An HMRC consultation paper– Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent the facilitation of evasion (July 2015), see www.bit.ly/1HwoUwE – has proposed that UK corporations should be held criminally accountable where they fail to prevent the facilitation of tax evasion. The consultation closed on 8 October 2015. HMRC aims to publish a response document and draft legislation for further consultation at Autumn Statement 2015.
HMRC’s consultation paper was published following press comments regarding banks’ employees (and other professional advisers) apparently assisting individuals to evade tax.
In the past, it had been notoriously difficult to prove criminal intent on the part of corporations, where the direct facilitation of tax evasion has been caused by their agents without the corporation’s direct knowledge.
The consultation process seeks to ‘find an appropriate and proportionate means of ensuring corporations can be held accountable under the criminal law for failing to prevent their agents from criminally facilitating tax evasion’.
However, a secondary purpose is also described in the introduction at para 2.8, where it says: ‘Ensuring that corporations foster a corporate culture of compliance and put in place systems to prevent, detect and report criminal facilitation of tax evasion by their agents is a key element in tackling offshore tax evasion.’
Historically, perhaps the single biggest hurdle to successfully bringing prosecutions for aiding and abetting tax evasion has been proving intent to facilitate the evasion.
The proposed offence, as described in the paper, attempts to address this by avoiding the need for enforcement authorities to prove that the senior officers (the ‘controlling minds’) of the corporation had the necessary intent to facilitate tax evasion.
Consequently, the proposed offence will be founded on three limbs:
The paper describes the standard against which the corporation will be judged. It frequently refers to ‘reasonable’ procedures to prevent but also expresses a specific preference for the s 7(2) of the Bribery Act 2010 (‘Bribery Act’) defence of ‘adequate’ procedures.
The preference for the Bribery Act approach is explained in the consultation paper: ‘The difficulty in holding commercial organisations to account for the criminal acts or omissions of their agents has been addressed in the area of bribery by criminalising the commercial organisations for failing to prevent bribery on its behalf.’
Section 7 of the Bribery Act made it a criminal offence for a commercial organisation to fail to prevent bribery by a person associated with the commercial organisation. The consultation paper recognises this measure as being effective because it incentivises companies to put in place adequate procedures and promotes good corporate governance.
‘Corporations’ will be broadly defined to include commercial organisations, not for profit companies and partnerships, though banks, wider financial organisations and professional advisors will be likely targets for the offence. ‘Agents’ does not appear to be defined in the traditional legal sense, but is more broadly defined to include employees and pretty much all individuals with links to the corporation for the purposes of acts covered by the proposed offence.
The proposed offence represents a significant departure from existing practice in that, while the UK has always recognised that corporations can only act through ‘agents’ (individuals), it has not previously sought to hold the corporation accountable unless the ‘controlling minds’ of the corporation also had the same intent as the agent acting on its behalf. Due to the difficulty in proving the criminal intent of the latter, prosecutions have historically been reserved for the individuals directly involved, not the corporates themselves.
The proposed offence will make the corporation criminally responsible through the concept of vicarious liability for the actions of any agent acting on its behalf. It goes further and will apply this standard to wherever in the world the agent involved is operating. While the agent must have the appropriate intent to facilitate the tax evasion, the concept of vicarious liability means that the corporation is not itself required to have any intent to facilitate the tax evasion, i.e. enforcement authorities will not be required to show that the corporation had any rea or guilty mind. It is even possible that what is being proposed could result being held accountable where they had no knowledge of their agents facilitating tax evasion at all.
The title of HMRC’s consultation paper might suggest that the proposed new offence is targeted only at those who help to facilitate ‘offshore tax evasion’. However, the paper is not limited in scope and proposes that all taxes, including VAT and corporation tax, should be within the scope for the offence. of these taxes would, of course, broaden the potentially impacted corporates well beyond the financial services sector. To date, HMRC has stated that: ‘No one has advanced any reason why, in principle, these taxes should not be within the scope of the offence.’
It is currently unclear as to whether customs duties will also be covered by the proposed offence, but given the extent of loss to the revenue from duty evasion, particularly in the alcohol and tobacco sector, there is every possibility that duties will be included, either at inception or subsequently.
The paper indicates that it will not matter what type of tax is evaded or where it is evaded, i.e. non-UK tax evaded is also within the scope of the proposed offence. Given the information sharing that will follow under the common reporting standard, such prosecutions should be considered by UK corporates to be a real risk.
HMRC is concerned about those they describe as ‘enablers’ and so the consultation describes (non-exhaustive) examples of where corporations may commit the new proposed criminal offence:
These examples are illustrative only, so care should be taken not to allow these to entirely shape thinking around the way the offence may operate in practice. For instance (as VAT is currently expected to be in the scope of the proposed offence), if an employee of a corporate knowingly assists in causing fraudulent VAT losses in a supply chain tainted by missing trader fraud, the may have committed a criminal offence. This is despite the fact that the may not have any knowledge of the VAT fraud or the actions of their employee in facilitating this.
Care must be taken to recall that the authorities will need to prove that the agent/employee and the taxpayer had the requisite intent to evade tax (or, possibly, duties) and so that standard of proof is high. However, it is not unknown for HMRC to allege supply chain participants ‘should have known’ that VAT fraud is occurring within the supply chain and to seek to deny input tax claims of an innocent party, which may put corporates to greater efforts on what might be regarded as ‘reasonable’ or ‘adequate’ in terms of procedures to prevent evasion in this context.
The consultation proposes a ‘due diligence defence’ to ensure that corporations which have taken steps to put in place compliance procedures to prevent the facilitation of tax evasion by their agents do not face prosecution. The issue remains that the standard to be regarded as ‘reasonable’ or ‘adequate’ is unclear, despite the gulf between them in practice. ‘Reasonable procedures’ to prevent is a much lower bar, but it is also a much looser concept. It may be more difficult to be certain that corporations have procedures that should prevent the facilitation of tax evasion, as the test is dependent upon what a hypothetical ‘reasonable person’ would deem appropriate to prevent it in identical or similar circumstances.
By contrast, ‘adequate procedures’ to prevent is a very high bar and has yet to be tested in court under the Bribery Act. The ordinary dictionary meaning of the word would imply that, for a corporation’s procedures to be ‘adequate’, they would normally have been sufficient to prevent the tax evasion had they operated normally but that they were deliberately subverted by the agent.
The consultation states that where a corporation’s procedures have failed to prevent the criminal facilitation of tax evasion by their agent(s), but the procedures have identified the agent’s offending and the corporation has ensured it is self-reported to the relevant authorities in a timely manner, this may be a situation in which a disposal other than criminal conviction would be appropriate. One example of such in these circumstances is a deferred prosecution agreement, which is likely to include a fine and/or other sanctions.
An HMRC consultation paper– Tackling offshore tax evasion: a new corporate criminal offence of failure to prevent the facilitation of evasion (July 2015), see www.bit.ly/1HwoUwE – has proposed that UK corporations should be held criminally accountable where they fail to prevent the facilitation of tax evasion. The consultation closed on 8 October 2015. HMRC aims to publish a response document and draft legislation for further consultation at Autumn Statement 2015.
HMRC’s consultation paper was published following press comments regarding banks’ employees (and other professional advisers) apparently assisting individuals to evade tax.
In the past, it had been notoriously difficult to prove criminal intent on the part of corporations, where the direct facilitation of tax evasion has been caused by their agents without the corporation’s direct knowledge.
The consultation process seeks to ‘find an appropriate and proportionate means of ensuring corporations can be held accountable under the criminal law for failing to prevent their agents from criminally facilitating tax evasion’.
However, a secondary purpose is also described in the introduction at para 2.8, where it says: ‘Ensuring that corporations foster a corporate culture of compliance and put in place systems to prevent, detect and report criminal facilitation of tax evasion by their agents is a key element in tackling offshore tax evasion.’
Historically, perhaps the single biggest hurdle to successfully bringing prosecutions for aiding and abetting tax evasion has been proving intent to facilitate the evasion.
The proposed offence, as described in the paper, attempts to address this by avoiding the need for enforcement authorities to prove that the senior officers (the ‘controlling minds’) of the corporation had the necessary intent to facilitate tax evasion.
Consequently, the proposed offence will be founded on three limbs:
The paper describes the standard against which the corporation will be judged. It frequently refers to ‘reasonable’ procedures to prevent but also expresses a specific preference for the s 7(2) of the Bribery Act 2010 (‘Bribery Act’) defence of ‘adequate’ procedures.
The preference for the Bribery Act approach is explained in the consultation paper: ‘The difficulty in holding commercial organisations to account for the criminal acts or omissions of their agents has been addressed in the area of bribery by criminalising the commercial organisations for failing to prevent bribery on its behalf.’
Section 7 of the Bribery Act made it a criminal offence for a commercial organisation to fail to prevent bribery by a person associated with the commercial organisation. The consultation paper recognises this measure as being effective because it incentivises companies to put in place adequate procedures and promotes good corporate governance.
‘Corporations’ will be broadly defined to include commercial organisations, not for profit companies and partnerships, though banks, wider financial organisations and professional advisors will be likely targets for the offence. ‘Agents’ does not appear to be defined in the traditional legal sense, but is more broadly defined to include employees and pretty much all individuals with links to the corporation for the purposes of acts covered by the proposed offence.
The proposed offence represents a significant departure from existing practice in that, while the UK has always recognised that corporations can only act through ‘agents’ (individuals), it has not previously sought to hold the corporation accountable unless the ‘controlling minds’ of the corporation also had the same intent as the agent acting on its behalf. Due to the difficulty in proving the criminal intent of the latter, prosecutions have historically been reserved for the individuals directly involved, not the corporates themselves.
The proposed offence will make the corporation criminally responsible through the concept of vicarious liability for the actions of any agent acting on its behalf. It goes further and will apply this standard to wherever in the world the agent involved is operating. While the agent must have the appropriate intent to facilitate the tax evasion, the concept of vicarious liability means that the corporation is not itself required to have any intent to facilitate the tax evasion, i.e. enforcement authorities will not be required to show that the corporation had any rea or guilty mind. It is even possible that what is being proposed could result being held accountable where they had no knowledge of their agents facilitating tax evasion at all.
The title of HMRC’s consultation paper might suggest that the proposed new offence is targeted only at those who help to facilitate ‘offshore tax evasion’. However, the paper is not limited in scope and proposes that all taxes, including VAT and corporation tax, should be within the scope for the offence. of these taxes would, of course, broaden the potentially impacted corporates well beyond the financial services sector. To date, HMRC has stated that: ‘No one has advanced any reason why, in principle, these taxes should not be within the scope of the offence.’
It is currently unclear as to whether customs duties will also be covered by the proposed offence, but given the extent of loss to the revenue from duty evasion, particularly in the alcohol and tobacco sector, there is every possibility that duties will be included, either at inception or subsequently.
The paper indicates that it will not matter what type of tax is evaded or where it is evaded, i.e. non-UK tax evaded is also within the scope of the proposed offence. Given the information sharing that will follow under the common reporting standard, such prosecutions should be considered by UK corporates to be a real risk.
HMRC is concerned about those they describe as ‘enablers’ and so the consultation describes (non-exhaustive) examples of where corporations may commit the new proposed criminal offence:
These examples are illustrative only, so care should be taken not to allow these to entirely shape thinking around the way the offence may operate in practice. For instance (as VAT is currently expected to be in the scope of the proposed offence), if an employee of a corporate knowingly assists in causing fraudulent VAT losses in a supply chain tainted by missing trader fraud, the may have committed a criminal offence. This is despite the fact that the may not have any knowledge of the VAT fraud or the actions of their employee in facilitating this.
Care must be taken to recall that the authorities will need to prove that the agent/employee and the taxpayer had the requisite intent to evade tax (or, possibly, duties) and so that standard of proof is high. However, it is not unknown for HMRC to allege supply chain participants ‘should have known’ that VAT fraud is occurring within the supply chain and to seek to deny input tax claims of an innocent party, which may put corporates to greater efforts on what might be regarded as ‘reasonable’ or ‘adequate’ in terms of procedures to prevent evasion in this context.
The consultation proposes a ‘due diligence defence’ to ensure that corporations which have taken steps to put in place compliance procedures to prevent the facilitation of tax evasion by their agents do not face prosecution. The issue remains that the standard to be regarded as ‘reasonable’ or ‘adequate’ is unclear, despite the gulf between them in practice. ‘Reasonable procedures’ to prevent is a much lower bar, but it is also a much looser concept. It may be more difficult to be certain that corporations have procedures that should prevent the facilitation of tax evasion, as the test is dependent upon what a hypothetical ‘reasonable person’ would deem appropriate to prevent it in identical or similar circumstances.
By contrast, ‘adequate procedures’ to prevent is a very high bar and has yet to be tested in court under the Bribery Act. The ordinary dictionary meaning of the word would imply that, for a corporation’s procedures to be ‘adequate’, they would normally have been sufficient to prevent the tax evasion had they operated normally but that they were deliberately subverted by the agent.
The consultation states that where a corporation’s procedures have failed to prevent the criminal facilitation of tax evasion by their agent(s), but the procedures have identified the agent’s offending and the corporation has ensured it is self-reported to the relevant authorities in a timely manner, this may be a situation in which a disposal other than criminal conviction would be appropriate. One example of such in these circumstances is a deferred prosecution agreement, which is likely to include a fine and/or other sanctions.
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