.
Overseas evasion for this purpose must be an offence in the other relevant jurisdiction and must also amount to behaviour that would be regarded as dishonest by a UK court.
As well as employees, agents and other people and organisations who work for or represent a business can be implicated. But some good news is that any assistance an employee or associate facilitates must be in their business role; not as just a private individual.
Preparation and principles
So how can a business prepare for this? After all, remember an offence may take place even if the management has no idea of what has been going on.
Fortunately, there is a defence if a business can prove it had established procedures to prevent the facilitation of tax evasion. Alternatively, they should be able to argue it would have been reasonable to expect procedures to have been put in place.
HMRC’s draft guidance sets out six principles for businesses to consider in setting up their prevention procedures. These are as follows:
1. Risk assessment
Businesses should carry out risk assessments. They should aim to identify the risks in their organisations and any gaps in their controls. People running businesses need to understand the extent to which their employees and associates have the motives, opportunities and means to facilitate evasion of one sort or another. Where these exist, businesses need to consider how to manage the situation.
It is all rather like the process that businesses should have gone through for the Bribery Act. And obviously it needs to be recorded adequately. As always: if you did not write it down, it did not happen.
HMRC’s guidance accepts there are some very low-risk businesses where the risk assessment might be the end of the process. However, it seems highly unlikely an advice business would come into this category. Almost certainly very few are involved in such shenanigans but the opportunities are there for advisers.
3. Top level commitment
The board and senior management need to understand and be prepared to act on countering their exposure to the new offences with new procedures and monitoring.
4. Due diligence
Businesses will need to make sure they carry out due diligence on their existing associates and potential business partners’ organisations with which they work.
5. Communication (including training)
HMRC says: “A clear articulation of an organisation’s policy against engaging in activities to help clients commit tax fraud deters those providing services on behalf of the relevant body from engaging in such activities.”
Training of all staff will also be a high priority but, as with all activities, it should be proportionate to the risk the business faces.
6. Monitoring and review
This should not be a one-off exercise. Businesses should monitor and review their procedures and make improvements to them as necessary.
So the first step should be to carry out a risk assessment. In particular, which advisers or other employees or associates could be a risk? What areas are higher risk than others? Businesses may have more scope than individual private investors, and expatriates and non-doms could have more opportunities for tax evasion than UK clients. Remember that evading non-UK tax is also caught under the act.
And what might be the tell-tale signs of something going amiss? These could include inconsistent fact-finding information about a client or group of clients, a sudden increase in higher risk business and any of the signs that would also lead one to suspect money laundering.
You have been warned. Businesses found guilty could face unlimited financial penalties and many other unpleasant consequences.
Danby Bloch is chairman at Helm Godfrey