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Why doing nothing can now be a criminal offence

The Criminal Finances Act 2017, which comes fully into effect on 30 September 2017, introduces new corporate offences for failing to prevent the facilitation of tax evasion, both in the UK and abroad.

Company Profile

Lawspeed Ltd

The provisions, which are contained within sections 44 – 52 of the Act, apply to all companies and partnerships, whatever their size.

Over recent years, HMRC has increasingly targeted those who promote or facilitate tax evasion, as well as those actually evading the tax, but the new provisions cast the net even wider and impose criminal liability on companies simply for failing to take action to prevent tax evasion offences.

Recruiters may mistakenly believe that the legislation has no relevance to their businesses; however, any recruitment business operating a payroll or using a payroll provider could potentially be at risk of committing a criminal offence. With heavy fines expected, not to mention the disastrous PR consequences of prosecution, recruiters should be alive to this issue.

What amounts to a tax facilitation offence?

Section 45 sets out the new offence of “failure to prevent facilitation of UK tax evasion offences”.

UK tax evasion offences are defined as either an offence of “cheating the public revenue”, or any UK offence consisting of “being knowingly concerned in (or taking steps with a view to) the fraudulent evasion of tax”.

The offence of “cheating the public revenue” is unusual in that it is not set out in any legislation, but is an offence under common law that has evolved over many centuries. It has been loosely defined in case law as “all frauds affecting the Crown and public at large are indictable as cheats at common law”, and is sometimes used by the government either as a “catch-all” (where it is otherwise unable to prosecute under a specific statutory offence), or because the maximum sentences are considerably higher.

Section 46 also introduces an offence of “failure to prevent facilitation of foreign tax evasion offences”.

The lack of a clear definition of what does, or does not amount to tax evasion, has led to fears that recruitment businesses may inadvertently find themselves facing prosecution. As there is no clear dividing line between tax avoidance and evasion, and the fact that apparently legitimate anti-avoidance schemes are sometimes declared to be illegal retrospectively, it does seem possible that even well-intentioned businesses may find themselves in the firing line.

Wherever there is an actual evasion or cheating event, a company can be committing an offence if it is aware of the potential of tax evasion or cheating risk and takes no steps to address it, or it itself condones or turns a blind eye to actions that amount to facilitation. This would be the case even if the facilitation is without the employer’s knowledge (and indeed may have been deliberately concealed from the employer) where the employer has not taken steps to prevent an obvious risk.

Recruitment businesses (or their individual employees) that recommend umbrella companies or service providers to agency workers could therefore face prosecution if the companies concerned are involved in risky tax avoidance activities.

Clearly, HMRC’s intention is to give itself the widest possible powers to clamp down on tax evasion, but the additional question mark over service providers means that some agencies may decide to avoid working with them at all, and many reputable service providers may lose business because they have been tarred with the same brush as their less scrupulous competitors.

Minimising the risk

It is a defence to these offences if the company concerned has in place prevention procedures which it was reasonable in all the circumstances to expect it to have in place. Conversely, a company may have a defence where it was not reasonable in all the circumstances for the company to have any prevention procedures in place. So, for example, if the company operates in such a way that there is no risk it would not be reasonable to have prevention measures in place.

In most cases, larger businesses will be expected to have gone to more effort to put prevention processes in place, but even small businesses should take note.

Although the Chancellor of the Exchequer is required under the Act to publish guidance for companies, and has recently done so, some would argue that the guidance poses more questions than it answers.

Theresa Mimnagh, Associate Director of Lawspeed, comments “Recruitment businesses must ensure that they have appropriate prevention procedures in place, which are appropriate for their size, sector and the extent of risk, or face heavy fines and reputational damage.

“Such measures include only using audited or approved service providers, undertaking assessments of the risk of their employees or representatives facilitating tax evasion, and having anti-facilitation policies and provisions in contracts with their employees, suppliers, agents, advisers and service providers. Lawspeed offers an independent auditing service, SPA, which clean advisers can use to establish their compliance, so helping agencies address the risk issue.”

For further advice on how to avoid falling foul of the new legislation, or for anti-facilitation contracts and policies, contact Lawspeed on 01273 236236 or info@lawspeed.com