Failure to prevent tax evasion

Failure to prevent tax evasion

On 30 September 2017 a new law drops onto the statute book and it is well for businesses to be prepared. Applying to all companies and partnerships, the offence of failing to prevent tax evasion sits within the Criminal Finances Act which received Royal assent in April.

Essentially, the new legislation is intended to stop businesses from ignoring activities carried out by their employees and associates which may criminally facilitate tax evasion. The word criminally is important here; in other words the individual or body which facilitates tax evasion must do so with criminal intent. Where this new law will catch companies and partnerships is that ignorance is no defence; even if senior management are unaware of the activities of their employees and other representatives, the company could still be found liable and face unlimited financial penalties.

Thankfully, businesses do have a defence if they can prove that they put in place reasonable precautions.  Guidance from HMRC lists these as:

  • Risk assessment
  • Proportionality of risk-based prevention procedures
  • Top level commitment
  • Due diligence
  • Communication (including training)
  • Monitoring and review

Whilst HMRC stress that following these six steps will not automatically render a company immune from prosecution, they also highlight the importance of proportionality: in other words “what is reasonable for a small business in a low risk sector may be entirely unreasonable for a large business in a high risk sector.”

Having said that, to do nothing is not an option. Companies and partnerships should look to include tax evasion risk within their overall risk assessment and management processes. In particular, HMRC say that in carrying out the risk assessment companies should look to ““sit at the desk” of their employees, agents and those who provide services for them or on their behalf and ask whether they have a motive, the opportunity and the means to criminally facilitate tax evasion offences, and if so how this risk might be managed.” The HMRC draft guidance includes a list of scenarios which may apply to a greater or lesser extent depending on the nature of the business.

Having identified the likely risk, it’s important that top-level management look to build a culture which sees tax evasion activity as totally unacceptable, whilst at the same time ensuring that this message is not only communicated throughout the organisation but that people are trained appropriately.

In April 2017 a YouGov survey indicated that 76% of senior decision-makers in British business were unaware of the failure to prevent tax evasion legislation. As the HMRC commentary says ignorance is no excuse; it’s time to act now or face the potential consequences.

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